<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1997
REGISTRATION NO. 333-28889
REGISTRATION NO. 333-28889-01
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
<TABLE>
<S> <C>
OCWEN FINANCIAL CORPORATION OCWEN CAPITAL TRUST I
(Exact name of registrant as specified in (Exact name of Registrant as specified
its articles of incorporation) in its trust agreement)
FLORIDA DELAWARE
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
6035 6719
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
65-0039856 APPLIED FOR
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
</TABLE>
THE FORUM, SUITE 1000
1675 PALM BEACH LAKES BLVD.
WEST PALM BEACH, FLORIDA 33401
(561) 681-8000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
WILLIAM C. ERBEY
CHAIRMAN, 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)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
RAYMOND A. TIERNAN, ESQ. LEE MEYERSON, ESQ.
GERARD L. HAWKINS, ESQ. SIMPSON THACHER & BARTLETT
ELIAS, MATZ, TIERNAN & HERRICK L.L.P. 425 LEXINGTON AVENUE
734 15TH STREET, N.W. NEW YORK, NEW YORK 10017-3955
WASHINGTON, D.C. 20005 (212) 455-2000
(202) 347-0300
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
EACH OF THE REGISTRANTS HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL EACH OF THE
REGISTRANTS 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>
SUBJECT TO COMPLETION, DATED JULY 15, 1997
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>
PROSPECTUS
$125,000,000
OCWEN CAPITAL TRUST I
% CAPITAL SECURITIES
(LIQUIDATION AMOUNT $1,000 PER CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
OCWEN FINANCIAL CORPORATION
---------------
The % Capital Securities (the "Capital Securities"), offered hereby
represent undivided beneficial ownership interests in the assets of Ocwen
Capital Trust I, a Delaware statutory business trust (the "Trust"). Ocwen
Financial Corporation, a Florida corporation (the "Company"), will be the owner
of all of the beneficial ownership interests represented by common securities of
the Trust (the "Common Securities," and together with the Capital Securities,
the "Trust Securities"). The Trust exists for the sole purpose of issuing the
Capital Securities and the Common Securities and investing the proceeds thereof
in % Junior Subordinated Debentures (the "Junior Subordinated Debentures"),
to be issued by the Company. The Junior Subordinated Debentures will mature on
, 2027 (the "Stated Maturity"). The Capital Securities will have a
preference under certain circumstances with respect to cash distributions and
amounts payable on liquidation, redemption or otherwise over the Common
Securities. See "Description of Capital
Securities--Subordination of Common Securities."
(CONTINUED ON NEXT PAGE)
Concurrently with the offering of Capital Securities (the "Capital
Securities Offering"), the Company is offering 3,000,000 shares of its common
stock, par value $0.01 per share (the "Common Stock") in an underwritten public
offering (the "Common Stock Offering" and, together with the Capital Securities
Offering, the "Offerings"). The Capital Securities offered hereby and the Common
Stock offered by the Company are being offered separately and not as units. The
Capital Securities Offering is conditioned upon consummation of the Common Stock
Offering.
-------------------
THE CAPITAL SECURITIES 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 CAPITAL
SECURITIES OFFERED HEREBY.
-------------------
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 SUCH STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND
ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC(1) COMMISSIONS(2) TRUST (3)(4)
<S> <C> <C> <C>
Per Capital Security................................. $ (3) $
Total................................................ $ (3) $
</TABLE>
(1) Plus accrued distributions, if any, from , 1997.
(2) The Trust and the Company have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(3) In view of the fact that the proceeds of the sale of the Capital Securities
will be used to purchase the Junior Subordinated Debentures, the
Underwriting Agreement provides that the Company will pay to the
Underwriters, as compensation ("Underwriters' Compensation") for their
arranging the investment therein of such proceeds, $ per Capital Security
(or $ in the aggregate). See "Underwriting."
(4) Before deducting expenses of the offering payable by the Company, estimated
at $ .
-------------------
The Capital Securities offered by this Prospectus are offered subject to
prior sale, to withdrawal or cancellation of the offer without notice, to
delivery to and acceptance by the Underwriters and to certain further
conditions. It is expected that delivery of the Capital Securities will be made
in book-entry form only through the facilities of The Depository Trust Company
on or about , 1997, against payment therefor in immediately available
funds.
-------------------
LEHMAN BROTHERS
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
MORGAN STANLEY DEAN WITTER
, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CAPITAL
SECURITIES. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF CAPITAL SECURITIES
FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE
CAPITAL SECURITIES OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE CAPITAL
SECURITIES. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
(CONTINUED FROM PREVIOUS PAGE)
Holders of the Capital Securities will be entitled to receive cumulative
cash distributions accruing from the date of original issuance and payable
semi-annually in arrears on and of each year, commencing
, 1997, at the annual rate of % of the liquidation amount of $1,000 per
Capital Security ("Distributions"). The distribution rate and the distribution
payment dates and other payment dates for the Capital Securities will correspond
to the interest rate and interest payment dates and other payment dates on the
Junior Subordinated Debentures, which will be the sole assets of the Trust. The
Company will guarantee the payment of Distributions and payments on liquidation
of the Trust or redemption of the Capital Securities, but only in each case to
the extent of funds held by the Trust, as described herein (the "Guarantee").
See "Description of Guarantee." If the Company does not make interest payments
on the Junior Subordinated Debentures held by the Trust, the Trust will have
insufficient funds to pay Distributions on the Capital Securities. The Company's
obligations under the Guarantee, taken together with its obligations under the
Junior Subordinated Debentures and the Indenture (as defined herein), including
its obligation to pay all costs, expenses and liabilities of the Trust (other
than with respect to the Capital Securities), constitute a full and
unconditional guarantee of all of the Trust's obligations under the Capital
Securities. The obligations of the Company under the Guarantee and the Junior
Subordinated Debentures are subordinate and junior in right of payment to all
Senior Indebtedness (as defined in "Description of Junior Subordinated
Debentures--Subordination") of the Company and will be structurally subordinated
to all liabilities and obligations of the Company's subsidiaries. As of March
31, 1997, $125 million aggregate principal amount of Senior Indebtedness was
outstanding, and the Company's consolidated subsidiaries had approximately $2.3
billion of indebtedness and other liabilities.
The Company has the right to defer payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 10 consecutive semi-annual periods with respect to each deferral
period (each, an "Extension Period"), provided that no Extension Period may
extend beyond the Stated Maturity (as defined herein) of the Junior Subordinated
Debentures. Upon the termination of any such Extension Period and the payment of
all amounts then due on any Interest Payment Date (as defined herein), the
Company may elect to begin a new Extension Period subject to the requirements
set forth herein. Accordingly, there could be multiple Extension Periods of
varying lengths throughout the term of the Junior Subordinated Debentures. If
interest payments on the Junior Subordinated Debentures are so deferred,
distributions on the Capital Securities will also be deferred and the Company
may not, and may not permit any subsidiary of the Company to, (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, the Company's capital stock or (ii) make
any payment of principal, interest or premium, if any, on or repay, repurchase
or redeem any debt securities that rank PARI PASSU with or junior to the Junior
Subordinated Debentures or make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any subsidiary of the Company
if such guarantee ranks PARI PASSU with or junior to the Junior Subordinated
Debentures (other than (a) dividends or distributions in common stock of the
Company, (b) payments under the Guarantee, (c) any declaration of a dividend in
connection with the implementation of a shareholders' rights plan, or the
issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (d) as a result of
reclassification of the Company's capital stock into one or more other classes
or series of the Company's capital stock or the exchange or conversion of one
class or series of the Company's capital stock for another class or series of
2
<PAGE>
the Company's capital stock, (e) the purchase of fractional interests in the
shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged
and (f) purchases of common stock related to the issuance of common stock or
rights under any of the Company's benefit plans or any of the Company's dividend
reinvestment plans). During an Extension Period, interest on the Junior
Subordinated Debentures will continue to accrue (and the amount of Distributions
to which holders of the Capital Securities are entitled will accumulate) at the
rate of % per annum to the extent permitted by applicable law, compounded
semi-annually, and holders of the Capital Securities will be required to accrue
interest income for United States federal income tax purposes prior to receipt
of cash related to such interest income. See "Description of Junior Subordinated
Debentures--Option to Extend Interest Payment Period" and "Certain United States
Federal Income Tax Consequences--Original Issue Discount."
The Junior Subordinated Debentures are not redeemable prior to ,
2007 unless a Special Event (as defined herein) has occurred. The Junior
Subordinated Debentures are redeemable prior to maturity at the option of the
Company, subject to the receipt of any necessary prior regulatory approval, (i)
on or after , 2007, in whole or in part, at a redemption price equal
to % of the principal amount thereof on , 2007 declining ratably
on each thereafter to 100% on or after , 2017, plus accrued
and unpaid interest thereon, or (ii) at any time, in whole (but not in part),
upon the occurrence and continuation of a Special Event at a redemption price
equal to the greater of (a) 100% of the principal amount thereof or (b) as
determined by a Quotation Agent (as defined herein), the sum of the present
values of the principal amount and premium payable with respect to an optional
redemption of such Junior Subordinated Debentures on , 2007,
together with scheduled payments of interest from the prepayment date to
, 2007, discounted to the prepayment date on a semi-annual basis (assuming
a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate
(as defined herein) plus, in either case, accrued interest thereon to the date
of prepayment, in each case subject to the further conditions described under
"Description of Junior Subordinated Debentures--Redemption." The Capital
Securities are subject to mandatory redemption, in whole or in part, upon
repayment of the Junior Subordinated Debentures at Stated Maturity or their
earlier redemption, in an amount equal to the amount of related Junior
Subordinated Debentures maturing or being redeemed and at a redemption price
equal to the redemption price of such Junior Subordinated Debentures, in each
case plus accumulated and unpaid Distributions thereon to the date of
redemption.
Upon the occurrence and continuation of a Special Event, the Company will
have the right, subject to the receipt of any necessary prior regulatory
approval, to terminate the Trust and cause the Junior Subordinated Debentures to
be distributed to the holders of the Capital Securities and the Common
Securities in liquidation of the Trust. If the Junior Subordinated Debentures
are distributed to the holders of Capital Securities upon the liquidation of the
Trust, the Company will use its best efforts to list the Junior Subordinated
Debentures on such stock exchanges, if any, on which the Capital Securities are
then listed. See "Description of Capital Securities--Redemption--Special Event
Redemption or Distribution of Junior Subordinated Debentures."
In the event of the liquidation of the Trust, after satisfaction of the
claims of creditors of the Trust, if any, as provided by applicable law, the
holders of the Capital Securities will be entitled to receive a liquidation
amount of $1,000 per Capital Security plus accumulated and unpaid Distributions
thereon to the date of payment, which may be in the form of a distribution of
such amount in Junior Subordinated Debentures as described above. If such
liquidation amount can be paid only in part because the Trust has insufficient
assets available to pay in full the aggregate liquidation amount, then the
amounts payable directly by the Trust on the Capital Securities shall be paid on
a pro rata basis. The holder(s) of the Common Securities will be entitled to
receive distributions upon any such liquidation pro rata with the holders of the
Capital Securities, except that if an Indenture Event of Default (as defined
herein) has occurred and is continuing, the Capital Securities will have a
priority over the Common Securities. See "Description of Capital
Securities--Liquidation Distribution Upon Dissolution."
3
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission ("Commission"). Reports, proxy statements and
other information concerning the Company can be inspected and copied at
prescribed rates at the Commission's Public Reference Room, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, as well as the following Regional
Offices of the Commission: 7 World Trade Center, 13th Floor, New York, New York
10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may be obtained by mail from the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. If available, such reports and other information
also may be accessed through the Commission's electronic data gathering,
analysis and retrieval system ("EDGAR") via electronic means, including the
Commission's web site on the Internet (http://www.sec.gov). The Common Stock is
quoted on the Nasdaq Stock Market's National Market and, as a result, such
reports, proxy statements and other information also may be inspected at the
offices of the National Association of Securities Dealers, Inc. ("NASD"), 1735 K
Street, N.W., Washington, D.C. 20006.
No separate financial statements of the Trust have been included herein. The
Company and the Trust do not consider that such financial statements would be
material to holders of the Capital Securities because (i) all of the Common
Securities of the Trust will be owned, directly or indirectly, by the Company, a
reporting company under the Exchange Act, (ii) the Trust has no independent
operations but exists for the sole purpose of issuing securities representing
undivided beneficial interests in its assets and investing the proceeds thereof
in Junior Subordinated Debentures issued by the Company and (iii) the
obligations of the Trust under the Capital Securities are guaranteed by the
Company to the extent described herein. In addition, the Company does not expect
that the Trust will file reports, proxy statements and other information under
the Exchange Act with the Commission.
This Prospectus constitutes a part of a Registration Statement on Form S-1
filed by the company with the Commission under the Securities Act of 1933, as
amended (the "Securities Act"), in connection with the Capital Securities
Offering. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission, and reference is hereby made
to the Registration Statement and to the exhibits thereto for further
information with respect to the Company, the Trust and the Capital Securities.
The Company also has filed a Registration Statement on Form S-1 with the
Commission under the Securities Act in connection with the Common Stock
Offering. Reference is made to such Registration Statement and to the exhibits
thereto for further information with respect to the Common Stock Offering. The
foregoing Registration Statements can be inspected and copied at prescribed
rates at the Commission, or accessed via EDGAR, in the manner set forth above.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION, RISK FACTORS AND FINANCIAL
STATEMENTS, INCLUDING THE RELATED NOTES, APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF OUTSTANDING EMPLOYEE STOCK OPTIONS TO PURCHASE AN AGGREGATE OF
689,477 SHARES OF COMMON STOCK AS OF MARCH 31, 1997.
THE COMPANY
GENERAL
The Company is a specialty financial services company which is engaged, on a
nationwide basis, primarily in the business of acquiring, servicing and
resolving non-performing and underperforming single and multi-family residential
and commercial real estate loans and in selected mortgage lending activities
involving servicing-intensive loan products. Since commencing its loan
resolution activities in mid-1991, the Company has acquired over $3.81 billion
gross principal amount of distressed loans and currently ranks (based on 1996
loan acquisition volume) as the largest purchaser of domestic distressed
residential and commercial real estate loan portfolios in the United States.
During the past year, the Company also has begun servicing distressed mortgage
loans for others on a fee basis. The Company believes that it is currently the
leading servicer of distressed mortgage loans in the United States with a
servicing portfolio of 38,670 loans aggregating approximately $2.59 billion in
gross principal amount at March 31, 1997 (including loans serviced for the
Company's joint ventures).
The Company's operations are based on the intensive use of technology and
proprietary information systems to acquire, manage and resolve distressed assets
and other servicing-intensive mortgage products on the most efficient basis
possible. The Company began its focus in this area in the early 1990s through
the acquisition and resolution of loan portfolios of troubled financial
institutions. The Company believes that its specialized focus and investment in
technology infrastructure has enabled it to become one of the most efficient
servicers of distressed mortgage assets in the industry. Currently, the Company
is one of only five special servicers of commercial mortgage loans to have
received a rating of "strong" from Standard & Poor's Ratings Services ("Standard
& Poor's"). In addition, the Company is rated a Tier 1 servicer and as a
preferred servicer for high-risk mortgages by the Federal Home Loan Mortgage
Corporation ("FHLMC"), the highest rating categories.
The Company's business is conducted primarily through its wholly-owned
subsidiary, Ocwen Federal Bank FSB (the "Bank"), which operates through a single
branch. Through the Bank the Company is able to access a diversified base of
funding sources and maintain high levels of available liquidity. The Company's
primary funding comes from brokered certificates of deposit obtained through
national and regional investment banking firms and, to a lesser extent, from
direct solicitations by the Company, as well as from Federal Home Loan Bank
("FHLB") advances, reverse repurchase agreements and asset securitizations
(which have totaled over $1 billion since 1993). The Company believes that these
non-branch dependent funding sources provide it with effective asset/liability
management tools and have an effective cost that is more attractive than
deposits obtained through a branch network after the general and administrative
costs associated with operating a branch network are taken into account.
RECENT OPERATING RESULTS
As the Company's specialized businesses have grown in recent years, its
profitability has increased substantially. The Company's core earnings
(representing income from continuing operations exclusive of the one-time
assessment to recapitalize the Savings Association Insurance Fund ("SAIF") in
1996 and gains from the sale of branch offices in 1995 and 1994, net of related
income taxes and profit sharing expense) increased from $24.0 million in 1994 to
$54.1 million in 1996 and to $17.0 million in the first quarter of 1997. During
this period, the Company's return on average assets increased from 1.40% to
2.61% and its return on average equity increased from 20.06% to 32.05% (in each
case based on core earnings). The Company's specialized focus, its emphasis on
technology and automated systems and the economies of scale it has been able to
achieve also have enabled it to operate at a high level of efficiency: the
Company's efficiency ratio based on core earnings
5
<PAGE>
improved from 64.1% in 1994 to 41.3% and 42.8% during 1996 and the first quarter
of 1997, respectively. At March 31, 1997, the Company had total assets of $2.65
billion, total deposits of $2.11 billion and stockholders' equity of $225.2
million.
STRATEGY
The Company believes that the current trend toward the sale or outsourcing
of servicing by financial institutions and government agencies of non-performing
and underperforming loans will continue to grow, particularly in the event that
credit quality for some product lines (such as sub-prime mortgage loans)
deteriorates, and that the Company will be uniquely positioned to take advantage
of this growth. The Company's strategy also focuses on leveraging its technology
infrastructure and core expertise to expand its activities into related business
lines both for itself and on a fee basis for others. Pursuant to this strategy,
the Company has, among other things, recently formed a new corporation, Ocwen
Asset Investment Corp. ("OAIC"), which is managed by Ocwen Capital Corporation
("OCC"), a newly-formed, wholly-owned subsidiary of the Company, and which
elected to be taxed as a real estate investment trust ("REIT") for federal
income tax purposes. In May 1997, OAIC successfully completed an initial public
offering of its common stock, which resulted in estimated net proceeds of $283.8
million (inclusive of the amount contributed by the Company for its shares).
Currently, the Company owns approximately 9.8% of the outstanding common stock
of OAIC and has a warrant to purchase an additional 10% of OAIC's common stock.
BUSINESS ACTIVITIES
The Company considers itself to be involved in a single business segment of
providing financial services and conducts a wide variety of business within this
segment. The Company's primary business activities currently consist of
discounted loan acquisition and resolution, multi-family residential and
commercial real estate lending, sub-prime single-family residential real estate
lending and special servicing of mortgage loans for others.
DISCOUNTED LOAN ACQUISITION AND RESOLUTION. 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 in the private sector and governmental agencies
such as the U.S. Department of Housing and Urban Development ("HUD") and, to a
lesser extent, the Federal Deposit Insurance Corporation ("FDIC"). 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, 1997, the Company has acquired over $3.81 billion of gross principal
amount of discounted loans. In addition, in 1996, BCBF, L.L.C. ("LLC"), a joint
venture which is 50% owned by the Company, acquired discounted single-family
residential loans having an aggregate unpaid principal balance of $741.2 million
from the Federal Housing Administration ("FHA"), a division of HUD. At March 31,
1997, the Company's discounted loan acquisition and resolution activities were
comprised of its discounted loan portfolio, which amounted to $1.28 billion (net
of $264.6 million of unaccreted discount and a $16.8 million allowance for loan
losses), $96.4 million of real estate owned related to discounted loans and a
$32.3 million net investment in LLC, which in the aggregate amounted to $1.41
billion or 53.2% of the Company's total assets.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. The Company's
lending activities emphasize loans secured by multi-family residential and
commercial real estate located nationwide. Recently, the Company transferred the
operations associated with its large multi-family residential and commercial
real estate lending activities (which generally involve loans with balances in
excess of $3.0 million) from the Bank to OCC. In conducting multi-family
residential and commercial real estate lending activities, the Company generally
seeks to emphasize types of loans and/or lending in geographic areas which, for
various reasons, may not be currently
6
<PAGE>
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 existing hotels and office buildings, as well
as loans for the construction and rehabilitation of hotels and multi-family
residential properties. At March 31, 1997, the Company's multi-family
residential and commercial real estate loans aggregated $347.1 million, net, or
13.1% 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 $99.9 million or 3.8% of the Company's total assets at
March 31, 1997.
SUBPRIME SINGLE-FAMILY RESIDENTIAL LENDING. 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 under federal agency guidelines
("sub-prime loans"). 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 in order
to acquire loans, 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. Between commencing these activities in late 1994 and March
31, 1997, the Company purchased or originated an aggregate of $598.8 million of
sub-prime single-family residential loans. Recently, the Company consolidated
its sub-prime single-family residential lending operations within Ocwen
Financial Services, Inc. ("OFS"), a newly-formed, 80% owned subsidiary of the
Company which acquired substantially all of the assets of Admiral Home Loan
("Admiral"), the Company's primary correspondent mortgage banking firm for
sub-prime single-family residential loans, in a transaction which closed on May
1, 1997. See "Business-- Subsidiaries." OFS currently maintains 17 loan
production offices in six states and plans on opening an additional 10 such
offices in 1997. The Company classifies its sub-prime single-family residential
loans as available for sale because, subject to market conditions, it generally
intends to sell such loans or to securitize such loans and sell substantially
all of the securities backed by such loans. The Company realized gains of $2.7
million and $7.8 million from the sale of sub-prime single-family residential
loans or securities resulting from the securitization of such loans during the
three months ended March 31, 1997 and the year ended December 31, 1996,
respectively. At March 31, 1997, the Company's sub-prime single-family
residential loans amounted to $76.1 million or 2.9% of the Company's total
assets.
SPECIAL SERVICING OF MORTGAGE LOANS FOR OTHERS. The Company has developed a
program to provide loan servicing, including asset management and resolution
services, to third party owners of non-performing, underperforming and subprime
assets. The amount of loans serviced by the Company for others increased from
$361.6 million at December 31, 1995 to $1.92 billion at December 31, 1996 and to
$2.59 billion at March 31, 1997. These increases have resulted in servicing fees
and other charges, which consist primarily of loan servicing and related fees,
increasing from $2.9 million during 1995 to $4.7 million during 1996 and to $5.2
million during the three months ended March 31, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Non-interest Income" and "Business--Loan
Servicing Activities."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered carefully by prospective purchasers of the Capital Securities.
7
<PAGE>
THE CAPITAL SECURITIES OFFERING
<TABLE>
<S> <C>
The Trust.................... Ocwen Capital Trust I, a Delaware statutory business trust. The
sole assets of the Trust will be the Junior Subordinated
Debentures.
Securities Offered........... % Capital Securities evidencing undivided beneficial ownership
interests in the assets of the Trust. The holders thereof will
be entitled to a preference in certain circumstances with respect
to Distributions and amounts payable on redemption or liquidation
over the Common Securities.
Distributions................ Holders of the Capital Securities will be entitled to receive
cumulative cash distributions at an annual rate of % of the
liquidation amount of $1,000 per Capital Security, accruing from
the date of original issuance and payable semi-annually in
arrears on and of each year commencing on ,
1997. The distribution rate and the distribution and other
payment dates for the Capital Securities will correspond to the
interest rate and interest and other payment dates on the Junior
Subordinated Debentures. See "Description of Capital Securities."
Junior Subordinated
Debentures................. The Trust will invest the proceeds from the issuance of the
Capital Securities and Common Securities in an equivalent amount
of % Junior Subordinated Debentures of the Company. The Junior
Subordinated Debentures will mature on , 2027. The Junior
Subordinated Debentures will rank subordinate and junior in right
of payment to all Senior Indebtedness of the Company. In
addition, the Company's obligations under the Junior Subordinated
Debentures will be structurally subordinated to all existing and
future liabilities and obligations of its subsidiaries. See "Risk
Factors--Ranking of Subordinate Obligations Under the Guarantee
and the Junior Subordinated Debentures," "Risk Factors--Limited
Sources for Payments on Junior Subordinated Debentures and
Non-Banking Activities" and "Description of Junior Subordinated
Debentures--Subordination."
Guarantee.................... Payment of distributions out of moneys held by the Trust, and
payments on liquidation of the Trust or the redemption of Capital
Securities, are guaranteed by the Company to the extent the Trust
has funds available therefor. If the Company does not make
principal or interest payments on the Junior Subordinated
Debentures, the Trust will not have sufficient funds to make
Distributions (as defined herein) on the Capital Securities, in
which event the Guarantee shall not apply to such Distributions
until the Trust has sufficient funds available therefor. The
Company's obligations under the Guarantee, taken together with
its obligations under the Junior Subordinated Debentures and the
Indenture, including its obligation to pay all costs, expenses
and liabilities of the Trust (other than with respect to the
Capital Securities), constitute a full and unconditional
guarantee of all of the Trust's obligations under the Capital
Securities. See "Description of Guarantee" and "Relationship
Among the Capital Securities, the Junior Subordinated Debentures
and the Guarantee." The obligations of the Company under the
Guarantee are subordinate and junior in right of payment to all
Senior Indebtedness of the Company. See "Risk Factors-- Ranking
of Subordinated Obligations Under the Guarantee and the Junior
Subordinated Debentures" and "Description of Guarantee."
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Right to Defer Interest...... The Company has the right to defer payment of interest on the
Junior Subordinated Debentures by extending the interest payment
period on the Junior Subordinated Debentures, from time to time,
for up to 10 consecutive semi-annual periods. There could be
multiple Extension Periods of varying lengths throughout the term
of the Junior Subordinated Debentures. If interest payments on
the Junior Subordinated Debentures are so deferred, distributions
on the Capital Securities will also be deferred for an equivalent
period and the Company may not, and may not permit any subsidiary
of the Company to, (i) declare or pay any dividends or distribu-
tions on, or redeem, purchase, acquire, or make a liquidation
payment with respect to, the Company's capital stock or (ii) make
any payment of principal, interest or premium, if any, on or
repay, repurchase or redeem any debt securities that rank PARI
PASSU with or junior to the Junior Subordinated Debentures or
make any guarantee payments with respect to any guarantee by the
Company of the debt securities of any subsidiary of the Company
if such guarantee ranks PARI PASSU with or junior to the Junior
Subordinated Debentures (other than (a) dividends or
distributions in common stock of the Company, (b) payments under
the Guarantee, (c) any declaration of a dividend in connection
with the implementation of a shareholders' rights plan, or the
issuance of stock under any such plan in the future, or the
redemption or repurchase of any such rights pursuant thereto, (d)
as a result of reclassification of the Company's capital stock
into one or more other classes or series of the Company's capital
stock or the exchange or conversion of one class or series of the
Company's capital stock for another class or series of the
Company's capital stock, (e) the purchase of fractional interests
in the shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the
security being converted or exchanged and (f) purchases of common
stock related to the issuance of common stock or rights under any
of the Company's benefit plans or any of the Company's dividend
reinvestment plans). During an Extension Period, interest on the
Junior Subordinated Debentures will continue to accrue (and the
amount of Distributions to which holders of the Capital
Securities are entitled will accumulate) at the rate of % per
annum, compounded semi-annually. During an Extension Period,
holders of Capital Securities will be required to include the
stated interest on their pro rata share of the Junior
Subordinated Debentures in their gross income as original issue
discount ("OID") even though the cash payments attributable
thereto have not been made. See "Description of Junior
Subordinated Debentures--Option to Extend Interest Payment
Period" and "Certain United States Federal Income Tax
Consequences--Original Issue Discount."
Redemption................... The Junior Subordinated Debentures are redeemable by the Company
in whole or in part on or after , 2007, or at any time, in
whole but not in part, upon the occurrence of a Special Event, in
either case, subject to the receipt of any necessary prior
regulatory approval. If the Junior Subordinated Debentures are
redeemed, the Trust must redeem Trust Securities having an
aggregate liquidation amount equal to the aggregate principal
amount of the Junior Subordinated Debentures so redeemed. The
Trust Securities will be redeemed upon maturity of the Junior
Subordinated
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Debentures. See "Description of Capital
Securities--Redemption--Mandatory Redemption" and "--Special
Event Redemption or Distribution of Junior Subordinated
Debentures."
Liquidation of the Trust..... Upon the occurrence and continuation of a Special Event, the
Company will have the right, subject to the receipt of any
necessary prior regulatory approval, to terminate the Trust and
cause the Junior Subordinated Debentures to be distributed to the
holders of the Capital Securities and the Common Securities in
liquidation of the Trust. If the Junior Subordinated Debentures
are distributed to the holders of Capital Securities upon the
liquidation of the Trust, the Company will use its best efforts
to list the Junior Subordinated Debentures on such stock
exchanges, if any, on which the Capital Securities are then
listed. See "Description of Capital Securities--Redemption--
Special Event Redemption or Distribution of Junior Subordinated
Debentures."
In the event of the liquidation of the Trust, after satisfaction
of the claims of creditors of the Trust, if any, as provided by
applicable law, the holders of the Capital Securities will be
entitled to receive a liquidation amount of $1,000 per Capital
Security plus accumulated and unpaid Distributions thereon to the
date of payment, which may be in the form of a distribution of
such amount in Junior Subordinated Debentures as described above.
If such Liquidation Distribution (as defined herein) can be paid
only in part because the Trust has insufficient assets available
to pay in full the aggregate Liquidation Distribution, then the
amounts payable directly by the Trust on the Capital Securities
shall be paid on a pro rata basis. The holder(s) of the Common
Securities will be entitled to receive distributions upon any
such liquidation pro rata with the holders of the Capital Securi-
ties, except that if an Indenture Event of Default has occurred
and is continuing, the Capital Securities shall have a priority
over the Common Securities. See "Description of Capital
Securities--Liquidation Distribution Upon Dissolution."
Use of Proceeds.............. The proceeds to the Trust from the offering of the Capital
Securities will be $125 million. All of the proceeds from the
sale of the Capital Securities and the Common Securities will be
invested by the Trust in the Junior Subordinated Debentures. The
estimated net proceeds received by the Company from the Capital
Securities Offering of approximately $ , as well as the
estimated $ of net proceeds from the Common Stock Offer-
ing ($ if the Common Stock Underwriters' over-allotment
options are exercised in full), will be used by the Company
primarily to fund discounted loan acquisition and other lending
and investment activities which are currently conducted by the
Company through non-banking subsidiaries of the Company and the
Bank and to develop related businesses. In addition, a portion of
the net proceeds from the Offerings also could be used to acquire
other businesses, including other financial institutions,
mortgage banking companies, particularly those which are engaged
in sub-prime single-family residential lending activities, and
companies which have software or other technology which would
enhance the Company's ability to conduct loan servicing and other
activities. Although the Company evaluates potential acquisition
opportunities from time to time, currently there are no
agreements, arrangements or understandings with regard to any
such transaction. See "Use of Proceeds."
</TABLE>
10
<PAGE>
SUMMARY 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, 1996,
1995, 1994, 1993 and 1992 have been derived from consolidated 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, 1997 and 1996 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, 1997 are not necessarily indicative
of the results that may be expected for any other interim period or the entire
year ending December 31, 1997. 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,
-------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995(1) 1994(1) 1993(2)
--------- --------- --------- --------- --------- -----------
OPERATIONS DATA:
Interest income....................................... $ 54,527 $ 47,956 $ 193,894 $ 137,275 $ 131,458 $ 78,923
Interest expense...................................... 37,164 28,132 116,160 84,060 62,598 35,306
--------- --------- --------- --------- --------- -----------
Net interest income................................. 17,363 19,824 77,734 53,215 68,860 43,617
Provision for loan losses (3)......................... 9,742 9,407 22,450 1,121 -- --
--------- --------- --------- --------- --------- -----------
Net interest income after provision for loan
losses............................................ 7,621 10,417 55,284 52,094 68,860 43,617
--------- --------- --------- --------- --------- -----------
Gains on sales of interest-earning assets, net........ 16,778 5,017 21,682 6,955 5,727 8,386
Gain on sale of branch offices........................ -- -- -- 5,430 62,600 --
Income (loss) on real estate owned, net............... (794) (1,916) 3,827 9,540 5,995 (1,158)
Fees on financing transactions (4).................... -- -- -- -- -- 15,340
Other non-interest income............................. 5,367 191 11,766 9,255 7,253 13,304
--------- --------- --------- --------- --------- -----------
Total non-interest income........................... 21,351 3,292 37,275 31,180 81,575 35,872
--------- --------- --------- --------- --------- -----------
Non-interest expenses................................. 22,697 11,683 69,578 45,573 68,858 41,859
--------- --------- --------- --------- --------- -----------
Equity in earnings of investment in joint
ventures(5)......................................... 14,372 -- 38,320 -- -- --
--------- --------- --------- --------- --------- -----------
Income from continuing operations before income
taxes............................................... 20,647 2,026 61,301 37,701 81,577 37,630
Income tax expense (benefit).......................... 3,606 (1,003) 11,159 4,562 29,724 10,325
--------- --------- --------- --------- --------- -----------
Income from continuing operations..................... 17,041 3,029 50,142 33,139 51,853 27,305
Discontinued operations (6)........................... -- -- -- (7,672) (4,514) (2,270)
Extraordinary gains................................... -- -- -- -- -- 1,538
Cumulative effect of a change in accounting
principle........................................... -- -- -- -- -- (1,341)
--------- --------- --------- --------- --------- -----------
Net income............................................ $ 17,041 $ 3,029 $ 50,142 $ 25,467 $ 47,339 $ 25,232
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Income per share:
Continuing operations............................... $ 0.63 $ 0.11 $ 1.88 $ 1.19 $ 1.52 $ 0.80
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Net income.......................................... $ 0.63 $ 0.11 $ 1.88 $ 0.91 $ 1.39 $ 0.73
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
<CAPTION>
<S> <C>
1992
---------
OPERATIONS DATA:
Interest income....................................... $ 71,723
Interest expense...................................... 28,148
---------
Net interest income................................. 43,575
Provision for loan losses (3)......................... --
---------
Net interest income after provision for loan
losses............................................ 43,575
---------
Gains on sales of interest-earning assets, net........ 8,842
Gain on sale of branch offices........................ --
Income (loss) on real estate owned, net............... 1,050
Fees on financing transactions (4).................... 6,760
Other non-interest income............................. 8,130
---------
Total non-interest income........................... 24,782
---------
Non-interest expenses................................. 32,468
---------
Equity in earnings of investment in joint
ventures(5)......................................... --
---------
Income from continuing operations before income
taxes............................................... 35,889
Income tax expense (benefit).......................... 11,552
---------
Income from continuing operations..................... 24,337
Discontinued operations (6)........................... (1,946)
Extraordinary gains................................... 2,963
Cumulative effect of a change in accounting
principle........................................... --
---------
Net income............................................ $ 25,354
---------
---------
Income per share:
Continuing operations............................... $ 0.68
---------
---------
Net income.......................................... $ 0.71
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------------------------------------------
1997 1996 1995(1) 1994(1) 1993(2) 1992
---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets...................................... $2,649,471 $2,483,685 $1,973,590 $1,226,403 $1,396,677 $833,117
Securities available for sale (7)................. 348,066 354,005 337,480 187,717 527,183 340,404
Loans available for sale (7)(8)................... 88,511 126,366 251,790 102,293 101,066 754
Investment securities, net........................ 11,201 8,901 18,665 17,011 32,568 30,510
Mortgage-related securities held for investment,
net............................................. -- -- -- 91,917 121,550 114,046
Loan portfolio, net (8)........................... 422,232 402,582 295,605 57,045 88,288 41,015
Discounted loan portfolio (8)..................... 1,280,972 1,060,953 669,771 529,460 303,634 213,038
Investment in low-income housing tax credit
interests....................................... 99,924 93,309 81,362 49,442 16,203 --
Real estate owned, net (9)........................ 98,466 103,704 166,556 96,667 33,497 4,710
Investment in joint ventures, net (5)............. 33,367 67,909 -- -- -- --
Excess of cost over net assets acquired, net...... -- -- -- -- 10,467 11,825
Deposits.......................................... 2,106,829 1,919,742 1,501,646 1,023,268 871,879 339,622
Borrowings and other interest-bearing
obligations..................................... 265,196 300,518 272,214 25,510 373,792 361,799
Stockholders' equity.............................. 225,156 203,596 139,547(10) 153,383 111,831 94,396
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995(1) 1994(1) 1993(2) 1992
----------- ----------- ----------- ----------- ----------- ----------- ---------
OTHER DATA (11):
Average assets(12)...................... $ 2,607,854 $ 1,956,202 $ 2,013,283 $ 1,521,368 $ 1,714,953 $ 1,152,655 $ 712,542
Average equity.......................... 212,706 141,374 161,332 121,291 119,500 97,895 82,460
Return on average assets (12)(13):
Income from continuing operations..... 2.61% 0.62% 2.35% 2.18% 3.02% 2.37% 3.42%
Net income............................ 2.61 0.62 2.35 1.67 2.76 2.19 3.56
Return on average equity (13):
Income from continuing operations..... 32.05 8.57 31.08 27.32 43.39 27.89 29.51
Net income............................ 32.05 8.57 31.08 21.00 39.61 25.77 30.75
Average equity to average assets(12).... 8.16 7.23 8.01 7.97 6.97 8.49 11.57
Net interest spread..................... 3.48 5.30 5.46 5.25 4.86 4.05 4.66
Net interest margin..................... 3.20 4.89 4.84 4.54 4.75 4.30 6.06
Efficiency ratio (14)................... 42.76 50.54 45.38 54.00 45.77 52.66 47.50
Non-performing loans to loans at end of
period (15)........................... 2.15 1.16 0.56 1.27 4.35 3.71 8.32
Allowance for losses on loans to loans
at end of period...................... 1.13 0.94 0.87 0.65 1.84 0.99 1.80
Allowance for losses on discounted loans
to discounted loans at end of
period................................ 1.30 1.26 1.08 -- -- -- --
Bank regulatory capital ratios at end of
period:
Tangible.............................. 9.48 6.99 9.33 6.52 11.28 5.25 6.94
Core (Leverage)....................... 9.48 6.99 9.33 6.52 11.28 6.00 6.94
Risk-based............................ 13.22 11.41 12.85 11.80 14.74 13.31 21.29
</TABLE>
- ------------------------------
(1) Financial data at December 31, 1995 and 1994 reflects the Company's sale of
two and twenty-three branch offices which resulted in the transfer of
deposits of $111.7 million and $909.3 million, respectively, and resulted in
a gain on sale of $5.4 million and $62.6 million during 1995 and 1994,
respectively. Operations data for 1995 and 1994 reflects the gains from
these transactions. Exclusive of these gains and related income taxes and
profit sharing expense, the Company's income from continuing operations
would have been $30.3 million and $24.0 million during 1995 and 1994,
respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
(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, 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 in the three months ended March 31, 1997 and
1996 and the year ended December 31, 1996 consists primarily of $8.4
million, $8.7 million and $20.6 million related to the Company's discounted
loan portfolio, respectively. Beginning in the first quarter of 1996, the
Company began recording general valuation allowances on discounted loans.
See "Management 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 that
portion of the deferred tax asset which relates to tax residuals.
(5) Relates primarily to the Company's investment in LLC, a joint venture formed
to acquire loans from HUD. At March 31, 1997 and December 31, 1996, the net
discounted loans held by such joint venture amounted to $48.6 million and
$110.7 million, respectively. All of such loans are classified as available
for sale. See "Business--Investment in Joint Ventures."
(6) In September 1995 the Company announced its decision to dispose of its
automated banking division, which was substantially complete at December 31,
1995. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Discontinued Operations" and
Note 3 to the Consolidated Financial Statements.
(7) Securities available for sale were carried at market value at March 31, 1997
and December 31, 1996, 1995, 1994 and 1993 and amortized cost at December
31, 1992. Loans available for sale are carried at the lower of cost or
market value.
(8) The discounted loan portfolio consists of mortgage loans purchased at a
discount to the unpaid debt, most of which were non-performing or
under-performing at the date of acquisition. 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-- Discounted Loan Acquisition and Resolution Activities" and
"--Lending Activities," respectively. Data related to discounted loans does
not include discounted loans held by LLC.
(9) Real estate owned consists of properties acquired by foreclosure or by
deed-in-lieu thereof on loans and is primarily attributable to the Company's
discounted loan acquisition and resolution business.
(10) Reflects the Company's repurchase of 8,815,060 shares of Common Stock
during 1995 for an aggregate of $42.0 million.
(11) Ratios for periods subsequent to 1992 are based on average daily balances
during the periods and ratios for 1992 are based on month-end balances.
Ratios for the three months ended March 31, 1997 and 1996 are annualized
where appropriate.
(12) Includes the Company's pro rata share of the average assets held by LLC.
(13) Exclusive of a one-time assessment to recapitalize the SAIF in 1996 and
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 2.54%, 2.00% and 1.40% during 1996,
1995 and 1994, respectively, and (ii) return on average equity on income
from continuing operations amounted to 33.35%, 25.02% and 20.06% during
1996, 1995 and 1994, respectively.
(14) The efficiency ratio represents non-interest expense divided by the sum of
net interest income before provision for loan losses, non-interest income
and equity in earnings of investment in joint venture. Exclusive of the SAIF
assessment in 1996 and gains from the sales of branch offices in 1995 and
1994 and related income taxes and profit sharing expense, the efficiency
ratio amounted to 41.33%, 56.34% and 64.14% during 1996, 1995 and 1994,
respectively.
(15) Non-performing loans and total 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 REVIEW THE FOLLOWING FACTORS, AS WELL
AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE DECIDING TO MAKE
AN INVESTMENT IN CAPITAL SECURITIES.
THE DISCUSSION IN THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE
COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY
STATEMENTS MADE IN THIS PROSPECTUS, INCLUDING THE RISK FACTORS DISCUSSED BELOW,
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE
DISCUSSED ELSEWHERE HEREIN OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN.
NO ASSURANCES AS TO CONSISTENCY OF EARNINGS; CHANGING NATURE OF RISKS
GENERAL. The Company's corporate strategy emphasizes the identification,
development and management of specialized businesses which the Company believes
are not accurately evaluated and priced by the marketplace due to market,
economic and competitive conditions. This strategy can result in the entry into
or development of businesses and investment in assets which produce substantial
initial returns, which generally can be expected to decrease as markets become
more efficient in the evaluation and pricing of such businesses and assets. In
recent years these businesses have included the Company's discounted loan
acquisition and resolution business and investment in various types of
mortgage-related securities. The consistency of the operating results of the
Company also can be significantly affected by inter-period variations in (i) the
amount of assets acquired, particularly discounted loans; (ii) the amount of
resolutions of discounted loans, particularly large multi-family residential and
commercial real estate loans; (iii) the amount of multi-family residential and
commercial real estate loans which mature or are prepaid, particularly loans
with terms pursuant to which the Company participates in the profits of the
underlying real estate; and (iv) sales by the Company of loans and/or securities
acquired from the Company's securitization of loans. In addition, many of the
Company's businesses are relatively young and still evolving and involve greater
uncertainties and risks of loss than the activities traditionally conducted by
savings institutions. As a result, there can be no assurance that there will not
be significant inter-period variations in the profitability of the Company's
operations.
FLUCTUATIONS IN NON-INTEREST INCOME. In recent years the Company's
operating results have been significantly affected by certain non-recurring
items of non-interest income. In addition to $5.4 million and $62.6 million of
gains from sales of branch offices in 1995 and 1994, respectively, in recent
periods the Company has earned significant non-interest income from gains on
sales of interest-earning assets and real estate owned and other assets. Gains
on sales of interest-earning assets amounted to $16.8 million, $5.0 million,
$21.7 million, $7.0 million and $5.7 million during the three months ended March
31, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994,
respectively, and gains on the sale of real estate owned, which are a component
of income (loss) on real estate owned, net, amounted to $3.9 million, $3.9
million, $22.8 million, $19.0 million and $21.3 million during the same
respective periods. Gains on sales of interest-earning assets and real estate
owned generally are dependent on various factors which are not within the
control of the Company, including market and economic conditions. As a result,
there can be no assurance that the level of gains on sales of interest-earning
assets and real estate owned reported by the Company in prior periods will be
repeated in future periods or that there will not be substantial inter-period
variations in the results from such activities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--Non-interest Income."
CHANGING NATURE OF RISKS. The nature of the risks associated with the
Company's operations have changed and are likely to continue to change over time
due to a corporate strategy which emphasizes the entry into and exit from
business lines based on market, economic or competitive conditions. As a result,
there can be no assurance that the risks associated with an investment in the
Company described herein
13
<PAGE>
will not materially change in the future or that there will not be additional
risks associated with the Company's future operations not described herein.
RISKS RELATED TO NON-TRADITIONAL OPERATING ACTIVITIES
As discussed below, the Company is engaged in a variety of businesses which
generally involve more uncertainties and risks than the single-family
residential lending activities historically emphasized by savings institutions.
In addition, many of the Company's business activities, including its lending
activities, are conducted on a nationwide basis, which reduces the risks
associated with concentration in any one particular market area but involves
other risks because, among other things, the Company may not be as familiar with
market conditions and other relevant factors as it would be in the case of
activities which are conducted in the market areas in which its executive
offices and branch office are located.
DISCOUNTED LOAN ACQUISITION AND RESOLUTION ACTIVITIES. The Company's
lending activities include the acquisition and resolution of non-performing or
underperforming single-family (one to four units) residential loans,
multi-family (over four units) residential loans and commercial real estate
loans which are purchased at a discount. At March 31, 1997, the Company's
discounted loan portfolio amounted to $1.28 billion or 48.4% of the Company's
total assets. The Company acquires discounted loans from governmental agencies,
which in the early years of the program consisted primarily of the FDIC and the
Resolution Trust Corporation ("RTC"), a federal agency formed to resolve failed
savings institutions which has since ceased operations, and in recent years has
consisted primarily of HUD. Inclusive of the Company's 50% pro rata interest in
discounted loans acquired by LLC, the Company acquired an aggregate of $1.19
billion principal amount of discounted loans, consisting primarily of $961.4
million principal amount of discounted single-family residential loans, from HUD
during 1995, 1996 and the three months ended March 31, 1997. In addition to
governmental agencies, the Company acquires discounted loans from various
private sector sellers, such as banks, savings institutions, mortgage companies
and insurance companies, which accounted for 53.8% of the discounted loans in
the Company's discounted loan portfolio at March 31, 1997. Although the Company
believes that a permanent market for the acquisition of non-performing and
underperforming mortgage loans at a discount has emerged in recent years, 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. There
also can be no assurance that the discount on the non-performing and
underperforming loans acquired by the Company, which in the aggregate decreased
from 31.4% of total discounted loans at December 31, 1992 to 16.9% of total
discounted loans at March 31, 1997, will enable the Company to resolve
discounted loans in the future as profitably as in prior periods. The yield on
the discounted portfolio also is subject to significant inter-period variations
as a result of the timing of resolutions of discounted loans, particularly
multi-family residential and commercial real estate loans and non-performing
single-family residential loans, interest on which is recognized on a cash
basis, and the mix of the overall portfolio between performing and
non-performing loans. See "Business--Discounted Loan Acquisition and Resolution
Activities" and "Business--Investment in Joint Ventures."
MULTI-FAMILY RESIDENTIAL, COMMERCIAL REAL ESTATE AND CONSTRUCTION LENDING
ACTIVITIES. The Company's lending activities currently include nationwide loans
secured by existing commercial real estate, particularly hotels and office
buildings, and, to a lesser extent, existing multi-family residential real
estate. In addition, from time to time the Company originates loans for the
construction of multi-family residential real estate and land acquisition and
development loans. At March 31, 1997, multi-family residential, commercial real
estate and construction loans (including land acquisition and development loans)
available for sale and held for investment aggregated $347.1 million, net, or
13.1% of the Company's total assets. Multi-family residential, commercial real
estate and construction lending generally is considered to involve a higher
degree of risk than single-family residential lending due to a variety of
factors, including generally larger loan balances, the dependency on successful
completion or operation of the project for repayment, the difficulties in
estimating construction costs and loan terms which often do not require full
amortization of
14
<PAGE>
the loan over its term and, instead, provide for a balloon payment at stated
maturity. There can be no assurance that the Company's multi-family residential,
commercial real estate and construction lending activities will not be adversely
affected by these and the other risks related to such activities. See
"Business--Lending Activities--Multi-family Residential and Commercial Real
Estate Loans."
SUBPRIME SINGLE-FAMILY RESIDENTIAL 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. At
March 31, 1997, the Company's sub-prime loans aggregated $76.1 million or 2.9%
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. Sub-prime loans present a higher
level of risk of default than conforming loans because of the increased
potential for default by borrowers who may have had previous credit problems or
who do not have any credit history, and may not be as saleable as loans which
conform to the guidelines established by various federal agencies. See
"Business--Lending Activities--Single-family Residential Loans."
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, 1997, the Company's investments in such
interests amounted to $99.9 million or 3.8% 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 resulting from potential changes
to the Code. See "Business--Investment Activities--Investment in Low-Income
Housing Tax Credit Interests."
INVESTMENTS IN MORTGAGE-RELATED SECURITIES. From time to time the Company
invests in a variety of mortgage-related securities, such as senior and
subordinate regular interests and residual interests in collateralized mortgage
obligations ("CMOs"), including CMOs which have qualified as Real Estate
Mortgage Investment Conduits ("REMICs"). These investments include so-called
stripped mortgage-related securities, in which interest coupons may be stripped
from a mortgage security to create an interest-only ("IO") strip, where the
investor receives all of the interest cash flows and none of the principal, and
a principal-only ("PO") strip, where the investor receives all of the principal
cash flows and none of the interest. At March 31, 1997, the Company's
mortgage-related securities available for sale amounted to $348.1 million or
13.1% of the Company's total assets and included $180.1 million of IO strips,
substantially all of which were either issued by FHLMC or the Federal National
Mortgage Association ("FNMA") or rated AAA by national rating agencies, as well
as $77.6 million of subordinate interests and $21.6 million of residual
interests in mortgage-related securities. Some mortgage-related securities, such
as IO strips, PO strips and residual interests, exhibit considerably more price
volatility than mortgages or ordinary mortgage pass-through securities, due in
part to the uncertain cash flows that result from changes in the prepayment
rates of the underlying mortgages. Other mortgage-related securities, such as
subordinated interests, also involve substantially more credit risk than the
senior classes of the mortgage-related securities to which such interests relate
and generally are not as liquid as such senior classes. The Company generally
acquires subordinated interests primarily in connection with the securitization
of its loans, particularly single-family residential loans to non-conforming
borrowers and discounted loans, and under circumstances in which it continues to
service the loans which back the related 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
15
<PAGE>
changing interest rate environments on the Company, investments in certain
mortgage-related securities and hedging transactions could cause the Company to
recognize losses depending on the terms of the instrument and the interest rate
environment. See "Business--Investment Activities."
REGULATION AND REGULATORY CAPITAL REQUIREMENTS
Both the Company, as a savings and loan holding company, and the Bank, as a
federally-chartered savings institution, are subject to significant governmental
supervision and regulation, which is intended primarily for the protection of
depositors. Statutes and regulations affecting the Company and the Bank may be
changed at any time, and the interpretation of these statutes and regulations by
examining authorities also is subject to change. There can be no assurance that
future changes in applicable statutes and regulations or in their interpretation
will not adversely affect the business of the Company. The applicable regulatory
authorities may, as a result of such regulation and examination, impose
regulatory sanctions upon the Company or the Bank, as applicable, as well as
various requirements or restrictions which could adversely affect their business
activities. A substantial portion of the Bank's operations involves businesses
that are not traditionally conducted by savings institutions and, as a result,
there can be no assurance that future actions by applicable regulatory
authorities, or future changes in applicable statutes or regulations, will not
limit or otherwise adversely affect the Bank's ability to engage in such
activities.
In connection with a recent examination of the Bank, the staff of the OTS
expressed concern about many of the Bank's non-traditional operations (which are
discussed under "--Risks Related to Non-Traditional Operating Activities"
above), certain of its accounting policies and the adequacy of the Bank's
capital in light of the Bank's lending and investment strategies. As a result of
such examination, the OTS instructed the Bank to maintain, commencing on June
30, 1997, regulatory capital ratios which significantly exceed the requirements
which are generally applicable to federally-chartered savings institutions such
as the Bank. Although the Bank strongly disagrees with the level of risk
perceived by the OTS in its businesses, the Bank has taken or agreed to take
various actions to address OTS concerns with respect to its risk profile,
including without limitation transferring certain of its lending operations to
non-banking subsidiaries of the Company, and modified certain of its accounting
policies. In addition, the Bank also has committed to the OTS to maintain a core
capital (leverage) ratio and a total risk-based capital ratio of at least 9% and
13%, respectively, commencing on June 30, 1997, which has been agreed to by the
OTS. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Regulatory Developments." At March 31, 1997, the
Bank's core capital (leverage) ratio and total risk-based capital ratio amounted
to 9.48% and 13.22%, respectively, which exceeded both the 3.00% and 8.00%
requirements of general applicability, respectively, and the amounts committed
to be maintained by the Bank on June 30, 1997. At March 31, 1997, the Bank also
qualified as a "well-capitalized" institution under applicable laws and
regulations because it had a total risk-based capital ratio of 10.0% or more, a
Tier 1 risk-based capital ratio of 6.0% or more and a Tier 1 leverage capital
ratio of 5.0% or more and was not subject to a written agreement, order or
directive issued by an appropriate agency to meet and maintain a specific
capital level for any capital measure.
There can be no assurance that in the future the OTS either will agree to a
decrease in the 9% core capital (leverage) ratio and the 13% total risk-based
capital ratio committed to be maintained by the Bank or will not seek an
increase in such requirements. Unless and until these regulatory capital
requirements are decreased, the Bank's ability to leverage its capital through
future growth in assets (including its ability to continue growing at historical
rates) will be adversely affected, as will the Company's ability to receive
dividends from the Bank, which are a primary source of payments on outstanding
indebtedness of the Company and for the payment of dividends on the Common Stock
in the future. See "--Limited Sources for Dividends on Common Stock" below.
Although the Company and its non-banking subsidiaries will not be restricted in
their growth by these capital requirements, because they do not have access to
the Bank's funding sources their profitability may be different from the Bank's
for particular types of business. In
16
<PAGE>
addition, there can be no assurance that the Bank will continue to meet the
regulatory capital requirements committed to be maintained by it or that the OTS
will not formally impose such requirements pursuant to a written agreement,
order or directive, which would cause the Bank to cease to be a "well-
capitalized" institution under applicable laws and regulations. In the event
that the Bank ceased to be a "well-capitalized" institution, the Bank would be
prohibited from accepting, renewing or rolling over its brokered and other
wholesale deposits, which are its principal source of funding, without the prior
approval of the FDIC, and the Bank could become subject to other regulatory
restrictions on its operations. For a description of these restrictions and
certain other regulatory consequences in the event that the Bank ceases to be a
"well-capitalized" institution under OTS regulations, see "Regulation--
Regulatory Capital Requirements," "--Prompt Corrective Action," "--Restrictions
on Capital Distributions" and "--Brokered Deposits."
RISK OF FUTURE ADJUSTMENTS TO ALLOWANCES FOR LOSSES
The Company believes that it has established adequate allowances for losses
for each of its loan portfolio and discounted loan portfolio in accordance with
generally accepted accounting principles. Future additions to these allowances,
in the form of provisions for losses on loans and discounted loans, may be
necessary, however, due to changes in economic conditions, increases in loans
and discounted loans and the performance of the Company's loan and discounted
loan portfolios. In addition, the OTS, as an integral part of its examination
process, periodically reviews the Company's allowances for losses and the
carrying value of its assets. As a result of such a review at the end of 1995,
the Company changed its methodology for valuing discounted loans and began
establishing provisions for loan losses and maintaining an allowance for loan
losses in connection with such loans, as well as increased its provision for
losses in fair value on real estate owned. In addition, as a result of such a
review at the end of 1996, the Company established as of December 31, 1996 $7.2
million of write downs of cost basis against loans and securities resulting from
its investment in loans acquired from HUD. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--Provisions for Loan Losses" and "--Recent Regulatory Developments."
There can be no assurance that the Company will not determine, at the request of
the OTS or otherwise, to further increase its allowances for losses on loans and
discounted loans or adjust the carrying value of its real estate owned or other
assets. Increases in the Company's provisions for losses on loans would
adversely affect the Company's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
RISKS RELATED TO REAL ESTATE OWNED
At March 31, 1997, the Company's real estate owned, net amounted to $98.5
million or 3.7% 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. 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 the areas
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, which adversely affect operations.
Real estate owned also require increased allocation of resources and expense to
the management and work out of the asset, which also can adversely affect
operations. Although the Company's real estate owned at March 31, 1997
represented a $68.1 million or 40.9% decrease from the amount of its real estate
owned at December 31, 1995, there can be no assurance that the amount of the
Company's real estate owned will not increase in the future as a result of the
Company's discounted loan acquisition and resolution activities and the
Company's single-family residential, multi-family residential, commercial real
estate and construction lending activities. In addition, there can be no
assurance that in the future the Company's real estate
17
<PAGE>
owned will not have environmental problems which could materially adversely
affect the Company's financial condition or operations. See "Business--Asset
Quality--Real Estate Owned."
RISKS RELATED TO RELIANCE ON BROKERED AND OTHER WHOLESALE DEPOSITS
The Company currently utilizes as its principal 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, 1997
certificates of deposit obtained through national investment banking firms which
solicit deposits for the Company from their customers amounted to $1.34 billion
or 63.6% of total deposits, certificates of deposit obtained through regional
and local investment banking firms amounted to $388.8 million or 18.4% of total
deposits and certificates of deposits obtained from the Company's direct
solicitation of institutional investors and high net worth individuals amounted
to $218.3 million or 10.4% 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 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 subject to
competition from 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 and
Regulatory Capital Requirements" above and "Regulation--The Bank-- Brokered
Deposits." As a result of the Company's reliance on brokered and other wholesale
deposits, significant changes in the prevailing interest rate environment, in
the availability of alternative investments for individual and institutional
investors or in the Company's financial condition, among other factors, could
affect the Company's liquidity and results of operations much more significantly
than might be the case with an institution that obtained a greater portion of
its funds from retail or core deposits attracted through a branch network.
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
on outstanding loans or dispose of real estate owned and would otherwise have an
adverse effect on its business, including the demand for new loans, the ability
of customers to repay loans and the value of both the collateral pledged to the
Company to secure its loans and its real estate owned. Moreover, earthquakes and
other natural disasters could have similar effects. Although such disasters have
not significantly adversely affected the Company to date, the availability of
insurance for such disasters in California, in which the Company conducts
substantial business activities, is severely limited. At March 31, 1997, the
Company had loans with an unpaid balance aggregating $475.7 million (including
loans available for sale) secured by properties located in California and $67.5
million of the Company's real estate owned was located in California, which
collectively represent 20.5% of the Company's total assets at such date.
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
18
<PAGE>
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 20 to the Consolidated Financial Statements.
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. The Company
also encounters significant competition in connection with its other lending
activities, its investment activities and in its deposit-gathering activities.
Many of the Company's competitors are significantly larger than the Company and
have access to greater capital and other resources. In addition, many of the
Company's competitors are not subject to the same extensive federal regulation
that govern federally-insured institutions such as the Bank and their holding
companies. As a result, many of the Company's competitors have advantages over
the Company in conducting certain businesses and providing certain services.
IMPORTANCE OF THE CHIEF EXECUTIVE OFFICER
William C. Erbey, Chairman, President and Chief Executive Officer of the
Company, has had, and will continue to have, a significant role in the
development and management of the Company's business. The loss of his services
could have an adverse effect on the Company. The Company and Mr. Erbey are not
parties to an employment agreement, and the Company currently does not maintain
key man life insurance relating to Mr. Erbey or any of its other officers. See
"Business--Management."
CONTROL OF CURRENT STOCKHOLDERS
After giving effect to the Common Stock Offering and including
currently-exercisable options to acquire Common Stock, the Company's directors
and executive officers and their affiliates will in the aggregate beneficially
own or control 54.7% of the outstanding Common Stock, including 33.1% owned or
controlled by William C. Erbey, Chairman, President and Chief Executive Officer
of the Company, and 17.0% owned or controlled by Barry N. Wish, Chairman,
Emeritus, of the Company. 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. In addition, Messrs. Erbey and Wish are two of the
five current directors of the Company. See "Management" and "Beneficial
Ownership of Common Stock."
19
<PAGE>
POTENTIAL CONFLICTS OF INTEREST INVOLVING OAIC
The Company will be subject to various potential conflicts of interest
arising from its and OCC's relationship with OAIC, which intends to invest
primarily in assets in which the Company also may invest, directly or indirectly
through the Bank. OAIC intends to invest primarily in (i) subordinated classes
of mortgage-related securities, and possibly other classes of such securities;
(ii) multi-family residential and commercial real estate, including properties
acquired by a mortgage lender by foreclosure or by deed-in-lieu thereof and
underperforming or otherwise distressed real property (collectively, "Distressed
Real Estate"); and (iii) single-family residential loans, multi-family
residential loans and commercial real estate loans, including in each case loans
that are current in accordance with their terms or are non-performing or
underperforming. The Company does not intend to invest in subordinated classes
of mortgage-related securities which are not created in connection with its
securitization activities or Distressed Real Estate and, as a result, the
Company, the Bank and OCC generally have agreed to give OAIC an exclusive right
to purchase such subordinated classes of mortgage-related securities and
Distressed Real Estate. Both the Company and OAIC may engage in the acquisition
and resolution of mortgage loans, including non-performing and underperforming
mortgage loans, and from time to time each such entity also may invest in
various non-subordinated classes of mortgage-related securities. In this regard,
OCC, which conducts the large multi-family residential and commercial real
estate lending activities of the Company as well as manages OAIC, currently is
emphasizing acquiring loans for OAIC (in order to enable OAIC to leverage the
proceeds from the initial public offering of OAIC's common stock) and not the
Company. As a result of the Company's and OAIC's strategies to invest in certain
assets, there can be no assurance that investment opportunities which previously
would have been taken by the Company will not be allocated to OAIC. In addition,
from time to time the Company may sell loans, securities and real estate owned
to OAIC, which also would involve potential conflicts of interest. The only such
sale to date was the Company's sale to OAIC on May 19, 1997 of nine subordinate
and IO mortgage-related securities with an aggregate carrying value of $42.6
million, which resulted in a $2.6 million gain to the Company. Although the
Company and OAIC have established certain policies and procedures in order to
ensure that sales and other transactions between the Company, the Bank and/or
OCC, on the one hand, and OAIC, on the other hand (including without limitation
the base compensation to be paid to OCC by OAIC for managing its day-to-day
operations), are conducted on an arms'-length basis on substantially the same
terms as would be present in transactions with unaffiliated parties, there can
be no assurance that such procedures will be sufficient in all situations to
solve potential conflicts of interest. See "Business--Subsidiaries."
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR
SUBORDINATED DEBENTURES
The obligations of the Company under the Guarantee issued by the Company for
the benefit of the holders of Capital Securities and under the Junior
Subordinated Debentures are unsecured and rank subordinate and junior in right
of payment to all Senior Indebtedness of the Company. At March 31, 1997, the
Senior Indebtedness of the Company aggregated $125 million. See "Description of
Junior Subordinated Debentures-- Subordination." For a description of covenants
in the Indenture relating to the Junior Subordinated Debentures which restrict
the incurrence of Funded Indebtedness (as defined) by the Company, see
"Description of Junior Subordinated Debentures--Certain Covenants of the
Company."
LIMITED SOURCES FOR PAYMENTS ON JUNIOR SUBORDINATED DEBENTURES AND OTHER
INDEBTEDNESS
AND FUNDING OF NON-BANKING ACTIVITIES
As a holding company, the ability of the Company to pay interest and
principal on the Junior Subordinated Debentures, to pay other indebtedness and
to conduct lending and investment activities directly or in non-banking
subsidiaries (including without limitation activities recently transferred from
the Bank to address concerns of the OTS regarding the risk profile of the Bank's
operations) will depend significantly 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 (including proceeds from the Offerings), any proceeds
from any subsequent securities offering or other borrowings and any dividends
from non-banking subsidiaries of the Company. The ability of the Bank to pay
dividends or make other distributions to the Company generally is dependent on
the Bank's compliance with applicable regulatory capital requirements and
regulatory restrictions. See "Regulation--The Bank--Restrictions on Capital
Distributions" and "--Affiliate Transactions." Moreover, in order to address
concerns by the OTS concerning the risk profile of the Bank's operations, the
Bank recently agreed, subject to compliance with the foregoing regulatory
limitations, to dividend to the Company certain subordinated mortgage-related
20
<PAGE>
securities resulting from securitization activities conducted by the Bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Regulatory Developments." Such dividends will reduce the
Bank's ability to dividend cash to the Company. In addition to the foregoing
limitations, 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, and there are certain contractual restrictions on the ability of the
Company and the Bank to pay dividends set forth in the Indenture, dated as of
September 30, 1996, between the Company and Bank One, Columbus, NA, as trustee,
relating to the Company's issuance of $125 million of 11.875% Notes due 2003
(the "Notes") in September 1996. In addition, the right of the Company to
participate in any distribution of assets of any subsidiary, including the Bank,
upon such subsidiary's liquidation or reorganization or otherwise (and thus the
ability of holders of the Capital Securities to benefit indirectly from such
distribution), will be subject to the prior claims of creditors of that
subsidiary, except to the extent that any claims of the Company as a creditor of
such subsidiary may be recognized as such. Accordingly, the Capital Securities
will effectively be subordinated to all existing and future liabilities of the
Company's subsidiaries, and holders of the Capital Securities should look only
to the assets of the Company for payments on the Capital Securities. As of March
31, 1997, the Company's consolidated subsidiaries had indebtedness and other
liabilities of approximately $2.3 billion.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CAPITAL SECURITIES
If a Trust Enforcement Event (as defined herein) occurs and is continuing,
then the holders of Capital Securities would rely on the enforcement by the
Property Trustee (as defined herein) of its rights as a holder of the Junior
Subordinated Debentures against the Company. The holders of a majority in
liquidation amount of the Capital Securities will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Property Trustee or to direct the exercise of any trust or power conferred
upon the Property Trustee under the Declaration (as defined herein), including
the right to direct the Property Trustee to exercise the remedies available to
it as a holder of the Junior Subordinated Debentures. If the Property Trustee
fails to enforce its rights with respect to the Junior Subordinated Debentures
held by the Trust, any record holder of Capital Securities may, to the fullest
extent permitted by law, institute legal proceedings directly against the
Company to enforce the Property Trustee's rights under such Junior Subordinated
Debentures without first instituting any legal proceedings against such Property
Trustee or any other person or entity.
If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Trust would lack funds for the
payment of Distributions or amounts payable on redemption of the Capital
Securities or otherwise, and, in such event, holders of the Capital Securities
would not be able to rely upon the Guarantee for payment of such amounts.
However, in the event the Company failed to pay interest on or principal of the
Junior Subordinated Debentures on any payment date on which such payment is due
and payable, then a holder of Capital Securities may directly institute a
proceeding against the Company under the Indenture for enforcement of payment to
such holder of the interest on or principal of such Junior Subordinated
Debentures having a principal amount equal to the aggregate liquidation amount
of the Capital Securities of such holder (a "Direct Action"). In connection with
such Direct Action, the Company will be subrogated to the rights of such holder
of Capital Securities under the Declaration to the extent of any payment made by
the Company to such holder of Capital Securities in such Direct Action. Except
as set forth herein, holders of Capital Securities will not be able to exercise
directly any other remedy available to the holders of Junior Subordinated
Debentures or assert directly any other rights in respect of the Junior
Subordinated Debentures. See "Description of Capital Securities--Enforcement of
Certain Rights by Holders of Capital Securities," "Description of Guarantee" and
"Description of Junior Subordinated Debentures--Debenture Events of Default."
The Declaration provides that each holder of Capital Securities by acceptance
thereof agrees to the provisions of the Guarantee and the Indenture.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES
The Company has the right under the Indenture to defer the payment of
interest on the Junior Subordinated Debentures at any time or from time to time
for a period not exceeding 10 consecutive semi-annual periods, provided that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. As a consequence of any such deferral, semi-annual
Distributions on the Capital Securities by the Trust will be deferred during any
such Extension Period but would continue to accumulate at the rate of % per
21
<PAGE>
annum to the extent permitted by applicable law, compounded semi-annually during
such Extension Period. During any such Extension Period, the Company may not,
and may not permit any subsidiary of the Company to, (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank PARI PASSU
with or junior to the Junior Subordinated Debentures or make any guarantee
payments with respect to any guarantee by the Company of the debt securities of
any subsidiary of the Company if such guarantee ranks PARI PASSU with or junior
to the Junior Subordinated Debentures (other than (a) dividends or distributions
in common stock of the Company, (b) payments under the Guarantee, (c) any
declaration of a dividend in connection with the implementation of a
shareholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, (d)
as a result of reclassification of the Company's capital stock into one or more
other classes or series of the Company's capital stock or the exchange or
conversion of one class or series of the Company's capital stock for another
class or series of the Company's capital stock, (e) the purchase of fractional
interests in the shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged and (f) purchases of common stock related to the issuance
of common stock or rights under any of the Company's benefit plans or any of the
Company's dividend reinvestment plans). Prior to the termination of any such
Extension Period, the Company may further extend the Extension Period, provided
that no Extension Period may exceed 10 consecutive semi-annual periods or extend
beyond the Stated Maturity of the Junior Subordinated Debentures. Upon the
termination of any Extension Period and the payment of all amounts then due on
any Interest Payment Date (as defined herein), the Company may elect to begin a
new Extension Period subject to the above requirements. See "Description of
Capital Securities--Distributions" and "Description of Junior Subordinated
Debentures--Option to Extend Interest Payment Period."
Should the Company defer payment of interest on the Junior Subordinated
Debentures, a holder of Capital Securities will be required to accrue income (in
the form of OID) for United States federal income tax purposes in respect of its
pro rata share of the Junior Subordinated Debentures held by the Trust. As a
result, a holder of Capital Securities will be required to include such interest
income in gross income for United States federal income tax purposes in advance
of the receipt of cash attributable to such interest income, and will not
receive the cash related to such income from the Trust if the holder disposes of
the Capital Securities prior to the record date for the payment of Distributions
with respect to such Extension Period. See "Certain United States Federal Income
Tax Consequences--Original Issue Discount" and "--Sales of Capital Securities."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. However, should the Company elect to exercise such
right in the future, the market price of the Capital Securities is likely to be
adversely affected. A holder that disposes of its Capital Securities during an
Extension Period, therefore, might not receive the same return on its investment
as a holder that continues to hold its Capital Securities. In addition, as a
result of the existence of the Company's right to defer interest payments, the
market price of the Capital Securities (which represent undivided beneficial
interests in the Junior Subordinated Debentures) may be more volatile than the
market prices of other similar securities where the issuer does not have such
right to defer interest payments.
SPECIAL EVENT REDEMPTION; POSSIBLE TAX LEGISLATION
Upon the occurrence and continuation of a Special Event, the Company has the
right, subject to the receipt of any necessary prior regulatory approval, to
redeem the Junior Subordinated Debentures in whole (but not in part) at the
redemption price within 90 days following the occurrence of such Special Event
and thereby cause a mandatory redemption of the Capital Securities and Common
Securities. A "Special Event" means a Tax Event, Regulatory Capital Event or an
Investment Company Event (each as defined herein).
Legislation was proposed by the United States Department of Treasury on
February 6, 1997 as part of President Clinton's Fiscal 1998 Budget Proposal that
contains a provision which generally would deny an interest deduction for
interest paid or accrued on an instrument issued by a corporation that (i) has a
maximum term of more than 15 years and (ii) is not shown as indebtedness on the
separate balance sheet of the issuer or, where the instrument is issued to a
related party (other than a corporation), where the holder or some other related
party issues a related instrument that is not shown as indebtedness on the
consolidated balance sheet that includes the issuer and the holder (the
"Administration's Proposal"). The Administration's Proposal was
22
<PAGE>
proposed to be effective generally for instruments issued on or after the date
of the first Congressional committee action taken on the Administration's
Proposal. If this provision were to apply to the Junior Subordinated Debentures,
the Company would not be able to deduct the interest on the Junior Subordinated
Debentures. Legislative proposals approved by the U.S. House of Representatives
and the U.S. Senate on June 26 and 27, 1997, respectively, did not include the
Administration's Proposal, and on June 30, 1997 the Clinton Administration
announced a new budget proposal which also does not appear to include such
proposal. There can be no assurance, however, that current or future legislative
proposals or final legislation will not adversely affect the ability of the
Company to deduct interest on the Junior Subordinated Debentures or otherwise
affect the tax treatment of the transactions described herein. Moreover, such
legislation could give rise to a Tax Event, which would permit the Company to
cause a redemption of the Capital Securities, as described more fully herein
under the caption "Description of Capital Securities--Redemption."
LIQUIDATION DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
Upon the occurrence and continuation of a Special Event the Company will
have the right, subject to the receipt of any necessary prior regulatory
approval, to terminate the Trust and cause the Junior Subordinated Debentures to
be distributed to the holders of the Capital Securities and the Common
Securities in liquidation of the Trust. In addition, upon liquidation of the
Trust in certain other events, the Junior Subordinated Debentures may be
distributed to such holders. Under current United States federal income tax law
and interpretations thereof and assuming, as expected, the Trust is treated as a
grantor trust for United States federal income tax purposes, a distribution by
the Trust of the Junior Subordinated Debentures pursuant to a liquidation of the
Trust will not be a taxable event to the Trust or to holders of the Capital
Securities and will result in a holder of the Capital Securities receiving
directly such holder's pro rata share of the Junior Subordinated Debentures
(previously held indirectly through the Trust). If, however, the liquidation of
the Trust were to occur because the Trust is subject to United States federal
income tax with respect to income accrued or received on the Junior Subordinated
Debentures as a result of the occurrence of a Tax Event or otherwise, the
distribution of Junior Subordinated Debentures to holders of the Capital
Securities by the Trust could be a taxable event to the Trust and each holder,
and holders of the Capital Securities may be required to recognize gain or loss
as if they had exchanged their Capital Securities for the Junior Subordinated
Debentures they received upon the liquidation of the Trust. See "Certain United
States Federal Income Tax Consequences--Distribution of Junior Subordinated
Debentures or Cash Upon Liquidation of the Trust."
There can be no assurance as to the market prices for Capital Securities or
Junior Subordinated Debentures that may be distributed in exchange for Capital
Securities if a liquidation of the Trust occurs. Accordingly, the Capital
Securities that an investor may purchase, whether pursuant to the offer made
hereby or in the secondary market, or the Junior Subordinated Debentures that a
holder of Capital Securities may receive on liquidation of the Trust, may trade
at a discount to the price that the investor paid to purchase the Capital
Securities offered hereby. Because holders of Capital Securities may receive
Junior Subordinated Debentures on termination of the Trust, prospective
purchasers of Capital Securities are also making an investment decision with
regard to the Junior Subordinated Debentures and should carefully review all the
information regarding the Junior Subordinated Debentures contained herein. See
"Description of Capital Securities--Redemption--Special Event Redemption or
Distribution of Junior Subordinated Debentures" and "Description of Junior
Subordinated Debentures--General."
LIMITED VOTING RIGHTS
Holders of Capital Securities generally will have limited voting rights
relating only to the modification of the Capital Securities and certain other
matters described herein. Holders of Capital Securities will not be entitled to
vote to appoint, remove or replace any of the Trustees (as defined herein),
which voting rights are vested exclusively in the holder of the Common
Securities. The Trustees and the Company may amend the Declaration (as defined
herein) without the consent of holders of Capital Securities to ensure that the
Trust will be classified as a grantor trust for United States federal income tax
purposes, unless such action materially and adversely affects the interests of
such holders. See "Description of Capital Securities--Voting Rights; Amendment
of the Declaration."
23
<PAGE>
TRADING CHARACTERISTICS OF CAPITAL SECURITIES
The Capital Securities may trade at prices that do not fully reflect the
value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. See "Certain United States Federal Income Tax
Consequences--Sale of Capital Securities." A holder of Capital Securities that
disposes of its Capital Securities between record dates for payments of
Distributions (and consequently does not receive a Distribution from the Trust
for the period prior to such disposition) will nevertheless be required to
include in income as ordinary income an amount equal to the accrued but unpaid
interest on the Junior Subordinated Debentures through the date of disposition
and to add such amount to its adjusted tax basis in the Capital Securities
disposed of. Such holder will recognize a capital loss to the extent the selling
price (which may not fully reflect the value of accrued but unpaid interest) is
less than its adjusted tax basis (which will include accrued but unpaid
interest). Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax purposes.
See "Certain Federal Income Tax Consequences--Original Issue Discount" and
"--Sales of Capital Securities."
THE COMPANY
The Company is a specialty financial services 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 Federal Home Loan Bank ("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.
THE TRUST
The Trust is a statutory business trust created under the Delaware Business
Trust Act, as amended (the "Trust Act"), pursuant to the filing of a certificate
of trust (the "Certificate of Trust") with the Secretary of State of the State
of Delaware and a declaration of trust (as amended and restated, the
"Declaration") substantially in the form filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The Declaration will be
qualified as an indenture under the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Company will acquire Common Securities in an
aggregate liquidation amount equal to at least 3% of the total capital of the
Trust. The Trust will use all the proceeds derived from the issuance of the
Capital Securities and the Common Securities to purchase the Junior Subordinated
Debentures and, accordingly, the assets of the Trust will consist solely of the
Junior Subordinated Debentures. The Trust exists for the exclusive purpose of
(i) issuing the Trust Securities representing undivided beneficial ownership
interests in the assets of the Trust, (ii) investing the gross proceeds of the
Trust Securities in the Junior Subordinated Debentures and (iii) engaging in
only those other activities necessary or incidental thereto.
Pursuant to the Declaration, there will initially be five trustees (the
"Trustees") for the Trust. Three of the Trustees (the "Regular Trustees") will
be individuals who are employees or officers of or who are affiliated with
24
<PAGE>
the Company. The fourth trustee will be a financial institution that is
unaffiliated with the Company and is indenture trustee for purposes of
compliance with the provisions of the Trust Indenture Act (the "Property
Trustee"). The fifth trustee will be an entity that maintains its principal
place of business in the State of Delaware (the "Delaware Trustee"). Initially,
The Chase Manhattan Bank will act as Property Trustee, and its affiliate, Chase
Manhattan Bank Delaware, will act as Delaware Trustee until, in each case,
removed or replaced by the holder of the Common Securities. For purposes of
compliance with the Trust Indenture Act, The Chase Manhattan Bank will also act
as trustee under the Guarantee (the "Guarantee Trustee").
The Property Trustee will hold title to the Junior Subordinated Debentures
for the benefit of the holders of the Trust Securities, and the Property Trustee
will have the power to exercise all rights, powers and privileges with respect
to the Junior Subordinated Debentures under the Indenture (as defined herein) as
the holder of the Junior Subordinated Debentures. In addition, the Property
Trustee will maintain exclusive control of a segregated non-interest bearing
bank account (the "Property Account") to hold all payments made in respect of
the Junior Subordinated Debentures for the benefit of the holders of the Trust
Securities. The Guarantee Trustee will hold the Guarantee for the benefit of the
holders of the Capital Securities. The Company, as the holder of all the Common
Securities, will have the right to appoint, remove or replace any of the
Trustees and to increase or decrease the number of Trustees, provided that the
number of Trustees shall be at least three; and provided further that at least
one Trustee shall be a Delaware Trustee, at least one Trustee shall be the
Property Trustee and at least one Trustee shall be a Regular Trustee. The
Company will pay all fees and expenses related to the organization and
operations of the Trust (including any taxes, duties, assessments or
governmental charges of whatever nature (other than withholding taxes) imposed
by the United States or any other domestic taxing authority upon the Trust) and
the offering of the Capital Securities and be responsible for all debts and
obligations of the Trust (other than with respect to the Capital Securities).
For so long as the Capital Securities remain outstanding, the Company will
covenant (i) to maintain directly or indirectly 100% ownership of the Common
Securities, (ii) to cause the Trust to remain a statutory business trust and not
to voluntarily dissolve, wind-up, liquidate or be terminated, except as
permitted by the Declaration, (iii) to use its commercially reasonable efforts
to ensure that the Trust will not be an "investment company" for purposes of the
Investment Company Act of 1940, as amended, and (iv) to take no action that
would be reasonably likely to cause the Trust to be classified as an association
or a publicly traded partnership taxable as a corporation for United States
federal income tax purposes.
The rights of the holders of the Capital Securities, including economic
rights, rights to information and voting rights, are set forth in the
Declaration and the Trust Act. See "Description of Capital Securities." The
Declaration and the Guarantee also incorporate by reference the terms of the
Trust Indenture Act.
The location of the principal executive office of the Trust is c/o Ocwen
Financial Corporation, 1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida
33401, and its telephone number is (561) 681-8000.
25
<PAGE>
USE OF PROCEEDS
The proceeds to the Trust from the offering of the Capital Securities will
be $125 million. All of the proceeds from the sale of the Capital Securities and
the Common Securities will be invested by the Trust in the Junior Subordinated
Debentures. The estimated net proceeds to the Company from the Capital
Securities Offering of approximately $ , as well as the estimated
$ of net proceeds from the Common Stock Offering ($ if the Common
Stock Underwriters' over-allotment options are exercised in full), will be used
by the Company primarily to fund discounted loan acquisition and other lending
and investment activities which are currently conducted by the Company through
non-banking subsidiaries of the Company and the Bank and to develop related
businesses. In addition, a portion of the net proceeds from the Offerings also
could be used to acquire other businesses, including other financial
institutions, mortgage banking companies, particularly those which are engaged
in sub-prime single-family residential lending activities, and companies which
have software or other technology which would enhance the Company's ability to
conduct loan servicing and other activities. Although the Company evaluates
potential acquisition opportunities from time to time, currently there are no
agreements, arrangements or understandings with regard to any such transaction.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratios of earning
to fixed charges for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1993
----- ----- ----- ----- ----- -----
Earnings to Fixed Charges:
Including interest on deposits................. 1.55x 1.07x 1.53x 1.45x 2.28x 2.04x
Excluding interest on deposits................. 3.78x 1.39x 3.68x 3.95x 5.40x 3.22x
<CAPTION>
<S> <C>
1992
-----
Earnings to Fixed Charges:
Including interest on deposits................. 2.25x
Excluding interest on deposits................. 3.88x
</TABLE>
For purposes of computing the ratios of earnings to fixed charges, earnings
represent income from continuing operations before income taxes, extraordinary
items and cumulative effect of a change in accounting principle plus 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.
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust will be treated as a subsidiary
of the Company and, accordingly, the accounts of the Trust will be included in
the consolidated financial statements of the Company. The sole asset of the
Trust will be $128,866,000 aggregate principal amount of Junior Subordinated
Debentures (including the amount attributable to the issuance of the Common
Securities of the Trust to the Company for $3,866,000). The Capital Securities
will be presented as a separate caption between liabilities and stockholders'
equity in the consolidated statement of financial condition of the Company as
"Company-obligated, mandatorily redeemable securities of subsidiary trust
holding solely junior subordinated debentures of the Company" and appropriate
disclosures about the Capital Securities, the Guarantee and the Junior
Subordinated Debentures will be included in the notes to the consolidated
financial statements of the Company for financial reporting purposes. The
Company will record Distributions payable on the Capital Securities as
non-interest expense in its consolidated statement of operations.
26
<PAGE>
CAPITALIZATION
The following table presents the consolidated capitalization of the Company
at March 31, 1997, and as adjusted to give effect to the Capital Securities
Offering and the Common Stock Offering. Consummation of the Capital Securities
Offering is conditioned upon consummation of the Common Stock Offering (although
consummation of the latter is not conditioned upon consummation of the former).
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
------------ ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deposits.............................................................................. $ 2,106,829 $ 2,106,829
------------ ------------
------------ ------------
Borrowings and other interest-bearing obligations:
The Company:
11.875% Notes due 2003.......................................................... $ 125,000 $ 125,000
The Bank:
FHLB advances................................................................... 399 399
12% Subordinated Debentures due 2005............................................ 100,000 100,000
Securities sold under agreements to repurchase.................................. 39,224 39,224
Other subsidiaries:
Other........................................................................... 573 573
------------ ------------
Total borrowings and other interest-bearing obligations....................... $ 265,196 $ 265,196
------------ ------------
------------ ------------
Company-obligated, mandatorily redeemable securities of subsidiary trust holding
solely junior subordinated debentures of the Company(1) $ -- $ 125,000
------------ ------------
------------ ------------
Stockholders' equity:
Preferred Stock, $0.01 par value: 20,000,000 shares authorized; none outstanding.... $ -- $ --
Common Stock, $0.01 par value: 200,000,000 shares authorized; 26,799,511 shares
outstanding; 29,799,511 shares, as adjusted(2).................................... 268 298
Additional paid-in capital.......................................................... 23,109
Retained earnings................................................................... 197,458 197,458
Unrealized gain on securities available for sale, net of taxes...................... 6,648 6,648
Notes receivable on exercise of options to purchase Common Stock(3)................. (2,327) (2,327)
------------ ------------
Total stockholders' equity...................................................... $ 225,156 $
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) Reflects the Capital Securities at their issue price. The sole asset of the
Trust will be $128,866,000 aggregate principal amount of Junior Subordinated
Debentures (including the amount attributable to the issuance of the Common
Securities of the Trust to the Company for $3,866,000). The Company owns all
of the Common Securities issued by the Trust and, as a result, the Trust is
a subsidiary of the Company for financial reporting purposes. See
"Accounting Treatment."
(2) Does not include 6,333,211 and 246,930 additional shares of Common Stock
reserved for issuance as of March 31, 1997 pursuant to the Stock Option Plan
and the Directors Stock Plan, respectively. See "Management--Stock Option
Plan" and "--Board of Directors Compensation."
(3) See "Management--Certain Relationships and Related Transactions."
27
<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, 1996,
1995, 1994, 1993 and 1992 have been derived from consolidated 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, 1997 and 1996 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, 1997 are not necessarily indicative
of the results that may be expected for any other interim period or the entire
year ending December 31, 1997. 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,
-------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995(1) 1994(1) 1993(2)
--------- --------- --------- --------- --------- ---------
OPERATIONS DATA:
Interest income............................................... $ 54,527 $ 47,956 $ 193,894 $ 137,275 $ 131,458 $ 78,923
Interest expense.............................................. 37,164 28,132 116,160 84,060 62,598 35,306
--------- --------- --------- --------- --------- ---------
Net interest income......................................... 17,363 19,824 77,734 53,215 68,860 43,617
Provision for loan losses (3)................................. 9,742 9,407 22,450 1,121 -- --
--------- --------- --------- --------- --------- ---------
Net interest income after provision for loan losses......... 7,621 10,417 55,284 52,094 68,860 43,617
--------- --------- --------- --------- --------- ---------
Gains on sales of interest-earning assets, net................ 16,778 5,017 21,682 6,955 5,727 8,386
Gain on sale of branch offices................................ -- -- -- 5,430 62,600 --
Income (loss) on real estate owned, net....................... (794) (1,916) 3,827 9,540 5,995 (1,158)
Fees on financing transactions (4)............................ -- -- -- -- -- 15,340
Other non-interest income..................................... 5,367 191 11,766 9,255 7,253 13,304
--------- --------- --------- --------- --------- ---------
Total non-interest income................................... 21,351 3,292 37,275 31,180 81,575 35,872
--------- --------- --------- --------- --------- ---------
Non-interest expenses......................................... 22,697 11,683 69,578 45,573 68,858 41,859
--------- --------- --------- --------- --------- ---------
Equity in earnings of investment in joint ventures(5)......... 14,372 -- 38,320 -- -- --
--------- --------- --------- --------- --------- ---------
Income from continuing operations before income taxes......... 20,647 2,026 61,301 37,701 81,577 37,630
Income tax expense (benefit).................................. 3,606 (1,003) 11,159 4,562 29,724 10,325
--------- --------- --------- --------- --------- ---------
Income from continuing operations............................. 17,041 3,029 50,142 33,139 51,853 27,305
Discontinued operations (6)................................... -- -- -- (7,672) (4,514) (2,270)
Extraordinary gains........................................... -- -- -- -- -- 1,538
Cumulative effect of a change in accounting principle......... -- -- -- -- -- (1,341)
--------- --------- --------- --------- --------- ---------
Net income.................................................... $ 17,041 $ 3,029 $ 50,142 $ 25,467 $ 47,339 $ 25,232
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Income per share:
Continuing operations....................................... $ 0.63 $ 0.11 $ 1.88 $ 1.19 $ 1.52 $ 0.80
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net income.................................................. $ 0.63 $ 0.11 $ 1.88 $ 0.91 $ 1.39 $ 0.73
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
<S> <C>
1992
---------
OPERATIONS DATA:
Interest income............................................... $ 71,723
Interest expense.............................................. 28,148
---------
Net interest income......................................... 43,575
Provision for loan losses (3)................................. --
---------
Net interest income after provision for loan losses......... 43,575
---------
Gains on sales of interest-earning assets, net................ 8,842
Gain on sale of branch offices................................ --
Income (loss) on real estate owned, net....................... 1,050
Fees on financing transactions (4)............................ 6,760
Other non-interest income..................................... 8,130
---------
Total non-interest income................................... 24,782
---------
Non-interest expenses......................................... 32,468
---------
Equity in earnings of investment in joint ventures(5)......... --
---------
Income from continuing operations before income taxes......... 35,889
Income tax expense (benefit).................................. 11,552
---------
Income from continuing operations............................. 24,337
Discontinued operations (6)................................... (1,946)
Extraordinary gains........................................... 2,963
Cumulative effect of a change in accounting principle......... --
---------
Net income.................................................... $ 25,354
---------
---------
Income per share:
Continuing operations....................................... $ 0.68
---------
---------
Net income.................................................. $ 0.71
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------------------------------------------------
1997 1996 1995(1) 1994(1) 1993(2) 1992
----------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................. $ 2,649,471 $ 2,483,685 $ 1,973,590 $ 1,226,403 $ 1,396,677 $833,117
Securities available for sale (7)............ 348,066 354,005 337,480 187,717 527,183 340,404
Loans available for sale (7)(8).............. 88,511 126,366 251,790 102,293 101,066 754
Investment securities, net................... 11,201 8,901 18,665 17,011 32,568 30,510
Mortgage-related securities held for
investment, net............................ -- -- -- 91,917 121,550 114,046
Loan portfolio, net (8)...................... 422,232 402,582 295,605 57,045 88,288 41,015
Discounted loan portfolio (8)................ 1,280,972 1,060,953 669,771 529,460 303,634 213,038
Investment in low-income housing tax credit
interests.................................. 99,924 93,309 81,362 49,442 16,203 --
Real estate owned, net (9)................... 98,466 103,704 166,556 96,667 33,497 4,710
Investment in joint ventures, net (5)........ 33,367 67,909 -- -- -- --
Excess of cost over net assets acquired,
net........................................ -- -- -- -- 10,467 11,825
Deposits..................................... 2,106,829 1,919,742 1,501,646 1,023,268 871,879 339,622
Borrowings and other interest-bearing
obligations................................ 265,196 300,518 272,214 25,510 373,792 361,799
Stockholders' equity......................... 225,156 203,596 139,547(10) 153,383 111,831 94,396
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995(1) 1994(1) 1993(2) 1992
---------- ---------- ---------- ---------- ---------- ---------- --------
OTHER DATA (11):
Average assets(12)...................... $2,607,854 $1,956,202 $2,013,283 $1,521,368 $1,714,953 $1,152,655 $712,542
Average equity.......................... 212,706 141,374 161,332 121,291 119,500 97,895 82,460
Return on average assets (12)(13):
Income from continuing operations..... 2.61% 0.62% 2.35% 2.18% 3.02% 2.37% 3.42%
Net income............................ 2.61 0.62 2.35 1.67 2.76 2.19 3.56
Return on average equity (13):
Income from continuing operations..... 32.05 8.57 31.08 27.32 43.39 27.89 29.51
Net income............................ 32.05 8.57 31.08 21.00 39.61 25.77 30.75
Average equity to average assets(12).... 8.16 7.23 8.01 7.97 6.97 8.49 11.57
Net interest spread..................... 3.48 5.30 5.46 5.25 4.86 4.05 4.66
Net interest margin..................... 3.20 4.89 4.84 4.54 4.75 4.30 6.06
Efficiency ratio (14)................... 42.76 50.54 45.38 54.00 45.77 52.66 47.50
Non-performing loans to loans at end of
period (15)........................... 2.15 1.16 0.56 1.27 4.35 3.71 8.32
Allowance for losses on loans to loans
at end of period...................... 1.13 0.94 0.87 0.65 1.84 0.99 1.80
Allowance for losses on discounted loans
to discounted loans at end of
period................................ 1.30 1.26 1.08 -- -- -- --
Bank regulatory capital ratios at end of
period:
Tangible.............................. 9.48 6.99 9.33 6.52 11.28 5.25 6.94
Core (Leverage)....................... 9.48 6.99 9.33 6.52 11.28 6.00 6.94
Risk-based............................ 13.22 11.41 12.85 11.80 14.74 13.31 21.29
</TABLE>
- ------------------------------
(1) Financial data at December 31, 1995 and 1994 reflects the Company's sale of
two and twenty-three branch offices which resulted in the transfer of
deposits of $111.7 million and $909.3 million, respectively, and resulted in
a gain on sale of $5.4 million and $62.6 million during 1995 and 1994,
respectively. Operations data for 1995 and 1994 reflects the gains from
these transactions. Exclusive of these gains and related income taxes and
profit sharing expense, the Company's income from continuing operations
would have been $30.3 million and $24.0 million during 1995 and 1994,
respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
(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, 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 in the three months ended March 31, 1997 and
1996 and the year ended December 31, 1996 consists primarily of $8.4
million, $8.7 million and $20.6 million related to the Company's discounted
loan portfolio, respectively. Beginning in the first quarter of 1996, the
Company began recording general valuation allowances on discounted loans.
See "Management 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 that
portion of the deferred tax asset which relates to tax residuals.
(5) Relates primarily to the Company's investment in LLC, a joint venture formed
to acquire loans from HUD. At March 31, 1997 and December 31, 1996, the net
discounted loans held by such joint venture amounted to $48.6 million and
$110.7 million, respectively. All of such loans are classified as available
for sale. See "Business--Investment in Joint Ventures."
(6) In September 1995 the Company announced its decision to dispose of its
automated banking division, which was substantially complete at December 31,
1995. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Discontinued Operations" and
Note 3 to the Consolidated Financial Statements.
(7) Securities available for sale were carried at market value at March 31, 1997
and December 31, 1996, 1995, 1994 and 1993 and amortized cost at December
31, 1992. Loans available for sale are carried at the lower of cost or
market value.
(8) The discounted loan portfolio consists of mortgage loans purchased at a
discount to the unpaid debt, most of which were non-performing or
under-performing at the date of acquisition. 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-- Discounted Loan Acquisition and Resolution Activities" and
"--Lending Activities," respectively. Data related to discounted loans does
not include discounted loans held by LLC.
(9) Real estate owned consists of properties acquired by foreclosure or by
deed-in-lieu thereof on loans and is primarily attributable to the Company's
discounted loan acquisition and resolution business.
(10) Reflects the Company's repurchase of 8,815,060 shares of Common Stock
during 1995 for an aggregate of $42.0 million.
(11) Ratios for periods subsequent to 1992 are based on average daily balances
during the periods and ratios for 1992 are based on month-end balances.
Ratios for the three months ended March 31, 1997 and 1996 are annualized
where appropriate.
(12) Includes the Company's pro rata share of the average assets held by LLC.
(13) Exclusive of a one-time assessment to recapitalize the SAIF in 1996 and
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 2.54%, 2.00% and 1.40% during 1996,
1995 and 1994, respectively, and (ii) return on average equity on income
from continuing operations amounted to 33.35%, 25.02% and 20.06% during
1996, 1995 and 1994, respectively.
(14) The efficiency ratio represents non-interest expense divided by the sum of
net interest income before provision for loan losses, non-interest income
and equity in earnings of investment in joint venture. Exclusive of the SAIF
assessment in 1996 and gains from the sales of branch offices in 1995 and
1994 and related income taxes and profit sharing expense, the efficiency
ratio amounted to 41.33%, 56.34% and 64.14% during 1996, 1995 and 1994,
respectively.
(15) Non-performing loans and total loans do not include loans in the Company's
discounted loan portfolio or loans available for sale.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's consolidated financial condition
and results of operations and capital resources and liquidity should be read in
conjunction with Selected Consolidated Financial Data and the Consolidated
Financial Statements and related notes included elsewhere herein.
RESULTS OF OPERATIONS
GENERAL. The Company recorded net income of $17.0 million or $0.63 per
share for the three months ended March 31, 1997, as compared to $3.0 million or
$0.11 per share in the same period in the prior year, and net income of $50.1
million or $1.88 per share for 1996, as compared with $25.5 million or $0.91 per
share for 1995 and $47.3 million or $1.39 per share for 1994. Included in net
income for 1996 is a net charge of $0.15 per share related to the FDIC's
assessment to recapitalize the SAIF.
The following table sets forth the Company's income from continuing
operations during the periods indicated, exclusive of the one-time assessment
for the recapitalization of SAIF in 1996 and gains from the sale of branch
offices in 1995 and 1994, net of related income taxes and profit sharing
expense, and certain performance ratios during such periods based on such income
from continuing operations.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income from continuing
operations, as adjusted................................... $ 17,041 $ 3,029 $ 54,127 $ 30,352 $ 23,967
Return on average assets(1)................................. 2.61% 0.62% 2.54% 2.00% 1.40%
Return on average equity.................................... 32.05% 8.57% 33.35% 25.02% 20.06%
</TABLE>
- ------------------------
(1) Includes the Company's pro rata share of the average assets held by LLC
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 focus on business lines which offer the
potential for above average returns without increased risk of loss. As a result
of the Company's business strategy, the average balance of the Company's
discounted loan portfolio (which does not include the Company's pro rata share
of discounted loans held by LLC) increased 217.1% from $352.6 million (20.6% of
total average assets) during 1994 to $675.3 million (33.5% of total average
assets) during 1996 to $1.11 billion (42.9% of total average assets) during the
three months ended March 31, 1997, and the average balance of the Company's
other loans, including loans available for sale, increased 107.6% from $261.0
million (15.2% of total average assets) to $503.5 million (25.0% of total
average assets) to $541.9 million (20.8% of total average assets) during the
same respective periods. This growth in the Company's lending activities,
particularly its discounted loan activities, has substantially contributed to
the Company's profitability in recent periods. In this regard, the Company
estimates that its discounted loan acquisition and resolution activities and its
other lending activities accounted for approximately 82%, 60%, 85%, 53% and 25%
of its income from continuing operations before income taxes during the three
months ended March 31, 1997 and 1996 and the years ended December 31, 1996, 1995
and 1994, respectively.
The Company's discounted loan activities also include investments in joint
ventures to acquire discounted loans, which to date have consisted primarily of
the Company's 50% interest in LLC, a joint venture which was formed by the
Company and BlackRock Capital Finance L.P. ("BlackRock") to acquire discounted
loans from HUD in April 1996. Equity in earnings of investment in joint ventures
amounted to $14.4 million and $38.3 million during the three months ended March
31, 1997 and the year ended
30
<PAGE>
December 31, 1996, respectively, and were primarily comprised of $9.2 million
and $28.5 million of gains related to the securitization of discounted
single-family residential loans acquired from HUD, respectively.
The Company's lending activities and increasing use of securitizations has
resulted in gains on the sale of interest-earning assets becoming a significant
part of the Company's operating results. Gains from the sale of interest-earning
assets amounted to $16.8 million and $5.0 million during the three months ended
March 31, 1997 and 1996, respectively, and $21.7 million, $7.0 million and $5.7
million during the years ended December 31, 1996, 1995 and 1994, respectively. A
significant component of these gains in 1997 and 1996 were gains from the direct
sale of discounted loans and single-family residential loans to non-conforming
borrowers, as well as gains from the sale of senior classes in mortgage-related
securities backed by such loans.
The Company's operating results in 1995 and 1994 also were significantly
affected by the effects of the sale of branch offices at the end of 1995 and
1994, which resulted in $5.4 million and $62.6 million of gains before profit
sharing expense and income taxes 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 shifted to brokered and other wholesale
deposits.
The Company's operating results during 1995 and 1994 also were affected by
losses from discontinued operations of its automated banking division and
related activities, which, net of applicable tax effect, amounted to $7.7
million and $4.5 million during these periods, 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.
The following table sets 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 average daily balances during the
indicated periods.
31
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
THREE MONTHS ENDED MARCH 31, 31,
-------------------------------------------------------------------- --------------------
1997 1996 1996
--------------------------------- --------------------------------- --------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE(1) BALANCE INTEREST RATE(1) BALANCE INTEREST
--------- --------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
AVERAGE ASSETS:
Federal funds sold and repurchase
agreements........................ $ 132,337 $ 1,658 5.01% $ 57,191 $ 769 5.38% $ 84,997 $ 4,681
Securities held for trading........... 13,179 248 7.53 -- -- -- 21,291 1,216
Securities available for sale(2)...... 338,956 8,173 9.64 322,322 7,781 9.66 284,433 26,932
Loans available for sale(3)........... 118,729 2,851 9.61 261,351 6,597 10.10 175,078 17,092
Investment securities and other(4).... 23,032 681 11.83 37,912 644 6.79 36,264 3,990
Mortgage-related securities held for
investment........................ -- -- -- -- -- -- -- --
Loan portfolio (3).................... 423,135 10,692 10.11 298,502 10,010 13.41 328,378 36,818
Discounted loan portfolio............. 1,118,233 30,224 10.81 645,482 22,155 13.73 675,345 103,165
--------- --------- --------- --------- --------- ---------
Total interest earning assets,
interest income................... 2,167,601 54,527 10.06 1,622,760 47,956 11.82 1,605,786 193,894
Non-interest earning cash............. 11,350 6,029 6,372
Investment in low-income housing tax
credit interests.................. 90,398 85,428 83,110
Investment in joint ventures.......... 63,637 -- 46,193
Real estate owned, net................ 112,227 162,988 137,250
Allowance for loan losses............. (16,515) (2,849) (11,250)
Other assets.......................... 179,156 81,846 145,822
--------- --------- ---------
Total assets...................... $2,607,854 $1,956,202 $2,013,283
--------- --------- ---------
--------- --------- ---------
AVERAGE LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing demand deposits...... $ 24,699 227 3.68 $ 26,302 229 3.48 $ 33,167 620
Savings deposits...................... 2,620 15 2.29 3,446 21 2.44 3,394 78
Certificates of deposit............... 1,964,020 29,652 6.04 1,465,587 22,751 6.21 1,481,197 93,075
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits... 1,991,339 29,894 6.00 1,495,335 23,001 6.15 1,517,758 93,773
Reverse repurchase agreements......... 20,934 272 5.20 44,985 653 5.81 19,581 1,101
Securities sold but not yet
purchased......................... -- -- -- -- -- -- -- --
FHLB advances......................... 21,521 283 5.26 70,399 1,039 5.90 71,221 4,053
Notes, debentures and other interest
bearing obligations............... 225,573 6,715 11.91 116,335 3,439 11.82 148,282 17,233
--------- --------- --------- --------- --------- ---------
Total interest -bearing
liabilities, interest expense..... 2,259,367 37,164 6.58 1,727,054 28,132 6.52 1,756,842 116,160
Non-interest bearing deposits......... 15,543 4,323 10,938
Escrow deposits....................... 71,713 37,167 41,306
Other liabilities..................... 48,525 46,284 42,865
--------- --------- ---------
Total liabilities................. 2,395,148 1,814,828 1,851,951
Stockholders' equity.................. 212,706 141,374 161,332
--------- --------- ---------
Total liabilities and
stockholders' equity.............. $2,607,854 $1,956,202 $2,013,283
--------- --------- ---------
--------- --------- ---------
Net interest income................... $ 17,363 $ 19,824 $ 77,734
--------- --------- ---------
--------- --------- ---------
Net interest spread................... 3.48% 5.30%
----------- -----------
----------- -----------
Net interest margin................... 3.20% 4.89%
----------- -----------
----------- -----------
Ratio of interest-earning assets to
interest-bearing liabilities...... 96% 94% 91%
<CAPTION>
1995 1994
--------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- --------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Federal funds sold and repurchase
agreements........................ 5.51% $ 55,256 $ 3,502 6.34% $ 166,592 $ 8,861 5.32%
Securities held for trading........... 5.71 -- -- -- -- -- --
Securities available for sale(2)...... 9.47 211,559 18,391 8.69 449,654 27,988 6.22
Loans available for sale(3)........... 9.76 167,011 15,608 9.35 179,962 19,353 10.75
Investment securities and other(4).... 11.00 46,440 4,033 8.68 79,895 9,842 12.32
Mortgage-related securities held for
investment........................ -- 77,257 4,313 5.58 140,321 6,930 4.94
Loan portfolio (3).................... 11.21 130,901 15,430 11.79 81,070 5,924 7.31
Discounted loan portfolio............. 15.28 483,204 75,998 15.73 352,633 52,560 14.91
--------- --------- --------- ---------
Total interest earning assets,
interest income................... 12.07 1,171,628 137,275 11.72 1,450,127 131,458 9.07
Non-interest earning cash............. 17,715 27,717
Investment in low-income housing tax
credit interests.................. 63,925 39,135
Investment in joint ventures.......... -- --
Real estate owned, net................ 144,348 51,314
Allowance for loan losses............. (1,180) (2,689)
Other assets.......................... 124,932 149,349
--------- ---------
Total assets...................... $1,521,368 $1,714,953
--------- ---------
--------- ---------
AVERAGE LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing demand deposits...... 1.87 $ 31,373 1,031 3.29 $ 77,433 1,396 1.80
Savings deposits...................... 2.30 20,370 451 2.21 138,434 2,602 1.88
Certificates of deposit............... 6.28 1,119,836 70,371 6.28 928,209 40,963 4.41
--------- --------- --------- ---------
Total interest-bearing deposits... 6.18 1,171,579 71,853 6.13 1,144,076 44,961 3.93
Reverse repurchase agreements......... 5.62 16,754 951 5.68 254,457 10,416 4.09
Securities sold but not yet
purchased......................... -- 17,149 1,142 6.66 39,526 2,780 7.03
FHLB advances......................... 5.69 14,866 1,126 7.57 26,476 1,232 4.65
Notes, debentures and other interest
bearing obligations............... 11.62 78,718 8,988 11.42 25,041 3,209 12.81
--------- --------- --------- ---------
Total interest -bearing
liabilities, interest expense..... 6.61 1,299,066 84,060 6.47 1,489,576 62,598 4.20
Non-interest bearing deposits......... 19,960 69,276
Escrow deposits....................... 4,073 2,430
Other liabilities..................... 76,978 34,171
--------- ---------
Total liabilities................. 1,400,077 1,595,453
Stockholders' equity.................. 121,291 119,500
--------- ---------
Total liabilities and
stockholders' equity.............. $1,521,368 $1,714,953
--------- ---------
--------- ---------
Net interest income................... $ 53,215 $ 68,860
--------- ---------
--------- ---------
Net interest spread................... 5.46% 5.25% 4.86%
----------- ----------- -----------
----------- ----------- -----------
Net interest margin................... 4.84% 4.54% 4.75%
----------- ----------- -----------
----------- ----------- -----------
Ratio of interest-earning assets to
interest-bearing liabilities...... 90% 97%
</TABLE>
32
<PAGE>
- ------------------------
(1) Annualized.
(2) Excludes effect of unrealized gains or losses on securities available for
sale, net of taxes.
(3) The average balances of loans available for sale and the loan portfolio
include non-performing loans, interest on which is recognized on a cash
basis.
(4) Interest income from investment securities and other includes interest
income attributable to that portion of the Company's deferred tax asset
which relates to tax residuals. See "Taxation-Federal Taxation-Tax
Residuals" and Note 21 to the Consolidated Financial Statements. If the
average balance of the deferred tax asset related to tax residuals was
included in the average balance of investment securities and other, the
weighted average yield would have been 11.82% and 4.47% during the three
months ended March 31, 1997 and 1996, respectively, and 7.34%, 5.93% and
11.48% during the years ended December 31, 1996, 1995 and 1994,
respectively.
33
<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,
--------------------------------- -----------------------------------------------------
1997 VS. 1996 1996 VS. 1995 1995 VS. 1994
--------------------------------- ------------------------------- --------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
---------------------- -------------------- --------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME
--------- ----------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Federal funds sold and repurchase
agreements............................. $ (56) $ 945 $ 889 $ (507) $ 1,686 $ 1,179 $ 1,445 $ (6,804)
Securities held for trading.............. 248 -- 248 608 608 1,216 -- --
Securities available for sale............ (9) 401 392 1,757 6,784 8,541 8,584 (18,181)
Loans available for sale................. (307) (3,439) (3,746) 713 771 1,484 (2,417) (1,328)
Investment securities and other.......... 355 (318) 37 947 (990) (43) (2,401) (3,408)
Mortgage-related securities held for
investment............................. -- -- -- -- (4,313) (4,313) 812 (3,429)
Loan portfolio........................... (2,850) 3,532 682 (788) 22,176 21,388 4,747 4,759
Discounted loan portfolio................ (5,484) 13,553 8,069 (2,235) 29,402 27,167 3,041 20,397
--------- ----------- --------- --------- --------- --------- --------- ---------
Total interest-earning assets........ (8,103) 14,674 6,571 495 56,124 56,619 13,811 (7,994)
--------- ----------- --------- --------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits......... 12 (14) (2) (467) 56 (411) 752 (1,117)
Savings deposits......................... (1) (5) (6) 17 (390) (373) 395 (2,546)
Certificates of deposit.................. (640) 7,541 6,901 (3) 22,707 22,704 19,777 9,631
--------- ----------- --------- --------- --------- --------- --------- ---------
Total interest-bearing deposits.......... (629) 7,522 6,893 (453) 22,373 21,920 20,924 5,968
Reverse repurchase agreements............ (62) (319) (381) (9) 159 150 2,926 (12,391)
Securities sold but not yet purchased.... -- -- -- -- (1,142) (1,142) (141) (1,497)
FHLB advances............................ (103) (653) (756) (345) 3,272 2,927 574 (680)
Notes, debentures and other.............. 24 3,252 3,276 163 8,082 8,245 (386) 6,165
--------- ----------- --------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities... (770) 9,802 9,032 (644) 32,744 32,100 23,897 (2,435)
--------- ----------- --------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest
income................................. $ (7,333) $ 4,872 $ (2,461) $ 1,139 $ 23,380 $ 24,519 $ (10,086) $ (5,559)
--------- ----------- --------- --------- --------- --------- --------- ---------
--------- ----------- --------- --------- --------- --------- --------- ---------
<CAPTION>
TOTAL
---------
<S> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and repurchase
agreements............................. $ (5,359)
Securities held for trading.............. --
Securities available for sale............ (9,597)
Loans available for sale................. (3,745)
Investment securities and other.......... (5,809)
Mortgage-related securities held for
investment............................. (2,617)
Loan portfolio........................... 9,506
Discounted loan portfolio................ 23,438
---------
Total interest-earning assets........ 5,817
---------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits......... (365)
Savings deposits......................... (2,151)
Certificates of deposit.................. 29,408
---------
Total interest-bearing deposits.......... 26,892
Reverse repurchase agreements............ (9,465)
Securities sold but not yet purchased.... (1,638)
FHLB advances............................ (106)
Notes, debentures and other.............. 5,779
---------
Total interest-bearing liabilities... 21,462
---------
Increase (decrease) in net interest
income................................. $ (15,645)
---------
---------
</TABLE>
34
<PAGE>
THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996
Net interest income before provision for loan losses decreased $2.5 million
or 12.4% during the three months ended March 31, 1997, as compared to the same
period in the prior year. This decrease was attributable to a 182 basis point
decrease in the net interest spread from 5.30% to 3.48% during the three months
ended March 31, 1996 and 1997, respectively, which more than offset a $544.8
million or 33.6% increase in average interest-earning assets from period to
period. Both the decrease in the net interest spread and the increase in average
interest-earning assets were primarily attributable to the discounted loan
portfolio.
Interest income on the discounted loan portfolio increased $8.1 million or
36.4% during the three months ended March 31, 1997, as compared to the same
period in the prior year, as a result of a $472.8 million or 73.2% increase in
the average balance of the discounted loan portfolio, which was offset in part
by a 292 basis point decrease in the weighted average yield earned. The decrease
in the yield was partly attributable to a 138% increase in the average balance
of discounted single-family residential loans as a result of acquisitions from
HUD. A majority of the $425.6 million of discounted single-family residential
loans acquired by the Company from HUD in the first quarter of 1997 is currently
under a HUD forbearance plan, which generally results in a lower effective yield
than the contract rate. The decrease in the weighted average yield on the
discounted loan portfolio also reflects a change in the Company's strategy to
resolve discounted loans through placing the borrowers on payment plans or other
forms of loan modification. In prior periods, the Company emphasized
pre-foreclosure resolutions through pre-approved sales of the underlying
collateral or loan payoffs, which results in a higher interest yield because the
amount by which the payoff proceeds exceed book value is included in interest
income. As a result of this change in strategy and other factors, the Company
decided to cease accretion of discount on non-performing discounted
single-family residential loans effective January 1, 1997. See "--Recent
Regulatory Developments" below. Discount accretion on the non-performing
discounted single-family residential loan portfolio amounted to $2.0 million or
125 basis points in yield during the three months ended March 31, 1996. As a
result of these factors, the Company believes that for the remainder of 1997 the
yield earned on its discounted loan portfolio will remain below the yield earned
in prior years but that the change in strategy should improve the ultimate value
of the discounted loan portfolio.
Interest income on the loan portfolio increased $682,000 or 6.8% during the
three months ended March 31, 1997, as compared to the same period in the prior
year, primarily due to a $124.6 million or 41.8% increase in the average balance
of the loan portfolio during this period, as compared to the same period in
1996, which was offset in part by a 330 basis point decrease in the weighted
average yield earned. The decrease in the yield was primarily due to $2.1
million of fees earned during the first quarter of 1996 in connection with the
repayment of hotel loans.
Interest income on loans available for sale decreased $3.7 million or 56.8%
in the first quarter of 1997, as compared to the same period in 1996, due to a
decrease in the average balance of loans available for sale of $142.6 million or
54.6% and a 49 basis point decrease in the weighted average yield earned.
The increase in interest expense during the three months ended March 31,
1997, as compared to the same period in the prior year, reflects the Company's
continued use of certificates of deposit to fund its asset growth and the
issuance of $125.0 million of 11.875% Notes in September 1996. The average
amount of the Company's certificates of deposit increased from $1.47 billion
during the three months ended March 31, 1996 to $1.96 billion during the three
months ended March 31, 1997.
1996 VERSUS 1995
The Company's net interest income increased $24.5 million or 46.1% during
1996, as compared to the prior year. This increase resulted from a $56.6 million
or 41.2% increase in interest income due to a $434.2 million or 37.1% increase
in average interest-earning assets during 1996 and, to a lesser extent, a 35
basis
35
<PAGE>
point increase in the weighted average yield on such assets. The increase in
interest income was offset in part by a $32.1 million or 38.2% increase in
interest expense due to a $457.8 million or 35.2% increase in average
interest-bearing liabilities, primarily certificates of deposit, FHLB advances,
notes and debentures, and to a lesser extent, a 14 basis point increase in the
weighted average rate paid on interest-bearing liabilities. The Company's net
interest margin increased to 4.84% in 1996 from 4.54% in 1995.
The increase in interest income during 1996, as compared to the prior year,
reflects substantial increases in the average balances on 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, as well as an
increase in the average balance of loans available for sale as a result of the
Company's emphasis on single-family residential loans to non-conforming
borrowers. 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 and not
against interest income on discounted loans. Had charge-offs on discounted loans
been included as a reduction of interest income in 1996, the weighted average
yield on the discounted loan portfolio would have been 13.9%.
The average balance of the Company's interest-bearing liabilities increased
substantially during 1996, as compared to the prior year, as a result of a
$361.4 million or 32.3% increase in the average balance of certificates of
deposit, a $56.4 million or 379.1% increase in the average balance of FHLB
advances and a $69.6 million or 88.4% increase in the average balance of notes
and debentures, which reflect the Company's continued reliance on brokered and
other wholesale certificates of deposit and advances from the FHLB as a source
of funds and the Company's issuance of the Notes in September 1996 and the
Bank's issuance of the Debentures in June 1995, respectively.
1995 VERSUS 1994
The Company's net interest income decreased $15.6 million or 22.7% during
1995 as a result of a $21.5 million or 34.3% increase in interest expense, which
was primarily attributable to the Company's use of brokered and other wholesale
deposits as a principal source of funds following the branch sale in 1994. The
Company believes that the increase in interest expense in 1995 was substantially
offset by the decrease in non-interest expense during this period as a result of
the branch sales at the end of 1995 and 1994. The Company's interest income
increased by $5.8 million or 4.4% during 1995, but was adversely affected by a
decrease in the average balance of interest-earning assets during the period as
a result of the branch sales. The Company's net interest margin decreased from
4.75% during 1994 to 4.54% during 1995.
The weighted average yield on interest-earning assets increased from 9.07%
in 1994 to 11.72% in 1995 primarily as a result of increases in the weighted
average yields on the Company's loan portfolio and discounted loan portfolio.
The weighted average yield on the Company's loan portfolios increased during
1995 because commercial real estate loans, which have higher interest rates than
single-family residential loans, comprised a significantly larger proportion of
such portfolios during this period. Average interest-earning assets decreased by
$278.5 million or 19.2% during 1995 as increases in the outstanding balances of
the Company's loan portfolios were more than offset by decreases in the average
balances of all other categories of interest-earning assets as a result of the
sales of branch offices at the end of 1995 and 1994.
The weighted average rate paid on interest-bearing liabilities increased
from 4.20% in 1994 to 6.47% in 1995 as a result of the Company's increased
utilization of brokered and other wholesale deposits, as noted above, and an
increase in market interest rates generally. Average interest bearing
liabilities decreased by $190.5 million or 12.8% in 1995 as increases in the
average balances of certificates of deposits and subordinated debentures and
other interest-bearing obligations, due primarily to the Bank's issuance of the
Debentures in June 1995, were more than offset by decreases in the average
balances of all other categories of interest-bearing liabilities.
36
<PAGE>
PROVISIONS FOR LOAN LOSSES. Provisions for losses on loans are charged to
operations to maintain an allowance for losses on each of the loan portfolio and
the discounted loan portfolio at a level which management considers adequate
based upon an evaluation of known and inherent risks in such loan portfolios.
Management's periodic evaluation is based on an analysis of each of the
discounted loan portfolio and the loan portfolio, historical loss experience,
current economic conditions and other relevant factors.
Provisions for loan losses amounted to $9.7 million and $9.4 million during
the three months ended March 31, 1997 and 1996, respectively, and $22.5 million,
$1.1 million and $0 during the years ended December 31, 1996, 1995 and 1994,
respectively. The provisions for losses in the three months ended March 31, 1997
and 1996 and the year ended December 31, 1996 were primarily attributable to a
change in methodology for valuing discounted loans, which was adopted by the
Company effective January 1, 1996 at the request of the OTS. Pursuant to this
change in methodology, the Company establishes provisions for losses on
discounted loans as necessary to maintain an allowance for losses at a level
which management believes reflects the inherent losses which may have occurred
but have not yet been specifically identified, and records all charge-offs on
the discounted loan portfolio, net of recoveries, against the allowance for
losses on discounted loans. Prior to 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 in
1995, were recorded in interest income on discounted loans.
Provision for losses on the discounted loan portfolio amounted to $8.4
million, $8.7 million and $20.6 million during the three months ended March 31,
1997 and 1996 and the year ended December 31, 1996, respectively, and net
charge-offs on the discounted loan portfolio amounted to $3.2 million, $525,000
and $9.2 million during the same respective periods.
Provisions for losses on the loan portfolio amounted to $1.3 million and
$699,000 during the three months ended March 31, 1997 and 1996, respectively,
and $1.9 million, $1.1 million and $0 during the years ended December 31, 1996,
1995 and 1994, respectively. Net charge-offs on the loan portfolio amounted to
$34,000 and $15,000 during the three months ended March 31, 1997 and 1996,
respectively, and $296,000 and $245,000 during the years ended December 31, 1996
and 1995, respectively. The Company had net recoveries of $187,000 on the loan
portfolio in 1994. The increases in the provisions for losses on the loan
portfolio in recent periods were primarily the result of increases in the amount
of loans outstanding, particularly commercial real estate loans.
Although management utilizes its best judgment in providing for possible
loan losses, there can be no assurance that the Company will not increase its
provisions for possible loan losses in subsequent periods. Changing economic and
business conditions, fluctuations in local markets for real estate, future
changes in nonperforming asset trends, large upward movements in market interest
rates or other factors could affect the Company's future provisions for loan
losses. In addition, the OTS, as an integral part of its examination process,
periodically reviews the adequacy of the Company's allowance for losses on loans
and discounted loans. Such agency may require the Company to recognize changes
to such allowances for losses based on its judgment about information available
to it at the time of examination.
NON-INTEREST INCOME. Non-interest income increased $18.1 million or 549% in
the three months ended March 31, 1997, as compared to the same period in the
prior year, and, exclusive of $5.4 million and $62.6 million of gains from the
sale of branch offices in 1995 and 1994, respectively, non-interest income
increased $11.5 million or 44.8% in 1996 and $6.8 million or 35.7% in 1995. The
increases in non-interest income during the three months ended March 31, 1997
and the year ended December 31, 1996 were primarily attributable to gains on the
sale of interest-earning assets, and the increase in non-interest
37
<PAGE>
income during the year ended December 31, 1995 was primarily attributable to
such gains, gain on the sale of a hotel and an increase in income from real
estate owned.
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,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Servicing fees and other charges......................... $ 5,236 $ (681) $ 4,682 $ 2,870 $ 4,786
Gains on sales of interest-earning assets, net........... 16,778 5,017 21,682 6,955 5,727
Income (loss) on real estate owned, net.................. (794) (1,916) 3,827 9,540 5,995
Gain on sale of hotel.................................... -- -- -- 4,658 --
Other income............................................. 131 872 7,084 1,727 2,467
--------- --------- --------- --------- ---------
Subtotal............................................... 21,351 3,292 37,275 25,750 18,975
Gain from sale of branch offices......................... -- -- -- 5,430 62,600
--------- --------- --------- --------- ---------
Total.................................................. $ 21,351 $ 3,292 $ 37,275 $ 31,180 $ 81,575
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Servicing fees and other charges increased in the three months ended March
31, 1997 and in the year ended December 31, 1996 primarily as a result of
increases in loan servicing and related fees, which reflect an increase in the
number and amount of loans serviced by the Company for others (including LLC)
from 1,366 and $361.6 million at December 31, 1995, respectively, to 38,670 and
$2.59 billion at March 31, 1997, respectively. Servicing fees and other charges
during the three months ended March 31, 1997 include $1.1 million of fees earned
in connection with the setup of loans transferred to the Company for servicing
during this period, and servicing fees and other charges during the same period
in the prior year include a $928,000 valuation adjustment to mortgage servicing
rights due to a significant increase in prepayments of the underlying loans
serviced, which were primarily attributable to refinancings. See "Business--Loan
Servicing Activities." 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 were 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.
Net gains on sales of interest-earning assets during the three months ended
March 31, 1997 were primarily attributable to the securitization by the Company,
LLC and an affiliate of BlackRock of 2,916 discounted single-family residential
loans with an unpaid principal balance of $140.7 million and past due interest
of $37.1 million, all of which were acquired from HUD during 1996 and 1995. The
Company realized a $9.5 million gain as a result of its direct participation in
this transaction. Net gains on sales of interest-earning assets during the three
months ended March 31, 1997 also include $2.7 million of gains from sales of
sub-prime single-family residential loans and $3.5 million of gains from sales
of discounted commercial real estate loans. 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 from the sale of discounted
single-family residential loans which had been brought current in accordance
with their terms.
Net gains on sales of interest-earning assets in 1996 were primarily
comprised of a $5.4 million gain from the sale of 256 single-family loans in the
Company's discounted loan portfolio which had been brought current in accordance
with their terms, a $4.5 million gain from the sale of discounted commercial
real estate loans, a $7.2 million net gain from the securitization of $219.6
million of sub-prime single-family residential loans and subsequent sale of the
senior classes of mortgage-backed securities backed by such loans, and a $7.9
million net gain from the securitization of $136.5 million of large discounted
commercial
38
<PAGE>
real estate loans and subsequent sale of the mortgage-backed securities backed
by such loans. Net gains on sales of interest-earning assets in 1995 were
primarily comprised of a $6.0 million gain from the sale of loans in the
Company's discounted loan portfolio which had been brought current in accordance
with their terms and a $1.6 million gain from the securitization of $83.9
million of multi-family residential loans and subsequent sale of the
mortgage-backed securities backed by such loans. Net gains on sales of interest-
earning assets in 1994 were primarily comprised of $7.2 million of net gains
from the sale of multi-family residential loans and mortgage-backed securities,
$1.8 million of gains from trading activities, $890,000 of gains from the sale
of loans in the Company's discounted loan portfolio which had been brought
current in accordance with their terms and $2.1 million of gains from the sale
of timeshare and other consumer loans, which more than offset $6.3 million of
net losses from the sale of mortgage-backed and related securities backed by
single-family residential loans.
Gains on sale of interest-earning assets (as well as other assets, such as
real estate owned, as discussed below) generally are dependent on various
factors which are not necessarily within the control of the Company, including
market and economic conditions. As a result, there can be no assurance that the
gains on sale of interest-earning assets (and other assets) reported by the
Company in prior periods will be reported in future periods or that there will
not be substantial inter-period variations in the results from such activities.
The following table sets forth the information regarding the Company's
income (loss) on real estate owned during the periods indicated, which were
primarily related to the discounted loan portfolio.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gains on sales.............................................. $ 3,898 $ 3,900 $ 22,835 $ 19,006 $ 21,308
Provision for losses in fair value.......................... (2,337) (6,378) (18,360) (10,510) (9,074)
Rental income (carrying costs), net......................... (2,355) 562 (648) 1,044 (6,239)
--------- --------- --------- --------- ---------
Income (loss) on real estate owned, net..................... $ (794) $ (1,916) $ 3,827 $ 9,540 $ 5,995
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Income (loss) on real estate owned primarily relates to real estate owned
acquired by foreclosure or deed-in-lieu thereof on loans in the Company's
discounted loan portfolio. The increase in the provision for losses in fair
value on real estate owned during 1996 was primarily attributable to discussions
between the Company and the OTS following an examination of the Bank by the OTS.
The Company incurred $2.4 million of carrying costs, net during the three months
ended March 31, 1997, as compared to $562,000 of rental income, net during the
same period in the prior year, primarily because properties acquired by
foreclosure or by deed-in-lieu thereof on loans acquired from HUD generally
require more repairs than other properties. In addition, during the first
quarter of 1997 the Company accrued $675,000 of expenses related to a bulk sale
of real estate owned. For additional information relating to the Company's real
estate owned, see "Business--Asset Quality--Real Estate Owned."
In October 1995, the Company sold one of the two hotels owned by the Company
for a gain of $4.7 million.
Other income increased during 1996 primarily as a result of a $4.9 million
gain on the sale of certain of the Company's investment in low-income housing
tax credits. See "Business-Investment Activities-Investments in Low Income
Housing Tax Credit Interests." Other income decreased in 1995 primarily because
other income in 1994 included $627,000 of servicing fees received in connection
with the servicing of the private mortgage insurance business of subsidiaries of
Investors Mortgage Insurance Holding Company ("IMI"), which were sold in 1993,
and $858,000 of fees received by Ocwen Asset Management, Inc. ("OAM"), a
subsidiary of the Company which had managed mortgage-backed and related
securities as
39
<PAGE>
a discretionary asset manager for an unaffiliated party. These decreases were
partially offset by a $1.0 million litigation settlement received in 1995 from a
broker-dealer relating to a tax residual transaction.
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. The Company sold these branch offices and the related
deposit liabilities because of the premiums which could be obtained for such
deposits under existing market and economic conditions and because the Company
believed that it could replace these deposits with other sources of funds, such
as brokered and other wholesale deposits, FHLB advances and reverse repurchase
agreements, which management generally believes have an effective cost to the
Company which is more attractive than the deposits obtained from branch offices
after the general and administrative expense associated with such offices is
taken into account. The Company funded the sale of the deposits transferred in
the branch sales with cash and cash equivalents obtained from brokered and other
wholesale deposits, proceeds obtained from sales of securities classified as
available for sale and other sources of funds. For a breakdown of the components
of the gains from the branch sales, see Note 2 to the Consolidated Financial
Statements.
NON-INTEREST EXPENSE. Non-interest expense increased $11.0 million or 94.3%
during the three months ended March 31, 1997, as compared to the same period in
1996, and by $24.0 million or 52.7% during the year ended December 31, 1996, and
decreased by $23.3 million or 33.8% during the year ended December 31, 1995. The
increase in non-interest expense during the three months ended March 31, 1997,
as compared to the same period in the prior year, was primarily attributable to
an $8.8 million or 141.9% increase in compensation and employee benefits. The
increase in non-interest expense in 1996 was primarily related to a $14.6
million or 61.3% increase in employee compensation and benefits and the SAIF
assessment of $7.1 million. 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 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,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Compensation and employee benefits......................... $ 14,923 $ 6,170 $ 38,357 $ 23,787 $ 42,395
Occupancy and equipment.................................... 2,829 2,045 8,921 8,360 11,537
Amortization of goodwill................................... -- -- -- -- 1,346
Net operating (gains) losses on investments in real estate
and certain low-income housing tax credit interests...... 1,093 461 (453) 337 (723)
SAIF assessment............................................ -- -- 7,140 -- --
Other operating expenses................................... 3,852 3,007 15,613 13,089 14,303
--------- --------- --------- --------- ---------
Total.................................................... $ 22,697 $ 11,683 $ 69,578 $ 45,573 $ 68,858
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The increases in compensation and employee benefits during the three months
ended March 31, 1997 and the year ended December 31, 1996 reflect increases in
the average number of full-time equivalent employees from 323 to 629 during the
three months ended March 31, 1996 and 1997, respectively, and from 344 to 398
during the year ended December 31, 1995 and 1996, respectively. In addition,
profit sharing expense increased by $3.6 million during the three months ended
March 31, 1997, as compared to the same period in the prior year, and by $8.4
million during the year ended December 31, 1996. The decrease in compensation
and employee benefits in 1995 reflected a decrease in the average number of
40
<PAGE>
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 occupancy and equipment expense during the three months
ended March 31, 1997, as compared to the same period in the prior year, was
primarily due to an increase in data processing costs and office equipment
expenses. The increase in occupancy and equipment expense in 1996 was related to
the increase in leased office space attributable to the increase in the number
of full-time equivalent employees discussed above. 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.
Net operating losses on investments in real estate and certain low-income
housing tax credit interests, which includes hotel operations, increased during
the three months ended March 31, 1997, as compared to the same period in 1996,
as a result of net operating losses and depreciation expense on low-income
housing tax credit interests placed in service since the first quarter of 1996.
The changes in this item during 1996, 1995 and 1994 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, as discussed
above.
Other operating expenses increased by $845,000 during the three months ended
March 31, 1997, as compared to the same period in the prior year, primarily due
to a $600,000 increase in loan related expenses and a $200,000 increase in
professional fees, which were offset in part by lower FDIC insurance premium
expenses of $405,000. Other expenses increased by $2.5 million in 1996,
primarily as a result of an $885,000 increase in FDIC insurance premiums and a
$1.7 million increase in loan related expenses. Other expenses decreased in 1995
primarily as a result of a $641,000 decrease in travel and lodging expenses, a
$337,000 decrease in marketing expenses and a $683,000 decrease in miscellaneous
other expenses, which were offset in part by a $1.1 million increase in loan
related expenses. See Note 25 to the Consolidated Financial Statements.
EQUITY IN EARNINGS OF INVESTMENT IN JOINT VENTURE. Equity in earnings of
investment in joint venture relates primarily to LLC. The Company's $14.4
million of earnings from LLC during the three months ended March 31, 1997
consisted of 50% of the net income of LLC before deduction of the Company's 50%
share of loan servicing fees, which are paid 100% to the Company, and the
recapture of $2.5 million of valuation allowances established in 1996 by the
Company on its equity investment in LLC as a result of the resolution and
securitization of loans. The Company's 50% pro rata share of LLC's income during
the three months ended March 31, 1997 consisted primarily of $1.7 million of
interest income on discounted loans and $9.2 million of gains on the sale of
discounted loans, including the securitization of HUD loans in March 1997 as
part of a larger transaction involving the Company and an affiliate of
BlackRock.
The Company's equity in earnings of LLC amounted to $38.3 million in 1996
and included 50% of the net income of LLC before deduction of the Company's 50%
share of loan servicing fees, which are paid 100% to the Company, 50% of the
gain on sale of loan servicing rights which the Company acquired from LLC, $7.6
million in provision for losses on the equity investment in LLC and a $460,000
gain on sale of future contracts used to hedge the loans securitized. The
Company's 50% pro rata share of LLC's income in 1996 consisted primarily of
$10.1 million of net interest income on discounted loans and $35.6 million of
gains on sales of discounted loans. The Company has recognized 50% of the loan
servicing fees not eliminated in consolidation in servicing fees and other
charges. See "Business--Investment in Joint Ventures," Note 3 to the Interim
Consolidated Financial Statements and Note 2 to the Consolidated Financial
Statements.
INCOME TAX EXPENSE (BENEFIT). Income tax expense (benefit) amounted to $3.6
million and $(1.0) million during the three months ended March 31, 1997 and
1996, respectively. The Company's income tax expense is reported net of tax
credits of $3.6 million and $2.4 million during the first quarter of 1997 and
1996, respectively, resulting from the Company's investment in low-income
housing tax credit interests.
41
<PAGE>
Exclusive of such amounts, the Company's effective tax rate amounted to 34.7%
and 37.0% during the three months ended March 31, 1997 and 1996, respectively.
Income tax expense on the Company's income from continuing operations
amounted to $11.2 million, $4.6 million and $29.7 million during 1996, 1995 and
1994, respectively. The Company's effective tax rate amounted to 18.2%, 12.1%
and 36.4% during 1996, 1995 and 1994, respectively. The Company's low effective
tax rates in 1996 and 1995 were primarily attributable to the tax credits
resulting from the Company's investment in low-income housing tax credit
interests, which amounted to $9.3 million, $7.7 million and $5.4 million during
1996, 1995 and 1994, respectively. The Company's effective tax rate in 1994
includes the effects of the Company's write-off of the remaining goodwill of
$9.1 million 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. Exclusive of the above amounts, the
Company's effective tax rate amounted to 33.4%, 32.6% and 38.73% during 1996,
1995 and 1994, respectively. For additional information see " -- Changes in
Financial Condition--Investments in Low-Income Tax Credit Interests" below.
DISCONTINUED OPERATIONS. In September 1995, the Company announced its
decision to dispose of its automated banking division, which generally
emphasized the installation of automated teller machines and automated banking
centers in a wide variety of locations which were not associated with branch
offices of the Company, as well as the development and installation of an
automated multi-application card system for the distribution of financial
products and services to members of a college or university population. As a
result of this decision, an after-tax loss on disposal of $3.2 million was
recorded, which consisted of a net loss of $2.0 million on the sale of assets
and a loss of $1.2 million incurred from related operations until the sale and
disposition, which was substantially completed at December 31, 1995. Losses from
the operations of the discontinued division prior to discontinuance, net of tax,
amounted to $4.5 million during 1995 and 1994. See Note 3 to the Consolidated
Financial Statements.
42
<PAGE>
CHANGES IN FINANCIAL CONDITION
The following table sets forth information relating to certain of the
Company's assets and liabilities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Assets:
Securities held for trading.............................................. $ -- $ 75,606 $ --
Securities available for sale............................................ 348,066 354,005 337,480
Loans available for sale................................................. 88,511 126,366 251,790
Loan portfolio, net...................................................... 422,232 402,582 295,605
Discounted loan portfolio, net........................................... 1,280,972 1,060,953 669,771
Investment in low-income housing tax credit interests.................... 99,924 93,309 81,362
Investment in joint ventures............................................. 33,367 67,909 --
Real estate owned, net................................................... 98,466 103,704 166,556
Investment in real estate................................................ 46,132 41,033 11,957
Deferred tax asset....................................................... 3,253 5,860 22,263
Total assets............................................................. 2,649,471 2,483,685 1,973,590
Liabilities:
Deposits................................................................. 2,106,829 1,919,742 1,501,646
FHLB advances............................................................ 399 399 70,399
Reverse repurchase agreements............................................ 39,224 74,546 84,761
Notes, debentures and other.............................................. 225,573 225,573 117,054
Total liabilities........................................................ 2,424,315 2,280,089 1,834,043
Stockholders' equity....................................................... 225,156 203,596 139,547
</TABLE>
SECURITIES HELD FOR TRADING. The Company held $75.6 million in
single-family CMOs for trading at December 31, 1996. This security, which was
sold in January 1997, was acquired from LLC in 1996 in connection with LLC's
securitization of a portion of the loans acquired by it from HUD. See
"Business-- Investment in Joint Ventures-Securitization of HUD Loans by LLC."
SECURITIES AVAILABLE FOR SALE. Securities available for sale decreased $5.9
million or 1.7% during the three months ended March 31, 1997 due primarily to
$14.0 million of sales and $14.0 million of principal repayments and net premium
amortization, which were offset in part by $21.7 million of purchases, including
the acquisition of a $3.8 million subordinate security in connection with the
Company's securitization of single-family residential loans acquired from HUD
and sale of the senior classes of securities backed by such loans. Securities
available for sale increased $16.5 million or 4.9% during 1996 primarily as a
result of the purchase of $88.6 million of IOs, the acquisition of two REMIC
residual securities with a carrying value of $20.6 million in connection with
the Company's securitization of $219.6 million of sub-prime single-family
residential loans, the acquisition of a subordinate security with a carrying
value of $18.9 million from LLC in connection with LLC's securitization of loans
acquired by it from HUD and the acquisition of an additional $32.1 million of
subordinate securities, of which $9.2 million were acquired in connection with
the Company's securitization of $136.5 million of commercial discounted loans.
These acquisitions were offset in part by the sale and repayment of $76.3
million of CMOs, the sale of $46.4 million of subordinate securities and the
sale of $16.1 million of IOs. For additional information relating to these
investments, see "Business--Investment Activities--Mortgage-Backed and Related
Securities" and Note 6 to the Consolidated Financial Statements.
LOANS AVAILABLE FOR SALE. Loans available for sale, which are comprised
primarily of sub-prime single-family residential loans, decreased $37.9 million
or 30.0% during the three months ended March 31, 1997 and $125.4 million or
49.8% during 1996. During the three months ended March 31, 1997, the Company
43
<PAGE>
acquired $64.5 million of sub-prime single-family residential loans and sold
$82.1 million of such loans. The decrease in loans available for sale in 1996
occurred primarily as a result of sales of $381.1 million of single-family
residential loans, $14.9 million of multi-family residential loans and principal
payments of $26.7 million, which substantially offset the purchase and
origination of $304.5 million of such loans. Of the single-family residential
loans sold during 1996, $219.6 million were due to the Company's securitization
of such loans. See "Business--Lending Activities--Single-Family Residential
Loans."
At March 31, 1997, non-performing loans available for sale amounted to $13.1
million or 14.8% of total loans available for sale, as compared to $14.4 million
or 11.4% at December 31, 1996 and $7.9 million or 3.2% at December 31, 1995.
Non-performing loans available for sale consist primarily of sub-prime
single-family residential loans, reflecting the higher risks associated with
such loans and resolutions of such loans by the Company in recent periods.
During 1996, the Company recorded a $1.6 million reduction in the carrying value
of these loans to record them at the lower of cost or fair value.
LOAN PORTFOLIO, NET. The Company's net loan portfolio increased $19.7
million or 4.9% during the three months ended March 31, 1997 primarily as a
result of loans for the construction or rehabilitation of multi-family
residences, which increased $22.9 million during this period. The Company's net
loan portfolio increased $107.0 million or 36.2% during 1996 primarily as a
result of increased investment in multi-family residential loans, particularly
construction loans, and commercial real estate loans secured by hotels and
office buildings. From December 31, 1995 to December 31, 1996, multi-family
residential loans, including construction loans, increased $18.8 million, and
commercial real estate and land loans increased $142.6 million, including a
$74.5 million and a $67.5 million increase in loans secured by hotels and office
buildings, respectively. See "Business--Lending Activities."
At March 31, 1997, non-performing loans amounted to $9.3 million or 2.2% of
total loans, as compared to $2.3 million or 0.6% at December 31, 1996 and $3.9
million or 1.3% at December 31, 1995. At March 31, 1997, non-performing loans
consisted primarily of $7.5 million of multi-family residential loans, which
represented a $7.4 million increase from December 31, 1996. The Company's
allowance for loan losses amounted to 51.9% and 154.2% of non-performing loans
at March 31, 1997 and December 31, 1996, respectively. See "Business--Asset
Quality" and Note 9 to the Consolidated Financial Statements.
DISCOUNTED LOAN PORTFOLIO, NET. The discounted loan portfolio increased
$220.0 million or 20.7% during the three months ended March 31, 1997 and $391.2
million or 58.4% during 1996. During the three months ended March 31, 1997,
discounted loan acquisitions having an unpaid principal balance of $442.9
million, which included $425.6 million of single-family residential loans
acquired from HUD, more than offset $63.6 million of resolutions and repayments,
$51.6 million of loans transferred to real estate owned and $79.8 million of
sales of discounted loans. During 1996, discounted loan acquisitions having an
unpaid principal balance of $1.11 billion more than offset $371.2 million of
resolutions and repayments, $138.5 million of transfers to real estate owned and
$230.2 million of sales. Of the discounted loans sold during 1996, $136.5
million were due to the Company's securitization of performing commercial
discounted loans. See "Business--Discounted Loan Acquisition and Resolution
Activities" and Note 10 to the Consolidated Financial Statements.
At March 31, 1997, discounted loans which were performing in accordance with
original or modified terms amounted to $536.0 million or 34.3% of the gross
discounted loan portfolio, as compared to $579.6 million or 44.1% at December
31, 1996 and $351.6 million or 37.3% at December 31, 1995. The Company's
allowance for losses on its discounted loan portfolio amounted to $16.8 million
or 1.3% of discounted loans at March 31, 1997, as compared to $11.5 million or
1.1% at December 31, 1996. The Company did not maintain an allowance for losses
on its discounted loan portfolio prior to 1996. See "Business-- Discounted Loan
Acquisition and Resolution Activities--Payment Status of Discounted Loans."
44
<PAGE>
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. In 1993, the
Company commenced a multi-family residential lending program which includes
direct and 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, 1997, the Company had $99.9
million of investments in low-income housing tax credit interests, as compared
to $93.3 million and $81.4 million at December 31, 1996 and 1995, respectively.
Investments by the Company in low-income housing tax interests made on or
after May 18, 1995 in which the Company invests solely as a limited partner,
which amounted to $23.7 million at March 31, 1997, are accounted for using the
equity method in accordance with the consensus of the Emerging Issues Task Force
through Issue Number 94-1. Limited partnership investments made prior to May 18,
1995, which amounted to $52.2 million at March 31, 1997, are accounted for under
the effective yield method as a reduction of income tax expense. Low-income
housing tax credit partnerships in which the Company invests as both a limited
and, through a subsidiary, a general partner amounted to $24.0 million at March
31, 1997 and are presented on a consolidated basis. See "Business--Investment
Activities-- Investment in Low-Income Housing Tax Credit Interests" and Note 14
to the Consolidated Financial Statements.
INVESTMENT IN JOINT VENTURES. From time to time the Company and a
co-investor acquire discounted loans by means of a co-owned joint venture. At
March 31, 1997, the Company's investment in joint ventures, net consisted of a
50% interest in LLC, a limited liability company formed by the Company and
BlackRock, and a 10% interest in BCFL, L.L.C. ("BCFL"), a limited liability
company which also was formed by the Company and BlackRock, which amounted to
$32.3 million and $1.1 million, respectively. LLC was formed in March 1996 to
acquire discounted single-family residential loans auctioned by HUD, and BCFL
was formed in January 1997 to acquire discounted multi-family residential loans
from HUD. At March 31, 1997, LLC had $70.2 million of assets, which consisted
primarily of $48.6 million of discounted single-family residential loans
available for sale and $12.1 million of real estate owned. See "Business--
Investment in Joint Ventures," Note 3 to the Interim Consolidated Financial
Statements and Note 2 to the Consolidated Financial Statements.
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 $96.4 million
or 97.9% of total real estate owned at March 31, 1997 and consisted of $45.8
million, $10.5 million and $40.1 million of properties attributable to
single-family residential loans, multi-family residential loans and commercial
real estate loans, respectively. Real estate owned decreased $5.2 million or
5.1% during the three months ended March 31, 1997 and $62.9 million or 37.7%
during the year ended December 31, 1996 as a result of decreases in
single-family and multi-family real estate owned attributable to the discounted
loan portfolio. The decrease in real estate owned during the three months ended
March 31, 1997 reflected a bulk sale of 288 properties for $21.2 million, which
resulted in a gain of $430,000.
The Company actively manages its real estate owned. The Company sold 533
properties with a carrying value of $46.9 million during the three months ended
March 31, 1997, 1,175 properties with a carrying value of $160.6 million during
1996, 1,229 properties with a carrying value of $139.2 million during 1995 and
1,410 properties with a carrying value of $116.0 million during 1994. These
sales resulted in gains, net of the provision for loss, of $1.6 million, $4.5
million, $8.5 million and $12.2 million during the three months ended March 31,
1997 and the years ended December 31, 1996, 1995 and 1994, respectively, which
are included in determining the Company's net income (loss) on real estate
owned. See "Business--Asset Quality--Real Estate Owned" and Note 11 to the
Consolidated Financial Statements.
INVESTMENT IN REAL ESTATE. In conjunction with its multi-family residential
and commercial real estate lending business activities, the Company has made
certain acquisition, development and construction loans in which the Company
participates in the expected residual profits of the underlying real estate and
the
45
<PAGE>
borrower has not made an equity contribution substantial to the overall project.
As such, the Company accounts for these loans under the equity method of
accounting as though it has made an investment in a real estate limited
partnership. The Company's investment in such loans amounted to $30.3 million at
March 31, 1997, as compared to $24.9 million at December 31, 1996. The Company
had no such investments at December 31, 1995.
The Company also has invested indirectly in The Westin Hotel, Columbus,
located in Columbus, Ohio. The Company's investment in such property increased
to $16.1 million at December 31, 1996 from $12.0 million at December 31, 1995 as
a result of capital improvements made to the hotel and decreased to $15.9
million at March 31, 1997 as a result of depreciation. For additional
information, see "Business-- Subsidiaries."
DEFERRED TAX ASSET. At March 31, 1997 the deferred tax asset, net of
deferred tax liabilities, amounted to $3.3 million, a decrease of $2.6 million
from the $5.9 million deferred tax asset at December 31, 1996. At March 31,
1997, the gross deferred tax asset amounted to $16.0 million and consisted
primarily of $2.1 million of mark-to-market and reserves on real estate owned,
$4.0 million of deferred interest expense on the discount loan portfolio, $3.8
million of valuation allowance reserves and $1.9 million of profit sharing
expense, and the gross deferred tax liability amounted to $12.7 million and
consisted of primarily of $4.4 million of deferred interest income on the
discount loan portfolio, $1.5 million related to hedge transactions and $3.7
million of mark-to-market on securities available for sale. At December 31,
1996, the gross deferred tax asset amounted to $15.1 million and consisted
primarily of $3.7 million related to tax residuals, $3.5 million of
mark-to-market and reserves on real estate owned and $3.9 million of deferred
interest expense on the discount loan portfolio, and the gross deferred tax
liability amounted to $9.2 million and consisted primarily of $4.6 million of
deferred interest income on the discount loan portfolio and $2.1 million of
mark-to-market on certain securities available for sale.
As 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 asset
which existed at March 31, 1997. 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 at March 31, 1997 because it
was management's assessment that, based on available information, it is more
likely than not that all of the deferred tax asset will be realized. A valuation
allowance will be established in the future to the extent of a change in
management's assessment of the amount of the net deferred tax asset that is
expected to be realized. See Note 21 to the Consolidated Financial Statements.
DEPOSITS. Deposits increased $187.1 million or 9.8% during the three months
ended March 31, 1997 and $418.1 million or 27.8% during the year ended December
31, 1996, primarily as a result of brokered deposits obtained through national
investment banking firms which solicit deposits from their customers, which
amounted to $1.34 billion at March 31, 1997, as compared to $1.22 billion and
$1.12 billion at December 31, 1996 and 1995, respectively. The Company's
deposits also increased during 1996 as a result of the Company's direct
solicitation and marketing efforts to regional and local investment banking
firms, institutional investors and high net worth individuals. Deposits obtained
in this manner amounted to $607.1 million at March 31, 1997, as compared to
$540.6 million and $273.4 million at December 31, 1996 and 1995, respectively.
See "Business--Sources of Funds--Deposits" and Note 16 to the Consolidated
Financial Statements.
FHLB ADVANCES AND REVERSE REPURCHASE AGREEMENTS. FHLB advances decreased
$70.0 million during 1996 as a result of the repayment of a $70.0 million
advance which matured during this period. Reverse repurchase agreements
decreased by $35.3 million and by $10.2 million during the three months ended
March 31, 1997 and the year ended December 31, 1996, respectively. From time to
time the Company utilizes such collateralized borrowings as additional sources
of liquidity. See Business--Sources of Funds-- Borrowings" and Notes 17 and 18
to the Consolidated Financial Statements.
46
<PAGE>
NOTES, DEBENTURES AND OTHER INTEREST-BEARING OBLIGATIONS. Notes, debentures
and other interest-bearing obligations increased $108.5 million during 1996
primarily as a result of the $125.0 million of 11.875% Notes issued by the
Company in September 1996. This increase more than offset the repayment of $8.6
million of short-term notes which were privately issued to stockholders of the
Company and a $7.8 million decrease in hotel mortgages payable due to the
Company's decision in November 1996 to acquire the mortgage payable on the
Company's hotel in Columbus, Ohio. See Note 19 to the Consolidated Financial
Statements.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $21.6 million or 10.6%
during the three months ended March 31, 1997 and $64.0 million or 45.9% during
1996. The increase in stockholders' equity during the three months ended March
31, 1997 was primarily attributable to net income of $17.0 million, an increase
of $3.2 million in the unrealized gain on securities available for sale and a
$1.5 million decrease in the outstanding balance of loans made to certain
officers and directors to fund the exercise of stock options. The increase in
stockholders' equity during 1996 was primarily due to $50.1 million of net
income, a $4.9 million increase in unrealized gain on securities available for
sale and a $13.0 million increase in Common Stock and additional paid-in capital
in connection with the issuance of 2,928,830 shares of Common Stock as a result
of the exercise of vested stock options by certain of the Company's and the
Bank's current and former officers and directors. These increases more than
offset the loans made to certain of such officers and directors to fund their
exercise of the stock options, which had an unpaid principal balance of $2.3
million at March 31, 1997.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. It is the objective of the Company to
attempt to control risks associated with interest rate movements. In general,
management's strategy is to match asset and liability balances within maturity
categories to limit the Company's exposure to earnings variations and variations
in the value of assets and liabilities as interest rates change over time. The
Company's asset and liability management strategy is formulated and monitored by
the Asset/Liability Committee, which is composed of directors and officers of
the Company and the Bank, in accordance with policies approved by the Board of
Directors of the Bank. The Asset/Liability Committee meets regularly to review,
among other things, the sensitivity of the Company's assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, including those attributable to hedging
transactions, purchase and sale activity, and maturities of investments and
borrowings. The Asset/Liability Committee also approves and establishes pricing
and funding decisions with respect to overall asset and liability composition.
The Asset/Liability Committee is authorized to utilize a wide variety of
off-balance sheet financial techniques to assist it in the management of
interest rate risk. These techniques include interest rate exchange agreements,
pursuant to which the parties exchange the difference between fixed-rate and
floating-rate interest payments on a specified principal amount (referred to as
the "notional amount") for a specified period without the exchange of the
underlying principal amount. Interest rate exchange agreements are utilized by
the Company to protect against the decrease in value of a fixed-rate asset or
the increase in borrowing cost from a short-term, fixed-rate liability, such as
reverse repurchase agreements, in an increasing interest-rate environment. At
March 31, 1997, the Company had entered into interest rate exchange agreements
with an aggregate notional amount of $44.1 million. Interest rate exchange
agreements had the effect of increasing (decreasing) the Company's net interest
income by ($74,000) and $0 during the three months ended March 31, 1997 and
1996, respectively, and by ($58,000), $358,000 and $754,000 during the years
ended December 31, 1996, 1995 and 1994, respectively.
The Company also enters 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 short duration mortgage-related
securities, and U.S. Treasury futures
47
<PAGE>
contracts have been sold by the Company to offset declines in the market value
of its fixed-rate 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, 1997, the Company had entered into U.S. Treasury
futures (short) contracts with an aggregate notional amount of $264.3 million.
The Company had no outstanding Eurodollar futures contracts at March 31, 1997.
Futures contracts had the effect of increasing (decreasing) the Company's net
interest income by ($904,000) and ($240,000) during the three months ended March
31, 1997 and 1996, respectively, and by ($729,000), $619,000 and $650,000 during
the years ended December 31, 1996, 1995 and 1994, respectively. In addition,
futures contracts had the effect of decreasing the Company's non-interest income
by $56,000 and $0 during the three months ended March 31, 1997 and 1996,
respectively, and by $4.1 million, $3.3 million and $0 during the years ended
December 31, 1996, 1995, and 1994, respectively. For additional information, see
Note 20 to the Consolidated Financial Statements and Note 4 to the Interim
Consolidated Financial Statements.
The Asset/Liability Committee's methods for evaluating interest rate risk
include an analysis of the Company's interest rate sensitivity "gap," which is
defined as the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
the amount of interest-rate sensitive liabilities. A gap is considered negative
when the amount of interest-rate sensitive liabilities exceeds interest-rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net interest income
adversely. Because different types of assets and liabilities with the same or
similar maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
The following table sets forth the estimated maturity or repricing of the
Company's interest-earning assets and interest-bearing liabilities at March 31,
1997. The amounts of assets and liabilities shown within a particular period
were determined in accordance with the contractual terms of the assets and
liabilities, except (i) adjustable-rate loans, performing discount 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 discount 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 Bank, and (vi) escrow deposits and other non-interest bearing checking
accounts, which amounted to $95.2 million at March 31, 1997, are excluded.
Management believes that these assumptions approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of the
48
<PAGE>
Company's assets and liabilities in the table could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which the assumptions are based.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------------------------------
MORE THAN 1
WITHIN 4 TO 12 YEAR TO 3 3 YEARS AND
3 MONTHS MONTHS YEARS OVER TOTAL
---------- ---------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Rate-Sensitive Assets:
Interest-earning cash, federal funds sold and
repurchase agreements.............................. $ 107,802 $ -- $ -- $ -- $ 107,802
Securities available for sale........................ 26,688 62,190 71,831 187,357 348,066
Loans available for sale (1)......................... 13,857 33,358 12,919 28,377 88,511
Investment securities, net........................... 95 238 19 10,849 11,201
Loan portfolio, net (1).............................. 118,372 86,726 53,522 163,612 422,232
Discount loan portfolio, net......................... 201,850 446,097 291,081 341,944 1,280,972
---------- ---------- -------------- ----------- ----------
Total rate-sensitive assets........................ 468,664 628,609 429,372 732,139 2,258,784
---------- ---------- -------------- ----------- ----------
Rate-Sensitive Liabilities:
NOW and money market checking deposits............... 13,784 1,292 1,431 6,145 22,652
Savings deposits..................................... 348 266 292 1,167 2,073
Certificates of deposit.............................. 326,956 642,889 444,154 572,941 1,986,940
---------- ---------- -------------- ----------- ----------
Total interest-bearing deposits.................... 341,088 644,447 445,877 580,253 2,011,665
FHLB advances........................................ -- 399 -- -- 399
Securities sold under agreements to repurchase....... 39,224 -- -- -- 39,224
Subordinated notes, debentures and other
interest-bearing obligations....................... -- -- -- 225,573 225,573
---------- ---------- -------------- ----------- ----------
Total rate-sensitive liabilities................... 380,312 644,846 445,877 805,826 2,276,861
---------- ---------- -------------- ----------- ----------
Interest rate sensitivity gap before off-balance
sheet financial instruments........................ 88,352 (16,237) (16,505) (73,687) (18,077)
Off-Balance Sheet Financial Instruments:
Futures contracts and interest rate swap............... 286,131 (39,595) (46,230) (200,306) --
---------- ---------- -------------- ----------- ----------
Interest rate sensitivity gap.......................... $ 374,483 $ (55,832) $ (62,735) $ (273,993) $ (18,077)
---------- ---------- -------------- ----------- ----------
---------- ---------- -------------- ----------- ----------
Cumulative interest rate sensitivity gap............... $ 374,483 $ 318,651 $ 255,916 $ (18,077)
---------- ---------- -------------- -----------
---------- ---------- -------------- -----------
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets............ 16.58% 14.11% 11.33% (0.80)%
---------- ---------- -------------- -----------
---------- ---------- -------------- -----------
</TABLE>
- ------------------------
(1) Balances have not been reduced for non-performing loans.
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, and as required by OTS regulations, the Asset/Liability Committee also
regularly reviews interest rate risk by forecasting the impact of alternative
interest rate environments on net interest income and market value of portfolio
equity ("MVPE"), which is defined as the net present value of an institution's
existing assets, liabilities and off-balance sheet instruments, and evaluating
such impacts against the maximum potential changes in net interest income and
MVPE that is authorized by the Board of Directors of the Bank.
49
<PAGE>
The following table sets forth at March 31, 1997 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
and sustained uniform change in interest rates at all maturities.
<TABLE>
<CAPTION>
CHANGE ESTIMATED CHANGE IN
(IN BASIS POINTS) ------------------------------
IN INTEREST RATES NET INTEREST INCOME MVPE
- ---------------------------------------------------------------- ------------------- ---------
<S> <C> <C>
+400............................................................ 11.99% (7.09)%
+300............................................................ 8.99 (4.44)
+200............................................................ 6.00 1.27
+100............................................................ 3.00 (1.19)
0............................................................ -- --
-100........................................................... (3.00) (8.81)
-200........................................................... (6.00) (22.72)
-300........................................................... (8.99) (31.56)
-400........................................................... (11.99) (36.70)
</TABLE>
The negative estimated changes in MVPE for -100 to -400 changes in interest
rates is attributable to the Company's investments in IO strips. Increased
payments of the underlying mortgages as a result of a decrease in market
interest rates or other factors can result in a loss of all or part of the
purchase price of IO strips. IO strips also are adversely affected by an
increase in interest rates, due primarily to inverse IO strips whose interest
rates change inversely with, and often as a multiple of, a specialized index
such as the one-month LIBOR rate. An increasing interest rate environment
adversely affects the value of inverse IO strips, because the coupons of inverse
IO strips decrease in an increasing interest rate environment. IO strips exhibit
considerably more price volatility than 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.
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, loan acquisition 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.
Sources of liquidity include certificates of deposit obtained primarily from
wholesale sources. At March 31, 1997 the Company had $1.99 billion of
certificates of deposit, including $1.34 billion of brokered certificates of
deposit obtained through national investment banking firms, all of which are
non-cancelable. At the same date scheduled maturities of certificates of deposit
during the 12 months ending March 31, 1998 and 1999 and thereafter amounted to
$969.8 million, $444.2 million and $572.9 million, respectively. Brokered and
other wholesale deposits generally are more responsive to changes in interest
rates than core deposits and, thus, are more likely to be withdrawn from the
Company upon maturity as changes in interest rates and other factors are
perceived by investors to make other investments more attractive. Management of
the Company believes that it can adjust the rates paid on certificates of
deposit to retain deposits in changing interest rate environments, 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, however.
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
50
<PAGE>
March 31, 1997, the Company had $399,000 of FHLB advances outstanding, was
eligible to borrow up to an aggregate of $167.1 million from the FHLB of New
York (subject to the availability of acceptable collateral) and had $123.4
million of single-family residential loans, $10.5 million of multi-family
residential loans and $33.2 million of loans secured by hotel properties 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 $188.1 million of unencumbered mortgage-related securities which could be
used to secure such borrowings.
The liquidity of the Company includes lines of credit obtained by OFS
subsequent to its acquisition of substantially all of the assets of Admiral in a
transaction which closed on May 1, 1997, as follows: (i) a $200.0 million
secured line of credit from Morgan Stanley Mortgage Capital Inc. and (ii) a
$50.0 million secured line of credit from Texas Commerce Bank National
Association. An aggregate of $46.2 million was outstanding under these lines of
credit at June 30, 1997, which have interest rates which float in accordance
with a designated prime rate. In addition, the Company provided a $30.0 million
unsecured, subordinated credit facility to OFS, of which $12.8 million was
outstanding at June 30, 1997.
The Company believes that its existing sources of liquidity will be adequate
to fund planned business activities for the foreseeable future, although there
can be no assurances in this regard. Moreover, the Company continues to evaluate
other sources of liquidity, such as lines of credit from unaffiliated parties,
which will enhance the management of its liquidity and the costs thereof.
The Company's operating activities provided cash flows of $124.2 million,
$8.3 million and $101.4 million during the three months ended March 31, 1997 and
1996 and the year ended December 31, 1996, respectively and used cash flows of
$189.4 million and $108.8 million during the years ended December 31, 1995 and
1994, respectively. During the foregoing periods cash resources were provided
primarily by net income and proceeds from sales of loans available for sale, and
cash resources were used primarily to purchase and originate loans available for
sale.
The Company's investing activities used cash flows totaling $212.8 million,
$558.3 million and $474.5 million during the three months ended March 31, 1997
and the years ended December 31, 1996 and 1995, respectively, and provided cash
flows of $104.5 million and $234.5 million during the three months ended March
31, 1996 and the year ended December 31, 1994, respectively. During the
foregoing periods, cash flows from investing activities were provided primarily
by principal payments on discount loans and loans held for investment, proceeds
from sales of securities available for sale and real estate owned, and cash
flows from investing activities were primarily utilized to purchase and
originate discount loans and loans held for investment and purchase securities
available for sale.
The Company's financing activities provided cash flows of $153.2 million,
$454.5 million and $681.8 million during the three months ended March 31, 1997
and the years ended December 31, 1996 and 1995, respectively and used cash flows
of $89.6 million and $127.9 million during the three months ended March 31, 1996
and the year ended December 31, 1994, respectively. Cash flows from financing
activities primarily relate to changes in the Company's deposits, issuance of
the Notes in 1996, issuance of the Debentures in 1995 and FHLB advances. Cash
flows used by financing activities were primarily utilized to repay FHLB
advances and reverse repurchase agreements and include the transfer of deposits
in connection with the sale of branch offices in 1995 and 1994.
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, averaged 6.4%, 8.8%, 12.9% and
14.2% during the three months ended
51
<PAGE>
March 31, 1997 and the years ended December 31, 1996, 1995 and 1994,
respectively. The Bank's regulatory liquidity amounted to 6.51% at March 31,
1997.
At March 31, 1997, the Company had $174.0 million of unfunded commitments
related to purchases and originations of loans, as well as a $6.8 million
commitment to acquire substantially all of the assets of Admiral, which was
consummated on May 1, 1997. See "Business--Subsidiaries." 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 1997. For additional information relating to
commitments and contingencies at March 31, 1997, see Note 6 to the Interim
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 4 to the Interim 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 following table sets forth the Bank's actual and required regulatory
capital ratios at March 31, 1997, as well as the amount of capital required to
be maintained by the Bank in order for it to be deemed to be "well-capitalized"
under the prompt corrective action regulatory framework set forth in applicable
laws and regulations of the OTS.
<TABLE>
<CAPTION>
TIER 1 TOTAL
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Actual capital:
Amount................................................... $ 242,852 $ 242,852 $ 242,852 $ 364,702(1)
Ratio.................................................... 9.48% 9.48% 8.80% 13.22%
Minimum required capital:
Amount................................................... $ 38,411 $ 76,822 n/a $ 220,769
Ratio.................................................... 1.50% 3.00% n/a 8.00%
"Well capitalized" required capital (2):
Amount................................................... n/a $ 128,037 $ 165,574 $ 275,956
Ratio.................................................... n/a 5.00% 6.00% 10.00%
</TABLE>
- ------------------------
(1) At March 31, 1997, the Bank's supplementary capital included $100.0 million
attributable to the Debentures and $21.9 million of general valuation
allowances. See Note 5 to the Interim Consolidated Financial Statements.
(2) In order to be "well capitalized," an institution also must not be subject
to any written agreement, order or directive issued by the appropriate
federal banking agency to meet and maintain a specific capital level for any
capital measure. See "Regulation--The Bank--Prompt Corrective Action."
In addition to regulatory capital requirements of general applicability, a
federally-chartered savings association such as the Bank may be required to meet
individual minimum capital requirements established by the OTS on a case-by-case
basis upon a determination that a savings association's capital is or may become
inadequate in view of its circumstances. See "Regulation--The Bank--Regulatory
Capital Requirements." As discussed under "--Recent Regulatory Developments"
below, based upon recent
52
<PAGE>
discussions with the OTS, the Bank has committed to the OTS to maintain a core
capital (leverage) ratio and a total risk-based capital ratio of at least 9% and
13%, respectively, commencing on June 30, 1997. The Bank is currently in
compliance with this commitment, as indicated in the above table. Based on
discussions with the OTS, the Bank believes that this commitment does not affect
its status as a "well-capitalized" institution, assuming the Bank's continued
compliance with the regulatory capital requirements required to be maintained by
it pursuant to such commitment.
RECENT REGULATORY DEVELOPMENTS
In connection with a recent examination of the Bank, the staff of the OTS
expressed concern about many of the Bank's non-traditional operations, which
generally are deemed by the OTS to involve higher risk, certain of the Bank's
accounting policies and the adequacy of the Bank's capital in light of the
Bank's lending and investment strategies. The activities which were of concern
to the OTS included the Bank's sub-prime single-family residential lending
activities, the Bank's origination of acquisition, development and construction
loans with terms which provide for shared participation in the results of the
underlying real estate, the Bank's discounted loan activities, which involve
significantly higher investment in non-performing and classified assets than the
majority of the savings industry, and the Bank's investment in subordinated
classes of mortgage-related securities issued in connection with the Bank's
asset securitization activities and otherwise.
Following the examination, the OTS instructed the Bank, commencing on June
30, 1997, to maintain a ratio of Tier 1 capital to assets of at least 12% and a
total risk-based capital ratio of no less than 18%. The OTS indicated, however,
that these amounts may be decreased in the event that the Bank reduced its risk
profile in a manner which was satisfactory to the OTS.
Although the Bank strongly disagrees with the level of risk perceived by the
OTS in its businesses, the Bank has taken various actions to address OTS
concerns with respect to its risk profile, including the following: (i) sold to
the Company subordinated, participating interests in a total of 11 acquisition,
development and construction loans, which interests had an aggregate principal
balance of $16.9 million; (ii) ceased originating mortgage loans with profit
participation features in the underlying real estate, with the exception of
existing commitments, which consisted of commitments for two loans with an
aggregate principal amount of $10.7 million at March 31, 1997; (iii) transferred
its sub-prime single-family residential lending operations and its large
multi-family residential and commercial real estate lending operations to OFS
and OCC, respectively (see "Business--General"); (iv) agreed (a) to discontinue
the purchase of subordinate classes of mortgage-related securities created by
unaffiliated parties, (b) to sell the five such securities held by it at March
31, 1997 (aggregate carrying value of $32.0 million), which was completed by a
sale to OAIC on May 19, 1997 (at a gain of $2.6 million to the Company), and (c)
subject to the requirements of the OTS capital distribution regulation, to
dividend to the Company all subordinated mortgage-related securities acquired by
the Bank in connection with its securitization activities (see
"Business--Investment Activities--Mortgage-Backed and Related Securities"),
including two subordinated securities with an aggregate carrying value of $19.8
million which were dividended to the Company in June 1997; (v) established as of
December 31, 1996 requested write downs of cost basis, which amounted to $7.2
million, against loans and securities resulting from its investment in loans
acquired from HUD; (vi) agreed to employ a senior officer to head its Credit
Management Department and to take other steps to improve the effectiveness of
its independent asset review function; and (vii) agreed to provide the OTS with
certain reports on a regular basis. In addition to the foregoing, and based on
discussions with the OTS, the Company modified certain of its accounting
policies in a manner which will result in more conservative recognition of
income. Specifically, the Company (i) ceased accreting into interest income
discount on non-performing residential loans, effective January 1, 1997; (ii)
discontinued the capitalization of period expenses to real estate owned,
effective January 1, 1997; and (iii) agreed to classify as doubtful for
regulatory purposes all real estate owned which are not generating cash flow and
which has been held for more than three years (see "Business--Asset
Quality--Classified Assets"). If the new policy on accretion of discount on
non-performing residential loans had been applied in 1994, 1995 and 1996, the
53
<PAGE>
Company's income from continuing operations before income taxes, as adjusted for
related profit sharing expense, would have increased by approximately $3.2
million in 1994, decreased by approximately $1.1 million in 1995 and decreased
by approximately $1.4 million in 1996. If the new policy on capitalization of
period expenses on real estate owned had been adopted in 1994, 1995 and 1996,
the Company's income from continuing operations before income taxes, as adjusted
for related profit sharing expense, would have been reduced by approximately
$1.0 million in 1994 and by approximately $2.3 million in 1995 and would have
increased by approximately $610,000 during 1996. In light of the foregoing, the
Company does not believe that the above-referenced accounting changes had a
material affect on the Company's financial condition or results of operations.
In connection with the foregoing actions, the Bank also committed to the OTS
to maintain a core capital ratio and a total risk-based capital ratio of at
least 9% and 13%, respectively, commencing on June 30, 1997. Although these
individual regulatory capital requirements have been agreed to by the OTS in
lieu of the higher levels previously specified by the OTS, there can be no
assurance that in the future the OTS will agree to a decrease in such
requirements, will not seek to increase such requirements or will not impose
these or other individual regulatory capital requirements in a manner which
affects the Bank's status as a "well-capitalized" institution under applicable
laws and regulations.
RECENT ACCOUNTING DEVELOPMENTS
For information relating to the effects on the Company of the adoption of
recent accounting standards, see Note 2 to the Interim Consolidated Financial
Statements and Note 1 to the Consolidated Financial Statements.
54
<PAGE>
BUSINESS
GENERAL
The Company considers itself to be involved in a single business segment of
providing financial services and conducts a wide variety of business within this
segment. The Company's primary business activities consist of its discounted
loan acquisition and resolution activities, multi-family residential and
commercial real estate lending activities, sub-prime single-family residential
lending activities and various investment activities, including investments in a
wide variety of mortgage-related securities and investments in low-income
housing tax credit interests. In addition, the Company formerly operated an
automated banking division, the operations of which were discontinued in
September 1995. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations--Discontinued Operations."
The Company conducts business primarily through the Bank, a
federally-charted savings bank and a wholly-owned subsidiary of the Company.
Recently, in order to address concerns by the OTS regarding the risk profile of
the Bank's operations (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Regulatory Developements"), the
Company consolidated the sub-prime single-family residential lending operations
previously conducted by the Bank, together with substantially all of the assets
of Admiral, within OFS and transferred the large multi-family residential and
commercial real estate lending operations of the Bank (which generally involve
loans with balances in excess of $3.0 million) to OCC. (In both cases, the loans
associated with the activities previously conducted by the Bank continue to be
held by it.) The Company also intends to conduct certain investment activities
previously conducted by the Bank, primarily investment in subordinated and
residual securities resulting from the Company's securitization activities,
directly or through a non-banking subsidiary. The Bank continues to conduct
substantially all of the Company's discounted loan acquisition and resolution
activities and loan servicing activities. In addition, the Bank currently
engages in certain multi-family residential and commercial real estate lending
activities (which generally involve loans with balances of up to $3.0 million
and no terms which permit the Bank to participate in the profits of the
underlying real estate) and certain investment activities.
COMPUTER SYSTEMS AND USE OF TECHNOLOGY
The Company believes that its use of information technology has been a key
factor in achieving its competitive advantage in the acquisition, and management
and resolution of discounted loans and believes that this technology also has
applicability to other aspects of its business which involve servicing intensive
assets, including subprime residential mortgage lending, servicing of
nonperforming or underperforming loans for third parties and asset management
services provided by OCC.
In addition to its standard industry software applications which have been
customized to meet the Company's requirements, the Company has internally
developed fully integrated proprietary applications designed to provide decision
support, automation of decision execution, tracking and exception reporting
associated with the management of nonperforming and underperforming loans. The
Company also has deployed a predictive dialing solution which permits the
Company to direct the calls made by its collectors and increases the
productivity of the department; an interactive voice response system which
provides automated account information to customers; a document imaging system
which permits immediate access to pertinent loan documents; and a data warehouse
which permits corporate data to be shared on a centralized basis for decision
support. The Company is also in the process of implementing electronic commerce
which will further automate the Company's communications with its third party
service providers.
The Company's proprietary systems result in a number of benefits including
consistency of service to customers, reduced training periods for employees,
resolution decisions which evaluate on an automated basis the optimal means
(which may or may not involve proceeding directly with foreclosure) to maximize
55
<PAGE>
the net resolution proceeds, the ability to effect foreclosure as quickly as
possible within state specific foreclosure timelines and the management of third
party service providers to ensure quality of service. The federal mortgage
agencies have established a variety of measurements for approved servicers,
against which the Company compares favorably. See "Business--Loan Servicing
Activities."
Through its document imaging system, the Company is able to produce and file
complete foreclosure packages within minutes. The Company believes that the
industry standard generally is to prepare a complete foreclosure package within
sixty days. Delays in the time to resolution result in increased third party
costs, opportunity costs and direct servicing expenses. As a result the Company
has designed its systems and procedures to move a loan through the foreclosure
process in a timely manner.
The Company has invested in a sophisticated computer infrastructure to
support its software applications. The Company uses an IBM RISC AS400 and
NetFrame and COMPAQ Proliant file servers as its primary hardware platform. The
Company uses CISCO Routers, Cabletron Hubs and chassis with fiber optic cabling
throughout and between buildings so as to achieve the highest performance. The
Company also has deployed a DAVOX predictive dialer which currently has capacity
for 120 seats. The Company's document imaging system currently stores 12 million
images. The Company's systems have significant capacity for expansion and
upgrade.
The Company protects its proprietary information by developing, maintaining
and enforcing a comprehensive set of information security policies; by having
each employee execute an intellectual property agreement with the Company,
which, among other things, prohibits disclosure of confidential information and
provides for the assignment of developments; by affixing a copyright symbol to
copies of any of the Company's proprietary information to which a third party
has access; by emblazoning the start-up screen of any of the Company's
proprietary software with the Company's logo and a copyright symbol; by having
third-party contract employees and consultants execute a contract with the
Company which contains, among other things, confidentiality and assignment
provisions; and by otherwise limiting third-party access to the Company's
proprietary information.
DISCOUNTED LOAN ACQUISITION AND RESOLUTION ACTIVITIES
The Company believes that under appropriate circumstances the acquisition of
non-performing and underperforming mortgage 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. 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, servicing 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 these resources have applications in other
areas.
COMPOSITION OF THE DISCOUNTED LOAN PORTFOLIO. At March 31, 1997, the
Company's net discounted loan portfolio amounted to $1.28 billion or 48.3% of
the Company's total assets. Substantially all of the Company's discounted loan
portfolio is secured by first mortgage liens on real estate.
56
<PAGE>
The following table sets forth the composition of the Company's discounted
loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- ---------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Single-family residential loans......... $ 835,592(1) $ 504,049 $ 376,501 $ 382,165 $ 430,355 $306,401
Multi-family residential loans.......... 323,553 341,796 176,259 300,220 -- --
Commercial real estate loans............ 401,054(2) 465,801 388,566 102,138 1,845 2,227
Other loans............................. 2,186 2,753 2,203 911 1,316 1,836
---------- ---------- --------- --------- --------- --------
Total discounted loans.................. 1,562,385 1,314,399 943,529 785,434 433,516 310,464
Unaccreted discount..................... (264,605)(3) (241,908) (273,758) (255,974) (129,882) (97,426)
Allowance for loan losses............... (16,808) (11,538) -- -- -- --
---------- ---------- --------- --------- --------- --------
Discounted loans, net................... $1,280,972(1) $1,060,953 $ 669,771 $ 529,460 $ 303,634 $213,038
---------- ---------- --------- --------- --------- --------
---------- ---------- --------- --------- --------- --------
</TABLE>
- ------------------------
(1) Does not include the Company's 50% ownership interest in LLC, which held
$48.6 million of discounted single-family residential loans, net at March
31, 1997. See "Business--Investment in Joint Ventures." Inclusive of the
Company's pro rata interest in such loans, the Company's discounted loans,
net would amount to $1.31 billion at March 31, 1997.
(2) Consists of $169.4 million of loans secured by office buildings, $29.1
million of loans secured by hotels, $131.5 million of loans secured by
retail properties or shopping centers and $71.1 million of loans secured by
other properties.
(3) Consists of $129.8 million on single-family residential loans, $66.9 million
on multi-family residential loans, $67.6 million on commercial real estate
loans and $275,000 on other loans, respectively.
The properties which secure the Company's discounted loans are located
throughout the United States. At March 31, 1997, the five states with the
greatest concentration of properties securing the Company's discounted loans
were California, New Jersey, New York, Pennsylvania and Connecticut, which had
$376.1 million, $137.9 million, $127.3 million, $122.4 million and $121.3
million principal amount of discounted loans (before unaccreted discount),
respectively. The Company believes that the broad geographic distribution of its
discounted loan portfolio reduces the risks associated with concentrating such
loans in limited geographic areas, and that, due to its expertise, technology
and software and procedures, the geographic diversity of its discounted loan
portfolio does not place significantly greater burdens on the Company's ability
to resolve such loans.
Discounted loans may have net book values up to the Bank's loans-to-one
borrower limitation. See "Regulation--The Bank--Loans-to-One Borrower."
ACQUISITION OF DISCOUNTED LOANS. In the early years of the program, the
Company acquired discounted loans from the FDIC and the RTC, 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 the
RTC no longer is in existence and the banking and thrift industries have
recovered from the problems experienced during the late 1980s and early 1990s,
governmental agencies, particularly HUD, continue to be potential sources of
discounted loans. In addition to governmental agencies, the Company obtains a
substantial amount of discounted loans from various private sector sellers, such
as banks, savings institutions, mortgage companies and insurance companies.
Loans from private sector sellers comprised 53.8% of the loans in the Company's
discounted loan portfolio at March 31, 1997.
The percentage of discounted loans in the Company's discounted loan
portfolio acquired from private sector sellers has decreased in recent periods
as a result of the Company's acquisition of a substantial amount of discounted
loans from HUD. During the three months ended March 31, 1997, the Company and a
co-investor were the successful bidder to purchase from HUD 13,781 single-family
residential loans with an aggregate unpaid principal balance of $855.7 million
and a purchase price of $757.2 million. The Company acquired $425.6 million of
these loans and the right to service all of such loans. In 1996, the Company and
a co-investor were the successful bidder to purchase from HUD 4,591
single-family
57
<PAGE>
residential loans with an aggregate unpaid principal balance of $258.1 million
and a purchase price of $204.0 million. The Company acquired $112.2 million of
these loans and the right to service all of such loans. In 1996, the Company
also acquired from HUD discounted multi-family residential loans with an unpaid
principal balance of $225 million. The foregoing acquisitions were in addition
to the acquisition of $741.2 million gross principal amount of single-family
residential loans from HUD by LLC. See "Business-Investment in Joint Ventures."
Primarily as a result of acquisitions from HUD, during 1996 the Company
(including its pro rata interest in LLC) was the second largest acquiror in the
United States (behind Goldman Sachs' Whitehall Street Real Estate Fund) of
distressed real estate assets and the largest acquiror of domestic portfolios of
such assets, according to statistics published by REAL ESTATE ALERT.
HUD loans are acquired by HUD pursuant to various assignment programs of the
FHA. Under programs of the FHA, a lending institution may assign an 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.
A majority of the $425.6 million of loans acquired from HUD during the three
months ended March 31, 1997 are subject to forbearance agreements after the
servicing transfer date of March 31, 1997. During the forbearance period,
borrowers are required to make a monthly payment which is based on their ability
to pay and which may be less than the contractual monthly payment. Once the
forbearance period is over, the borrower is required to make at least the
contractual payment regardless of ability to pay. Virtually all of the foregoing
loans acquired from HUD will reach the end of the forbearance period by July
1998. Prior purchases of loans from HUD by the Company (and LLC) primarily
included loans that were beyond the forbearance period.
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 one or more co-investors
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-investors generally allocate ownership of 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. In addition, from time
to time the Company and a co-investor may acquire discounted loans through a
joint venture. See "Business--Investment in Joint Ventures."
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
58
<PAGE>
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 and timing and cost of
the resolution of the loans. The amount offered by the Company generally is at a
discount from both the stated value of the loan and the value of the underlying
collateral which the Company estimates is sufficient to generate an acceptable
return on its investment.
RESOLUTION OF DISCOUNTED LOANS. After a discounted loan is acquired, the
Company utilizes its computer software system to resolve the loan as
expeditiously as possible in accordance with specified procedures. 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, or (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. In addition,
in the case of single-family residential loans, assistance is provided to
borrowers 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 contractual monthly payment to make up for
arrearages.
The Company recently has shifted its strategy to emphasize working with
borrowers to resolve the loan in advance of foreclosure through forbearance
agreements, which generally allow the borrower to pay the contractual monthly
payment plus a portion of the arrearage each month, and other means. Although
this strategy may result in an initial reduction in the yield on a discounted
loan, the Company believes that it is advantageous because it (i) generally
results in a higher resolution value than foreclosure; (ii) reduces the amount
of real estate owned acquired by foreclosure or by deed-in-lieu thereof and
related costs and expenses; (iii) enhances the ability of the Company to sell
the loan in the secondary market, either on a whole loan basis or through
securitizations (in which case the Company may continue to earn fee income from
servicing such loans); and (iv) permits the borrower to retain ownership of the
home and, thus, enhances relations between the Company and the borrower. As a
result of the Company's current loan resolution strategy of emphasizing
forbearance agreements and other resolutions in advance of foreclosure, the
Company resolved prior to foreclosure 77% and 71% of the discounted loans which
were resolved or transferred to real estate owned during the three months ended
March 31, 1997 and the year ended December 31, 1996, respectively.
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 the resolution of such
loans.
The Credit Committee of the Board of Directors of the Bank actively monitors
the asset resolution process to identify discounted loans which have exceeded
their expected foreclosure period and real estate owned which has been held
longer than anticipated. Plans of action are developed for each of these assets
to remedy the cause for delay and are reviewed by the Credit Committee.
SALE OF DISCOUNTED LOANS. From time to time the Company sells performing
discounted loans either on a whole loan basis or indirectly through the
securitization of such loans and sale of the mortgage-related securities backed
by them. During the three months ended March 31, 1997 and the years ended
December 31, 1996, 1995 and 1994, respectively, the Company sold $79.8 million,
$230.2 million, $51.6 million and $37.9 million of discounted loans,
respectively, which resulted in gains of $13.0 million, $15.3
59
<PAGE>
million, $6.0 million and $890,000, respectively, including securitization gains
of $9.5 million, $7.9 million, $0 and $0, respectively. Also during the three
months ended March 31, 1997, LLC, as part of a larger transaction involving the
Company and an affiliate of BlackRock, completed the securitization of 1,196
discounted single-family residential loans acquired from HUD in 1996 and 1995
with an unpaid principal balance of $51.7 million and past due interest of $14.2
million, which resulted in the Company recognizing an indirect gain of $9.2
million as a result of the Company's pro rata interest in LLC. The Company
continues to service the loans for a fee and has retained an interest in the
related subordinate class of securities. For information concerning the
foregoing subordinate securities, see "Business--Investment Activities."
60
<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,
1997 1996 1995 1994
-------------------- ---------------------- ---------------------- ----------------------
NO. OF NO. OF NO. OF NO. OF
BALANCE LOANS BALANCE LOANS BALANCE LOANS BALANCE LOANS
--------- --------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period........ $1,314,399 5,460 $ 943,529 4,543 $ 785,434 3,894 $ 433,516 5,160
Acquisitions(1)....................... 442,878 8,211 1,110,887 4,812 791,195 2,972 826,391 2,781
Resolutions and repayments(2)......... (63,553) (194) (371,228) (2,355) (300,161) (960) (265,292) (2,153)
Loans transferred to real estate
owned............................... (51,586) (392) (138,543) (860) (281,344) (984) (171,300) (1,477)
Sales................................. (79,753) (883) (230,246) (680) (51,595) (379) (37,881) (417)
--------- --------- --------- ----------- --------- ----- --------- -----------
Balance at end of period.............. $1,562,385 12,202 $1,314,399 5,460 $ 943,529 4,543 $ 785,434 3,894
--------- --------- --------- ----------- --------- ----- --------- -----------
--------- --------- --------- ----------- --------- ----- --------- -----------
<CAPTION>
1993 1992
---------------------- ----------------------
NO. OF NO. OF
BALANCE LOANS BALANCE LOANS
--------- ----------- --------- -----------
<S> <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
Resolutions and repayments(2)......... (116,890) (1,430) (28,194) (473)
Loans transferred to real estate
owned............................... (26,887) (602) (6,130) (139)
Sales................................. (27,530) (578) -- --
--------- ----------- --------- -----
Balance at end of period.............. $ 433,516 5,160 $ 310,464 5,358
--------- ----------- --------- -----
--------- ----------- --------- -----
</TABLE>
- ------------------------
(1) In the three months ended March 31, 1997, acquisitions consisted of $436.8
million of single-family residential loans (inclusive of the Company's
approximate 50% interest in $855.7 million principal amount of loans
acquired from HUD, as discussed above), $5.2 million of multi-family
residential loans and $900,000 of commercial real estate loans. In 1996,
acquisitions consisted of $365.4 million of single-family residential loans,
$310.4 million of multi-family residential loans, $433.5 million of
commercial real estate loans and $1.5 million of other loans. The 1996 data
does not include the Company's pro rata share of the $741.2 million of
discounted loans acquired by the LLC (see "Business-- Investment in Joint
Venture"). 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 and 1992,
substantially all of the acquisitions were of single-family residential
loans.
(2) Resolutions and repayments consists of loans which were resolved in a manner
which resulted in partial or full repayment of the loan to the Company, as
well as principal payments on loans which have been brought current in
accordance with their original or modified terms (whether pursuant to
forbearance agreements or otherwise) or on other loans which have not been
resolved.
61
<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,
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MARCH 31,
1997 1996 1995 1994 1993 1992
------------ ------------ ---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loan status:
Current.................................... $ 535,999 $ 579,597 $ 351,630 $ 113,794 $ 23,629 $ 25,463
Past due 31 days to 89 days................ 40,365 22,161 86,838 57,023 15,175 4,063
Past due 90 days or more................... 975,517(1) 563,077 385,112 413,506 254,413 31,808
Acquired and servicing not yet transferred... 10,504 149,564 119,949 201,111 140,299 249,130
------------ ------------ ---------- ---------- ---------- ----------
$ 1,562,385 $ 1,314,399 $ 943,529 $ 785,434 $ 433,516 $ 310,464
------------ ------------ ---------- ---------- ---------- ----------
------------ ------------ ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Includes $234.1 million of loans which are less than 90 days past due under
forbearance agreements.
The following table sets forth the payment status at March 31, 1997 of the
loans in the Company's discounted loan portfolio which were subject to
forbearance agreements.
<TABLE>
<CAPTION>
% OF
DISCOUNTED
AMOUNT LOANS
---------- -------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Loans with Forbearance Agreements:
Current (past due less than 31 days)............................... $ 9,002 0.6%
Past due 31 days to 89 days........................................ 8,844 0.6
Past due 90 days or more........................................... 378,922(1) 24.2
---------- ---
Total............................................................ $ 396,768 25.4%
---------- ---
---------- ---
</TABLE>
- ------------------------
(1) Includes $234.1 million of loans which are less than 90 days past due.
ACCOUNTING FOR DISCOUNTED LOANS. The acquisition cost for a pool of
discounted loans is allocated to each individual loan within the pool based upon
the Company's pricing methodology. Prior to January 1, 1997, the discount
associated with all single-family residential loans was recognized as a yield
adjustment and was accreted into interest income using the interest method
applied on a loan-by-loan basis once foreclosure proceedings are initiated, to
the extent the timing and amount of cash flows could be reasonably determined.
Effective January 1, 1997, the Company ceased accretion of discount on its
nonperforming discounted single-family residential loans. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Net Interest Income' and '-- Recent
Regulatory Developments." The discount which is associated with a single-family
residential loan and certain multi-family residential and commercial real estate
loans which are current or 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. For
additional information, see Note 10 to the Consolidated Financial Statements.
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.
62
<PAGE>
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 1996,
such adjustments were charged against interest income on discounted loans.
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 businesses. The
Company commenced a program in 1995 to utilize this experience by financing the
acquisition of discounted loans by other institutions. During the three months
ended March 31, 1997 and the years ended December 31, 1996 and 1995, the Company
originated $0, $25.8 million and $41.7 million, respectively, of portfolio
finance loans, which had an aggregate balance of $39.5 million at March 31,
1997. 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 that collateralize the Company's portfolio finance loans. See
"Business--Lending Activities."
The Company's discounted loan acquisition and resolution activities and
related securitization activities also have contributed significantly to
increases in the Company's loan servicing activities. See "Business--Loan
Servicing Activities."
INVESTMENT IN JOINT VENTURES
As of March 31, 1997, the Company's investment in joint ventures consisted
of investments in LLC and BCFL, the latter of which had not engaged in
substantial activities as of such date.
ACQUISITION OF HUD LOANS BY LLC. In April 1996, LLC purchased 16,196
single-family residential loans offered by HUD at an auction. Many of the loans,
which had an aggregate unpaid principal balance of $741.2 million at the date of
acquisition, were not performing in accordance with their original terms or an
applicable forbearance agreement. The aggregate purchase price paid to HUD
amounted to $626.4 million.
In connection with this acquisition the Company entered into an agreement
with LLC to service the HUD loans in accordance with its loan servicing and loan
default resolution procedures. In return for such servicing, the Company
receives specific 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 held by LLC did not result
in the Company's recording capitalized mortgage servicing rights for financial
reporting purposes.
All of the HUD loans acquired by LLC are secured by first mortgage liens on
single-family residences. The properties which secure the HUD loans held by LLC
remaining at March 31, 1997 are located throughout 31 states in the U.S., the
District of Columbia and Puerto Rico.
At March 31, 1997, LLC held discounted loans with an unpaid principal
balance of $73.7 million, of which $24.7 million were subject to forbearance
agreements and $66.7 million were past due 90 days or more.
SECURITIZATION OF HUD LOANS BY LLC. At the time of LLC's acquisition of HUD
loans the Company and its co-investor intended to have LLC securitize such loans
after an approximately six to nine month period during which the Company, as
loan servicer, sought to enhance the performance of the HUD loans held by LLC
by, among other things, resolving existing delinquencies, documenting verbal
forbearance agreements and bringing loans which are subject to forbearance
agreements into compliance with such
63
<PAGE>
agreements. Securitization generally involves the creation of a REMIC to acquire
loans and issuance by the REMIC of securities backed by such loans, which in the
case of the senior classes generally are sold to third party investors at the
time of securitization and in the case of the subordinate class generally are
retained by LLC and other participants, if applicable.
During the three months ended March 31, 1997, LLC, as part of a larger
transaction involving the Company and an affiliate of BlackRock, completed a
securitization of 1,196 HUD loans held by it with an unpaid principal balance of
$51.7 million, past due interest of $14.2 million and a net book value of $40.5
million; and during 1996, LLC completed a securitization of 9,825 HUD loans with
an aggregate unpaid principal balance of $419.4 million, past due interest of
$86.1 million and a net book value of $394.2 million. LLC recognized gains of
$18.4 million and $69.8 million (including a gain of $12.9 million on the sale
of $79.4 million of securities to the Company) from the sale of the senior
classes in the REMICs formed for purposes of these transactions in the three
months ended March 31, 1997 and the year ended December 31, 1996, respectively,
of which $9.2 million and $34.9 million, respectively, were allocable to the
Company as a result of its pro rata interest in LLC and included in equity in
earnings of joint venture.
ACCOUNTING FOR INVESTMENT IN JOINT VENTURES. The Company's 50% investment
in LLC is accounted for under the equity method of accounting. Under the equity
method of accounting, an investment in the shares or other interests of an
investee is initially recorded at the cost of the shares or interests acquired
and thereafter is periodically increased (decreased) by the investor's
proportionate share of the earnings (losses) of the investee and decreased by
all dividends received by the investor from the investee. At March 31, 1997, the
Company's investment in the LLC amounted to $32.3 million. Because the LLC is a
pass-through entity for federal income tax purposes, provisions for income taxes
are established by each of the Company and its co-investor and not the LLC. The
Company recognized $14.4 million and $38.3 million of pre-tax income from its
investment in the LLC during the three months ended March 31, 1997 and the year
ended December 31, 1996, respectively. For additional information, see Note 3 to
the Interim Consolidated Financial Statements and Note 2 to the Consolidated
Financial Statements.
The Company's 10% investment in BCFL is accounted for under the cost method.
Such investment amounted to $1.1 million at March 31, 1997.
LENDING ACTIVITIES
COMPOSITION OF LOAN PORTFOLIO. At March 31, 1997, the Company's net loan
portfolio amounted to $422.2 million or 15.9% 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.
64
<PAGE>
The following table sets forth the composition of the Company's loan
portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MARCH 31,
1997 1996 1995 1994 1993 1992
--------- -------- -------- ------- ------- -------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential loans.............. $ 73,118 $ 73,186 $ 75,928 $31,926 $30,385 $33,799
Multi-family residential loans............... 90,776(1) 67,842(1) 49,047(1) 1,800 39,352 5,563
Commercial real estate and land loans:
Hotels....................................... 196,523(2) 200,311(2) 125,791 19,659 14,237 --
Office buildings............................. 119,944 128,782 61,262 -- -- --
Land......................................... 4,566 2,332 24,904 1,315 4,448 --
Other........................................ 23,415 25,623 2,494 4,936 4,059 1,908
--------- -------- -------- ------- ------- -------
Total.................................... 344,448 357,048 214,451 25,910 22,744 1,908
Commercial non-mortgage...................... 3,750 2,614 -- -- -- --
Consumer..................................... 402 424 3,223 1,558 3,639 2,395
--------- -------- -------- ------- ------- -------
Total loans.............................. 512,494 501,114 342,649 61,194 96,120 43,665
Undisbursed loan proceeds.................... (80,487) (89,840) (39,721) -- -- --
Unaccreted discount.......................... (4,941) (5,169) (5,376) (3,078) (6,948) (1,898)
Allowance for loan losses.................... (4,834) (3,523) (1,947) (1,071) (884) (752)
--------- -------- -------- ------- ------- -------
Loans, net............................... $ 422,232 $402,582 $295,605 $57,045 $88,288 $41,015
--------- -------- -------- ------- ------- -------
--------- -------- -------- ------- ------- -------
</TABLE>
- ------------------------
(1) At March 31, 1997 and December 31, 1996 and 1995, multi-family residential
loans included $44.0 million, $36.6 million and $7.7 million of construction
loans, respectively.
(2) At March 31, 1997 and December 31, 1996, hotel loans included $24.1 million
and $26.4 million of construction loans, respectively.
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, 1997, the five states in
which the largest amount of properties securing the loans in the Company's loan
portfolio were located were New York, Illinois, California, New Jersey and
Georgia, which had $124.2 million, $81.3 million, $74.3 million, $51.4 million
and $28.9 million of principal amount of loans, respectively. As noted above,
the Company believes that the broad geographic distribution of its loan
portfolio reduces the risks associated with concentrating such loans in limited
geographic areas.
CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth certain
information at December 31, 1996 regarding the dollar amount of loans maturing
in the Company's loan portfolio based on scheduled contractual amortization, 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
65
<PAGE>
(i) undisbursed loan proceeds, unearned discounts and the allowance for loan
losses and (ii) non-performing loans.
<TABLE>
<CAPTION>
MATURING IN
----------------------------------------------------------
AFTER FIVE
ONE YEARS
YEAR OR AFTER ONE YEAR THROUGH TEN AFTER TEN
LESS THROUGH FIVE YEARS YEARS YEARS
----------- ------------------ -------------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Single-family residential loans..................... $ 15,314 $ 6,429 $ 4,446 $ 46,997
Multi-family residential loans...................... 37,341 26,921 3,513 67
Commercial real estate and land loans............... 14,484 297,698 40,850 4,016
Consumer and other loans............................ 2,647 323 68 --
----------- -------- ------- ---------
Total........................................... $ 69,786 $ 331,371 $ 48,877 $ 51,080
----------- -------- ------- ---------
----------- -------- ------- ---------
Interest rate terms on amounts due:
Fixed........................................... $ 44,744 $ 274,078 $ 47,777 $ 38,208
Adjustable...................................... 25,042 57,293 1,100 12,872
----------- -------- ------- ---------
$ 69,786 $ 331,371 $ 48,877 $ 51,080
----------- -------- ------- ---------
----------- -------- ------- ---------
</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.
66
<PAGE>
ACTIVITY IN THE LOAN PORTFOLIO. The following table sets forth the activity
in the Company's gross loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, ---------------------------------
1997 1996 1995 1994
------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period................................. $ 501,114 $ 342,649 $ 61,194 $ 96,120
Originations:
Single-family residential loans.............................. 1,769 10,681 14,776 7,119
Multi-family residential loans............................... 12,680 68,076 48,664 --
Commercial real estate loans................................. -- 199,017 212,630 22,486
Commercial non-mortgage and consumer loans................... 1,134 3,366 207 --
------------- ---------- ---------- ---------
Total loans originated..................................... 15,583 281,140 276,277 29,605
------------- ---------- ---------- ---------
Purchases:
Single-family residential loans.............................. -- 305 29,833 --
Commercial real estate loans................................. -- -- 2,245 --
Consumer loans............................................... -- -- 1,966 --
------------- ---------- ---------- ---------
Total loans purchased...................................... -- 305 34,044 --
------------- ---------- ---------- ---------
Sales.......................................................... -- -- -- (1,078)
Loans transferred from (to) available for sale................. 13,802 45 4,353 (24,380)
------------- ---------- ---------- ---------
Principal repayments, net of capitalized interest.............. (17,652) (121,818) (33,168) (39,073)
Transfer to real estate owned.................................. (353) (1,207) (51) --
------------- ---------- ---------- ---------
Net increase (decrease) in net loans........................... 11,380 158,465 281,455 (34,926)
------------- ---------- ---------- ---------
Balance at end of period....................................... $ 512,494 $ 501,114 $ 342,649 $ 61,194
------------- ---------- ---------- ---------
------------- ---------- ---------- ---------
</TABLE>
LOANS AVAILABLE FOR SALE. In addition to loans acquired for investment, the
Company also 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 generally are carried at the lower of cost or
aggregate market value. At March 31, 1997, loans available for sale amounted to
$88.5 million or 3.3% of the Company's total assets.
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,
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MARCH 31,
1997 1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ---------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential loans.............. $ 87,847 $ 111,980 $ 221,927 $ 16,825 $ 30,217 $ 754
Multi-family residential loans............... -- 13,657 28,694 83,845 44,919 --
Consumer loans............................... 664 729 1,169 1,623 25,930 --
----------- ---------- ---------- ---------- ---------- ---------
$ 88,511 $ 126,366 $ 251,790 $ 102,293 $ 101,066 $ 754
----------- ---------- ---------- ---------- ---------- ---------
----------- ---------- ---------- ---------- ---------- ---------
</TABLE>
Although the Company's loans available for sale are secured by properties
located nationwide, currently a substantial majority of such loans are sub-prime
single-family residential loans originated primarily in the western states,
particularly California. As a result, $25.3 million or 28.6% of the Company's
loans available for sale at March 31, 1997 were secured by properties located in
California.
67
<PAGE>
SINGLE-FAMILY RESIDENTIAL LOANS. Since late 1994, the Company's lending
activities have included 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 guidelines of the FNMA and
FHLMC ("conforming loans") and who have substantial equity in the properties
which secure the loans. Loans to non-conforming borrowers are perceived by the
Company as being advantageous 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 servicing and
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.
Through 1996, the Company acquired sub-prime single-family residential loans
primarily through a correspondent relationship with Admiral 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.
In order to solidify and expand its sources of sub-prime single-family
residential loans, the Company, through OFS, acquired substantially all of the
assets of Admiral in a transaction which closed on May 1, 1997. See
"Business--Subsidiaries." At the time of acquisition, Admiral engaged in
sub-prime lending on a retail and wholesale basis through 11 loan production
offices located in California and independent mortgage brokers and correspondent
lending institutions located in California and eleven other states. In
connection with the Company's acquisition of assets from Admiral, the Bank
transferred its retail and wholesale sub-prime single-family residential lending
operations to OFS, which included, among other things, transferring its rights
under contracts with brokers and correspondent lending institutions and its
rights and obligations under leases to six loan production offices recently
opened by it, which are located in California, Illinois, Massachusetts, Oregon,
Utah and Wisconsin. OFS currently conducts its business on a retail and
wholesale basis through 17 loan production offices located in six states and
plans on opening an additional 10 such offices in 1997. OFS' principal sources
of funds consist of (i) two lines of credit with unaffiliated parties which
aggregate $250 million and are secured by the mortgage loans acquired with such
lines and (ii) a $30 million unsecured, subordinated credit facility provided by
the Company to OFS at the time of the acquisition of substantially all of the
assets of Admiral. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity, Commitments and Off-Balance
Sheet Risks."
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 sub-prime loans. These
policies include program descriptions which set forth four classes of 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 adverse incidents in the borrower's
credit histories. 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
its correspondents 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 documentation for verifying a
borrower's income and employment. Loans which permit reduced documentation
generally require documentation of employment and income for the most recent
six-month period, as
68
<PAGE>
opposed to the two-year period required in the case of full documentation loans.
Although the Company reserves the right to verify a borrower's income, assets
and liabilities and employment history, other than as set forth above, it
generally does not verify such information through other sources.
The Company's strategy is to offer a broad range of products to its
borrowers and its origination sources. Loans may have principal amounts which
conform to the guidelines set by FHLMC or FNMA for conforming loans, or
principal amounts which significantly exceed these amounts (so called "jumbo
loans"). Loans may have fixed or adjustable interest rates and terms ranging up
to 30 years.
The Company purchased and originated a total of $64.5 million, $294.0
million and $240.3 million of sub-prime single-family residential loans during
the three months ended March 31, 1997 and the years ended December 31, 1996 and
1995, respectively. At March 31, 1997, the Company had $76.1 million of
sub-prime single-family residential loans, which had a weighted average yield of
10.4%.
The Company generally intends to sell or securitize its sub-prime
single-family residential loans and, as a result, all of such loans were
classified as available for sale at March 31, 1997. During the three months
ended March 31, 1997, the Company sold $82.1 million of sub-prime single-family
residential loans for gains of $2.7 million; during 1996, the Company sold
$161.5 million of sub-prime single-family residential loans for gains of
$571,000; and during 1995 the Company sold $25.3 million of sub-prime
single-family residential loans for gains of $188,000. During 1996, an
additional $219.6 million of loans were securitized and sold in two underwritten
public offerings managed by unaffiliated investment banking firms, which
resulted in gains of $7.2 million upon the Company's sale of the securities. The
Company received residual securities in the REMICs which were formed in
connection with these two transactions as partial payment for the loans sold by
it. See "Business--Investment Activities."
Although sub-prime loans generally have higher levels of default than
conforming loans, the Company believes that the borrower's equity in the
security property and its expertise in the area of resolution of non-performing
loans will continue to make its sub-prime borrower loan program a profitable one
notwithstanding such defaults and any resulting losses. There can be no
assurance that this will be the case, however.
In addition to the Company's sub-prime single-family residential loan
programs, 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 AND COMMERCIAL REAL ESTATE 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
commercial properties, the refurbishment of distressed properties and, recently,
the construction of hotels. At March 31, 1997, the Company's loans secured by
commercial real estate (and land) amounted to $344.4 million and consisted
primarily of $196.5 million and $119.9 million of loans secured by hotels and
office buildings, respectively.
From time to time, the Company originates loans for the construction of
multi-family residences, as well as bridge loans to finance the acquisition and
rehabilitation of distressed multi-family residential properties. At March 31,
1997, the Company's multi-family residential loan portfolio included $44.0
million of multi-family residential construction loans, of which $29.9 million
had been funded at such date, and $46.8 million of acquisition and
rehabilitation loans, of which $40.7 million had been funded.
From time to time the Company also originates loans secured by existing
multi-family residences. Although the Company has deemphasized this type of
lending in recent periods, it previously was active in the origination and
securitization of such loans. During 1995, 1994 and 1993, the Company
securitized multi-family residential loans acquired by it with an aggregate
principal amount of $83.9 million, $346.6
69
<PAGE>
million and $67.1 million, respectively. The Company subsequently sold
substantially all of the securities backed by these loans.
The multi-family residential and commercial real estate loans acquired by
the Company in recent periods generally have principal amounts between $3.0
million and the Bank's loan-to-one-borrower limitation (see "Regulation--The
Bank--Loans-to-One-Borrower") and are secured by properties which in
management's view have good prospects for appreciation in value during the loan
term. In addition, the Company currently is implementing a program to originate
multi-family residential and commercial real estate loans with smaller principal
amounts (generally up to $3.0 million) and which may be secured by a wide
variety of such properties.
The Company's large multi-family residential and commercial real estate
loans generally have fixed interest rates, terms of two to five years and
payment schedules which are based on amortization over 15 to 25 year periods.
The maximum loan-to-value ratio generally does not exceed 80% of the stabilized
value of the property and 88% of the total costs of the property in the case of
construction, refurbishment or
rehabilitation loans.
Multi-family residential and 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 multi-family
residential and commercial real estate loan generally is limited to the
borrower's interest in the property, except with respect to certain specified
circumstances.
In addition to stated interest, the large multi-family residential and
commercial real estate loans originated by the Company commonly 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 10-37.5%) of the net cash flow from the property during the
term of the loan and/or the net proceeds from the sale or refinancing of the
property upon maturity of the loan. Participating interests also 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. At March 31, 1997, the Company's loan portfolio included
$320.8 million of funded and unfunded loans in which the Company participates in
the residual profits of the underlying real estate, of which $243.7 million had
been funded. See Notes 1 and 9 to the Consolidated Financial Statements. The
Company generally accounts for loans in which it participates in residual
profits as loans and not as investments in real estate; however, because of
concerns raised by the staff of the OTS in this regard, in December 1996 and the
three months ended March 31, 1997 the Bank sold to the Company subordinated,
participating interests in a total of 11 acquisition, development and
construction loans, which interests had an aggregate principal balance of $16.9
million. On a consolidated basis, eight of these loans, which amounted to $30.3
million at March 31, 1997, were carried by the Company as investments in real
estate. The Bank (but not the Company) has agreed with the OTS to cease
origination of mortgage loans with profit participation features in the
underlying real estate, with the exception of existing commitments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Regulatory Developments."
Construction loans generally have terms of three to four 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 a
portion of its term.
70
<PAGE>
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 revenues and
gross receipts generated in connection with the property. Construction loans are
made without pre-leasing requirements or any requirement of a commitment by
another lender to "take-out" the construction loan by making a permanent loan
secured by the property upon completion of construction. Disbursements on a
construction loan are subject to a retainage percentage of 10% and are made only
after evidence that available funds have been utilized by the borrower and are
sufficient to pay for all construction costs through the date of the
construction advance and funds remain in the construction budget and from
sources other than the loan to complete construction of the project.
The Company generally requires the general contractor selected by the
borrower, which along with the general construction contract is subject to the
Company's review and approval, to provide payment and performance bonds issued
by a surety approved by the Company in an amount at least equal to the 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.
Multi-family residential, commercial real estate and construction lending
generally are 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.
LOAN SERVICING ACTIVITIES
During 1996, the Company developed a program to provide loan servicing and
various other asset management and resolution services to third party owners of
non-performing assets, underperforming assets and subprime assets such as Class
B, C and D single-family residential loans. Servicing contracts entered into by
the Company provide for the payment to the Company of specified fees and in some
cases may include terms which allow the Company to participate in the profits
resulting from the successful resolution of the assets being serviced.
The Bank has been approved as a loan servicer by HUD, FHLMC and FNMA. The
Bank is rated a Tier 1 servicer and as a preferred servicer for high-risk
mortgages by FHLMC, the highest rating categories, and also is rated as a
"strong" special servicer for commercial mortgage loans by Standard & Poor's,
which also is the highest rating category. In addition, the Bank is a rated
servicer for residential
71
<PAGE>
mortgage loans by Standard & Poor's and Fitch Investors Service has rated the
Bank as an above-average special servicer for commercial loans.
The following table sets forth the number and amount of loans serviced by
the Company for others at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------
1997 1996 1995
------------ ------------ ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Loans serviced for others(1):
Number.................................................................. 38,670 30,163 1,366
Amount.................................................................. $ 2,592,000 $ 1,918,100 $ 361,600
</TABLE>
- ------------------------
(1) Includes loans serviced for LLC.
The increases in the number and amount of loans serviced by the Company for
others in recent periods were primarily attributable to the Company's
acquisition of rights to service discounted loans acquired from HUD by
BlackRock, directly and indirectly through LLC, and servicing rights resulting
from the securitization of both loans acquired from HUD by the Company and
BlackRock, directly and indirectly through LLC, and single-family residential
loans to non-conforming borrowers held by the Company, and the sale of the
senior classes in the resulting mortgage-related securities backed by such
loans.
The Company generally does not purchase rights to service loans for others
and, as a result, capitalized mortgage servicing rights amounted to only $2.2
million at March 31, 1997. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," the
Company amortizes mortgage servicing rights over the estimated weighted average
life of the loans and periodically evaluates its mortgage servicing rights for
impairment based on the fair value of those rights, which is recognizable
through a valuation allowance.
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 and reports to the Board of Directors at
regularly scheduled meetings.
NON-PERFORMING LOANS. It is the Company's policy to establish an allowance
for uncollectible interest on loans in its loan portfolio and loans available
for sale which are past due 90 days or more and to place such loans on
non-accrual status. As a result, the Company currently does not have any loans
which are accruing interest but are past due 90 days or more. Loans also may be
placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is reversed by a charge to interest income.
The following table sets forth certain information relating to the Company's
non-performing loans in its loan portfolio at the dates indicated. For
information relating to the payment status of loans in the Company's discounted
loan portfolio, see "Business--Discounted Loan Acquisitions and Resolution
Activities," and for information concerning non-performing loans available for
sale, see "Management Discussion and Analysis of Financial Condition-Changes in
Financial Condition-Loans Available for Sale."
72
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Non-performing loans (1)
Single-family residential loans................. $1,728 $2,123 $2,923 $2,478 $2,347 $2,955
Multi-family residential loans.................. 7,517(3) 106 731 152 664 269
Consumer and other loans........................ 62 55 202 29 556 407
--------- ------ ------ ------ ------ ------
Total......................................... $9,307 $2,284 3,856 $2,659 $3,567 $3,631
--------- ------ ------ ------ ------ ------
--------- ------ ------ ------ ------ ------
Non-performing loans as a percentage of:
Total loans (2)................................. 2.15% 0.56% 1.27% 4.35% 3.71% 8.32%
Total assets.................................... 0.35% 0.09% 0.20% 0.21% 0.27% 0.44%
Allowance for loan losses as a percentage of:
Total loans(2)................................ 1.13% 0.87% 0.65%(4) 1.84% 0.99% 1.80%
Non-performing loans.......................... 51.94% 154.24% 50.49% 40.28% 24.78% 20.71%
</TABLE>
- ------------------------
(1) The Company did not have any non-performing loans in its loan portfolio
which were deemed troubled debt restructuring at the dates indicated.
(2) Total loans is net of undisbursed loan proceeds.
(3) The increase in non-performing multi-family residential loans during the
first quarter of 1997 was primarily attributable to a $7.4 million loan
secured by a 127-unit condominium building located in New York, New York,
which management believes is well collateralized.
(4) The decrease in the allowance for loan losses as a percentage of total loans
from 1994 was due to the significant increase in the loan portfolio in 1995
as a result of the purchase of single family residential loans and the
origination of multi-family residential and commercial real estate loans.
REAL ESTATE OWNED. Properties acquired through foreclosure or by
deed-in-lieu thereof are valued at the lower of amortized cost or fair value.
Properties included in the Company's real estate owned portfolio 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 valuation allowances amounted to $7.6 million at March
31, 1997.
73
<PAGE>
The following table sets forth certain information relating to the Company's
real estate owned at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MARCH 31,
1997 1996 1995 1994 1993 1992
----------- ---------- ---------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Discounted loan portfolio:
Single-family residential................... $ 45,839 $ 49,728 $ 75,144 $ 86,426 $ 33,369 $ 4,390
Multi-family residential.................... 10,468 14,046 59,932 -- -- --
Commercial real estate...................... 40,084 36,264 31,218 8,801 -- --
----------- ---------- ---------- --------- --------- ---------
Total..................................... 96,391 100,038 166,294 95,227 33,369 4,390
Loan portfolio................................ 581 592 262 1,440 128 320
Loans available for sale...................... 1,494 3,074 -- -- -- --
----------- ---------- ---------- --------- --------- ---------
Total..................................... $ 98,466 $ 103,704 $ 166,556 $ 96,667 $ 33,497 $ 4,710
----------- ---------- ---------- --------- --------- ---------
----------- ---------- ---------- --------- --------- ---------
</TABLE>
The following table sets forth certain geographical information at the date
indicated related to the Company's real estate owned.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MULTI-FAMILY
SINGLE-FAMILY RESIDENTIAL
RESIDENTIAL AND COMMERCIAL TOTAL
---------------------- ---------------------- -------------------
<CAPTION>
NO. OF NO. OF NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES AMOUNT PROPERTIES
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California.................... $26,033 258 $41,470 40 $67,503 298
New York...................... 10,266 166 2,117 13 12,383 179
New Jersey.................... 3,175 38 3,014 14 6,189 52
Florida....................... 949 18 2,134 3 3,083 21
Connecticut................... 1,704 30 577 8 2,281 38
Other......................... 5,786(1) 105 1,241(2) 9 7,027 114
------- --- ------- --- ------- ---
Total..................... $47,913 615 $50,553 87 $98,466 702
------- --- ------- --- ------- ---
------- --- ------- --- ------- ---
</TABLE>
- ------------------------
(1) Consists of properties located in 24 other states, none of which aggregated
over $1.0 million in any one state.
(2) Consists of properties located in four other states, none of which
aggregated over $1.0 million in any one state.
The following table sets forth the activity in the real estate owned during
the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, 1997 1996 1995 1994
------------------------- ----------------------- ----------------------- -----------------------
NO. OF NO. OF NO. OF NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES AMOUNT PROPERTIES AMOUNT PROPERTIES
---------- ------------- ---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of
period...................... $ 103,704 825 $ 166,556 1,070 $ 96,667 1,018 $ 33,497 541
Properties acquired through
foreclosure or deed-in-lieu
thereof..................... 37,653 407 102,098 918 185,174 970 142,536 1,489
Acquired in connection with
acquisitions of discounted
loans....................... 70 3 2,529 12 24,617 311 38,071 398
Sales......................... (46,863) (533) (160,592) (1,175) (139,233) (1,229) (115,955) (1,410)
Change in allowance........... 3,902 -- (6,887) -- (669) -- (1,482) --
---------- --- ---------- ----------- ---------- ----------- ---------- -----------
Balance at end of
period.................. $ 98,466 702 $ 103,704 825 $ 166,556 1,070 $ 96,667 1,018
---------- --- ---------- ----------- ---------- ----------- ---------- -----------
---------- --- ---------- ----------- ---------- ----------- ---------- -----------
</TABLE>
74
<PAGE>
The following table sets forth the amount of time that the Company had held
its real estate owned at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C> <C>
MARCH 31,
1997 1996 1995
----------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
One to two months..................................... $ 32,539 $ 17,695 $ 25,398
Three to four months.................................. 12,572 15,291 22,672
Five to six months.................................... 7,637 14,348 25,742
Seven to 12 months.................................... 12,855 13,004 76,782
Over 12 months........................................ 32,863 43,366 15,962
----------- ---------- ----------
$ 98,466 $ 103,704 $ 166,556
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The average period during which the Company held the $46.9 million, $160.6
million, $139.2 million and $116.0 million of real estate owned which was sold
during the three months ended March 31, 1997 and the years ended December 31,
1996, 1995 and 1994, respectively, was 11 months, 11 months, eight months and
seven months, respectively.
Although the Company evaluates the potential for significant environmental
problems prior to acquiring a loan, there is a risk for any mortgage loan,
particularly a multi-family residential and commercial real estate loan, that
hazardous substances or other environmentally restricted substances could be
discovered on the related real estate. In such event, the Company might be
required to remove such substances from the affected properties or to engage in
abatement procedures at its sole cost and expense. There can be no assurance
that the cost of such removal or abatement will not substantially exceed the
value of the affected properties or the loans secured by such properties, that
the Company would have adequate remedies against the prior owners or other
responsible parties or that the Company would be able to resell the affected
properties either prior to or following completion of any such removal or
abatement procedures. If such environmental problems are discovered prior to
foreclosure, the Company generally will not foreclose on the related loan;
however, the value of such property as collateral will generally be
substantially reduced and the Company may suffer a loss upon collection of the
loan as a result.
From time to time the Company makes loans to finance the sale of real estate
owned. At March 31, 1997, such loans amounted to $12.3 million and consisted of
$6.1 million of single-family residential loans, $3.7 million of multi-family
residential loans, $2.1 million of land loans and $403,000 of commercial loans.
All of the Company's loans to finance the sale of real estate owned were
performing in accordance with their terms at March 31, 1997.
CLASSIFIED ASSETS. OTS regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured associations, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified loss, the insured
institution must either establish specific allowances for loan losses in the
amount of 100% of the portion of the asset classified loss or charge off such
amount. In this regard, the Company establishes
75
<PAGE>
required reserves and charges off loss assets as soon as administratively
practicable. General loss allowances established to cover possible losses
related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital.
In 1996, based upon discussions with the OTS and as a result of an OTS
bulletin issued on December 13, 1996 entitled "Guidance on the Classification
and Regulatory Reporting of Certain Delinquent Loans and Other Credit Impaired
Assets," the Company has classified all discounted loans that are 90 or more
days contractually past due, not otherwise classified, as special mention and
all real state owned, not otherwise classified, as special mention. The Company
also modified its policy for classifying non-performing discounted loans and
real state owned related to its discounted loan portfolio ("non-performing
discounted assets") to take into account both the holding period of such assets
from the date of acquisition and the ratio of book value to market value of such
assets. All non-performing discounted assets which are held 15 months or more
after the date of acquisition are classified substandard; non-performing
discounted assets held 12 months to less than 15 months from the date of
acquisition are classified as substandard if a ratio of book value to market
value is 80% or more; and non-performing discounted assets held less than 12
months from the date of acquisition are classified as substandard if they have a
ratio of book value to market value of more than 85%. In addition,
non-performing discounted assets which are performing for a period of time
subsequent to acquisition by the Company are classified as substandard at the
time such loans become non-performing. The Company also has modified its
classified assets policy to classify all real state owned which is not cash
flowing and which has been held for more than 15 months and three years as
substandard and doubtful, respectively. The Company's past experience indicates
that the resulting classified discounted assets do not necessarily correlate to
probability or severity of loss.
Excluding assets which have been classified loss and fully reserved by the
Company, the Company's classified assets at March 31, 1997 under the above
policy consisted of $298.0 million of assets classified as substandard and
$22,000 of assets classified as doubtful. In addition, at the same date $687.3
million of assets were designated as special mention.
Substandard assets at March 31, 1997 under the above policy consisted
primarily of $104.2 million of loans and real estate owned related to the
Company's discounted single-family residential loan program, $170.2 million of
loans and real estate owned related to the Company's discounted commercial real
estate loan program and $15.1 million of sub-prime single-family residential
loans. Special mention assets at March 31, 1997 under the policy consisted
primarily of $601.6 million and $79.0 million of loans and real estate owned
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 loan losses
for each of its loan portfolio and discounted loan portfolio at a level which
management considers adequate to provide for potential losses in each portfolio
based upon an evaluation of known and inherent risks in such portfolios.
76
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses on the Company's loan portfolio and discounted loan portfolio by loan
category 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,
1997 1996 1995 1994 1993 1992
-------------- -------------- ------------- ------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Loan Portfolio:
Single-family residential
loans..................... $ 433 14.3% $ 520 14.6% $ 346 22.2% $ 615 52.2% $174 31.6% $ 20 77.3%
Multi-family residential
loans..................... 1,745 17.7 673 13.5 683 14.3 -- 2.9 333 40.9 281 12.7
Commercial real estate
loans..................... 2,610 67.2 2,299 71.3 875 62.6 218 42.3 218 23.7 220 4.6
Commercial non-mortgage..... 28 0.7 11 0.5 -- -- -- -- -- -- -- --
Consumer loans.............. 18 0.1 20 0.1 43 0.9 238 2.6 159 33.8 231 5.4
------- ----- ------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total..................... $ 4,834 100.0% $ 3,523 100.0% $1,947 100.0% $1,071 100.0% 884 100.0% $752 100.0%
------- ----- ------- ----- ------ ----- ------ ----- ------ ----- ------ -----
------- ----- ------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Discounted loan portfolio(1):
Single-family residential
loans..................... $ 8,522 53.5% $ 3,528 38.4% $ -- --% $ --% $ -- --% $ -- --%
Multi-family residential
loans..................... 3,464 20.7 3,124 26.0 -- -- -- -- -- -- -- --
Commercial real estate
loans..................... 4,822 25.7 4,886 35.4 -- -- -- -- -- -- -- --
Other....................... -- 0.1 -- 0.2 -- -- -- -- -- -- -- --
------- ----- ------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total..................... $16,808 100.0% $11,538 100.0% $ -- --% $ -- --% $ -- --% $ -- --%
------- ----- ------- ----- ------ ----- ------ ----- ------ ----- ------ -----
------- ----- ------- ----- ------ ----- ------ ----- ------ ----- ------ -----
</TABLE>
- ------------------------
(1) The Company did not maintain an allowance for loan losses on its discounted
loan portfolio prior to 1996.
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.
77
<PAGE>
The following table sets forth an analysis of activity in the allowance for
loan losses relating to the Company's loan portfolio during the periods
indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance, beginning of period......................... $ 3,523 $ 1,947 $ 1,071 $ 884 $ 752 $ 934
Provision for loan losses............................ 1,345 1,872 1,121 -- -- --
Charge-offs:
Single-family residential loans.................... (34) (261) (131) (302) (150) (138)
Multi-family residential loans..................... -- (7) -- -- (170) (3)
Commercial real estate loans....................... -- -- (40) -- -- --
Consumer loans..................................... -- (28) (92) (170) (16) (88)
------ --------- --------- --------- --------- ---------
Total charge-offs................................ (34) (296) (263) (472) (336) (229)
Recoveries:
Single-family residential loans.................... -- -- 3 410 346 29
Multi-family residential loans..................... -- -- -- -- -- --
Commercial real estate loans....................... -- -- 15 -- --
Consumer loans..................................... -- -- -- 249 122 18
------ --------- --------- --------- --------- ---------
Total recoveries................................. -- -- 18 659 468 47
------ --------- --------- --------- --------- ---------
Net (charge-offs) recoveries..................... (34) (296) (245) 187 132 (182)
------ --------- --------- --------- --------- ---------
Balance, end of period............................... $ 4,834 $ 3,523 $ 1,947 $ 1,071 $ 884 $ 752
------ --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- ---------
Net charge-offs (recoveries) as a percentage of
average loan portfolio, net........................ 0.01% 0.09% 0.19% (0.28)% (0.10)% 0.37%
</TABLE>
The following table sets forth an analysis of activity in the allowance for
loan losses relating to the Company's discounted loan portfolio during the
periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996
------------------- ------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Balance, beginning of period.................................................. $ 11,538 $ --
Provision for loan losses..................................................... 8,397 20,578
Charge-offs:
Single-family residential loans............................................. (1,795) (7,009)
Multi-family residential loans.............................................. (509) (704)
Commercial real estate loans................................................ (870) (1,503)
Other loans................................................................. -- --
------- ------------
Total charge-offs......................................................... (3,174) (9,216)
------- ------------
Recoveries:
Single-family residential loans............................................. 47 176
Multi-family residential loans.............................................. -- --
Commercial real estate loans................................................ -- --
Consumer loans.............................................................. -- --
------- ------------
Total recoveries.......................................................... 47 176
------- ------------
Net (charge-offs) recoveries.............................................. (3,127) (9,040)
------- ------------
Balance, end of period........................................................ $ 16,808 $ 11,538
------- ------------
------- ------------
Net charge-offs (recoveries) as a percentage of average discounted loan
portfolio, net.............................................................. 0.28% 1.34%
</TABLE>
78
<PAGE>
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 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 mortgage-related securities. Although
mortgage-backed and mortgage-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.
Other mortgage-backed and mortgage-related securities bear the distilled risks
of the underlying loans, such as prepayment risk (interest-only securities) and
credit risk (subordinated interests), and are generally less liquid than
individual loans. See Note 6 to the Consolidated Financial Statements.
Mortgage-related securities include senior and subordinate regular interests
and residual interests in CMOs, including CMOs which have qualified as REMICs.
The regular interests in some CMOs are like traditional debt instruments because
they have stated principal amounts and traditionally defined interest-rate
terms. Purchasers of certain other interests in REMICs are entitled to the
excess, if any, of the issuer's cash inflows, including reinvestment earnings,
over the cash outflows for debt service and administrative expenses. These
interests may include instruments designated as residual interests, which
represent an equity ownership interest in the underlying collateral, subject to
the first lien of the investors in the other classes of the REMIC.
A senior-subordinated structure often is used with CMOs to provide credit
enhancement for securities which are backed by collateral which is not
guaranteed by FNMA, FHLMC or the Government National Mortgage Association
("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 be held in 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 principal repayments 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.
Interest-only and principal-only securities are so-called stripped
mortgage-related securities, in which interest coupons may be stripped from a
mortgage-related security to create an IO strip, where the investor receives all
of the interest cash flows and none of the principal, and a PO strip, where the
investor receives all of the principal cash flows and none of the interest.
Inverse floating rate interest-only ("Inverse IO") securities also have coupons
which are stripped from a mortgage-related security. However, Inverse IOs have
coupons whose interest rates change inversely with, and often as a multiple of,
a specialized index such as the one-month London Interbank Offered Rate.
79
<PAGE>
The following table sets forth the fair value of the Company's
mortgage-backed and related securities available for sale at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------------------
1997 1996 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Mortgage-backed securities:
Single-family residential...................................... $ -- $ -- $ -- $ 19,099
---------- ---------- ---------- ----------
Mortgage-related securities:
Single-family residential:
Privately issued CMOs--AAA-rated............................. 69,664 73,935 138,831 75,032
Interest only(1)............................................. 98,655 98,124 11,774 1,996
Principal only............................................... -- -- 8,218 11,490
Subordinates................................................. 23,197 19,164 27,310 --
PAC securities............................................... -- -- 574 --
REMIC residuals.............................................. 21,566 20,560 472 --
Futures contracts and swaps.................................. (1,623) (1,921) (1,598) 1,143
---------- ---------- ---------- ----------
Total.................................................... 211,459 209,862 185,581 89,661
---------- ---------- ---------- ----------
Multi-family residential and commercial:
Privately issued CMOs........................................ -- -- -- 53,939
Interest only(2)............................................. 81,435 87,389 109,193 --
Subordinates................................................. 54,401 57,534 42,954 22,095
Futures contracts............................................ 771 (780) (248) (609)
---------- ---------- ---------- ----------
Total.................................................... 136,607 144,143 151,899 75,425
---------- ---------- ---------- ----------
Total.................................................. $ 348,066 $ 354,005 $ 337,480 $ 184,185
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) All of the indicated securities are either issued by FHLMC or FNMA or are
rated AAA by national rating agencies.
(2) All of the indicated securities are rated AAA by national rating agencies,
except $4.2 million and $3.8 million of securities at March 31, 1997 and
December 31, 1996, respectively.
At March 31, 1997, $97.6 million of the Company's securities available for
sale were issued by FHLMC or FNMA and $250.2 million of such securities were
privately issued. Of the $250.2 million of securities available for sale which
were privately issued at March 31, 1997, $164.7 million were rated AAA by
national rating agencies, $3.6 million were rated investment grade below this
level and $81.6 million (amortized cost of $77.1 million) were unrated or rated
below investment grade.
At March 31, 1997, the carrying value of the Company's investment in IO
strips amounted to $180.1 million and the Company had no investments in PO
strips. The Company invests in IO strips and PO strips from time to time based
on its capital position, interest rate risk profile and the market for such
securities. IO strips and PO strips exhibit considerably more price volatility
than mortgages or ordinary mortgage pass-through securities, due in part to the
uncertain cash flows that result from changes in the prepayment rates of the
underlying mortgages. In the case of IO strips in particular, increased
prepayments of the underlying mortgages as a result of a decrease in market
interest rates or other factors 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 $82.5 million of the $180.1 million of IO strips owned by the
Company at March 31, 1997) generally have provisions which prohibit and/or
provide economic disincentives to prepayments for specified periods. The Company
generally attempts to offset the interest rate risk associated with a particular
IO strip or PO strip by purchasing other securities. At March 31, 1997, all of
the Company's IO strips were either issued by FHLMC or FNMA or rated AAA by
national rating agencies, with the exception of six IO securities with an
aggregate carrying value of $3.7 million, which were rated investment grade
below this level.
At March 31, 1997, the carrying value of the Company's investment in
subordinate classes of mortgage-related securities amounted to $77.6 million and
included $32.5 million of subordinated classes
80
<PAGE>
of mortgage-related securities acquired in connection with the securitization
activities of the Company. During the three months ended March 31, 1997, the
Company acquired $4.5 million of subordinate mortgage-related securities in
connection with the securitization of single-family residential loans acquired
from HUD. During 1996, the Company acquired $9.2 million of subordinate
mortgage-related securities in connection with the Company's securitization of
commercial discounted loans and $18.9 million of subordinate mortgage-related
securities in connection with LLC's securitization of HUD loans. For additional
information see "Business--Discounted Loan Acquisition and Resolution
Activities--Sales of Discounted Loans" and "Business--Investment in Joint
Ventures--Securitization of HUD Loans by LLC." At March 31, 1997, the Company's
subordinate securities supported senior classes of securities having an
outstanding principal balance of $1.14 billion. Because of their subordinate
position, subordinate classes of mortgage-related securities involve more risk
than the other classes.
During 1996, the Company also retained residual securities in REMICs which
were formed in connection with the securitization and sale of $219.6 million of
single-family residential loans to non-conforming borrowers in two underwritten
public offerings as partial payment for the loans sold by it. These REMIC
residual securities had a carrying value of $21.6 million at March 31, 1997 and
supported senior classes of securities having an outstanding principal balance
of $175.0 million at such date. Cash flows supporting the REMIC residuals, which
provide credit support similar to a senior-subordinated structure, are generated
by the amount by which the interest collected on the mortgage loan exceeds the
interest due on the senior securities. See "Business--Lending
Activities--Single-Family Residential Loans."
The Company generally does not intend to purchase subordinate classes of
mortgage-related securities created by unaffiliated parties. The Company held
five such securities with a carrying value of $32.0 million at March 31, 1997,
which subsequently were sold to OAIC. The Company may retain subordinated
classes resulting from the securitization of assets held by it directly or
indirectly through the Bank and investments in joint ventures, although it is
intended that any such securities held by the Bank will be distributed to the
Company as a dividend, subject to its ability to declare such dividends under
applicable limitations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Regulatory Developments."
Under a regulatory bulletin issued by the OTS, a federally-charted savings
institution such as the Bank generally may invest in "high risk" mortgage
securities only to reduce its overall interest rate risk and after it has
adopted various policies and procedures, although under specified circumstances
such securities also may be acquired for trading purposes. A "high risk"
mortgage security for this purpose generally is any mortgage-related security
which meets one of three tests which are intended to measure the average life or
price volatility of the security in relation to a benchmark fixed rate, 30-year
mortgage-backed pass-through security. At March 31, 1997, the Bank held
mortgage-related securities with a carrying value of $152.1 million (amortized
cost of $140.4 million) which were classified as "high-risk" mortgage securities
by the OTS.
The expected actual maturity of a mortgage-backed and related security is
shorter than its stated maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and adversely affect its yield to maturity. The yield is based upon the
interest income and the amortization of any premium or accretion of any discount
related to the mortgage-backed and related security. Prepayments on
mortgage-backed and related securities have the effect of accelerating the
amortization of premiums and accretion of discounts, which decrease and increase
interest income, respectively. Although prepayments of underlying mortgages
depend on many factors, including the type of mortgages, the coupon rate, the
age of mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of the rate of prepayments. During periods of falling mortgage interest rates,
if the coupon rate of the underlying mortgages exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Similarly, during periods of increasing interest rates, refinancing generally
decreases, thus lengthening the estimated maturity of mortgage loans.
81
<PAGE>
For additional information relating to the Company's mortgage-related
securities, see Note 6 to the Consolidated Financial Statements.
INVESTMENT SECURITIES. Investment securities currently consist primarily of
a 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, -------------------------------
1997 1996 1995 1994
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Available for sale:
U.S. Government securities.......................................... $ -- $ -- $ -- $ 3,532
----------- --------- --------- ---------
Held for investment:
U.S. Government securities.......................................... -- -- 10,036 10,325
FHLB stock(1)....................................................... 10,845 8,798 8,520 6,555
Limited partnership interests......................................... 97 103 109 131
Investment in OAIC.................................................... 259 -- -- --
----------- --------- --------- ---------
Total............................................................. 11,201 8,901 18,665 17,011
----------- --------- --------- ---------
Total investment securities........................................... $ 11,201 $ 8,901 $ 18,665 $ 20,543
----------- --------- --------- ---------
----------- --------- --------- ---------
</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.
TRADING SECURITIES. When securities are purchased with the intent to resell
in the near term, they are classified as trading securities and reported on the
Company's consolidated statement of financial condition as a separately
identified trading account. Securities in this account are carried at current
market value. All trading securities are marked-to-market, 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 mortgage-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's securities held for trading at December 31, 1996 amounted to
$75.6 million and represented one AAA-rated CMO which was sold in January 1997.
The Company held no securities for trading at March 31, 1997.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. The Company invests
in low-income housing tax credit interests primarily through limited
partnerships for the purpose of obtaining Federal 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 tax credit allocating
agency, which in most cases also serves as the 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
82
<PAGE>
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, 1997, the Company's investment in low-income housing tax credit
interests amounted to $99.9 million or 3.8% of the Company's total assets. The
Company's investments in low-income housing tax credit interests are made by the
Company indirectly through subsidiaries of the Company, which may be a general
partner and/or a limited partner in the partnership.
In accordance with a 1995 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
$75.9 million in the aggregate at March 31, 1997, 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, 1997, the Company's investment in low-income housing tax credit
interests included $24.0 million of assets related to low-income housing tax
credit partnerships in which a subsidiary of the Company acts as a general
partner. The Company had commitments to make $16.4 million of additional
investments in such partnerships.
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, 1997, the Company had $35.1 million of
construction loans outstanding to low-income housing tax credit partnerships and
commitments to fund an additional $12.6 million of such loans. Approximately
$13.9 million of such funded construction loans at March 31, 1997 were made to
partnerships in which subsidiaries of the Company acted as a general partner and
thus were consolidated with the Company for financial reporting purposes. The
risks associated with these construction loans generally are the same as those
made by the Company to unaffiliated third parties. See "Business--Lending
Activities."
The affordable housing projects owned by the low-income housing tax credit
partnerships in which the Company had invested at March 31, 1997 are
geographically located throughout the United States. At March 31, 1997, the
Company's largest funded investment in a low-income housing tax credit interest
was a $15.4 million investment in a partnership which owned a 408-unit
qualifying project in Fort Lauderdale, Florida, and the Company's largest
unfunded investment in such a partnership was a $27.8 million commitment to fund
equity and debt investments in a partnership which will construct a 240-unit
qualifying project in Greece, New York, of which $1,000 of equity and $14.8
million of debt was funded as of such date.
At March 31, 1997, the Company had invested in or had commitments to invest
in 32 low-income housing tax credit partnerships, of which 27 had been allocated
tax credits. The Company estimates that its investment in low-income housing tax
credit interests at March 31, 1997 will provide approximately $218.0 million of
tax credits.
During 1996, the Company sold $19.8 million of its investments in low-income
housing credit interests for a gain of $4.9 million. Depending on available
prices, its ability to utilize tax credits and other factors, the Company may
seek to sell other of its low-income housing tax credit interests in the future.
The ownership of low-income housing tax credit interests produces 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
83
<PAGE>
20%. At December 31, 1996, the Company could recover $8.7 million and $700,000
of taxes paid in 1994 and 1993, respectively, through the carryback of tax
credits realized in the current year. In addition, the operation of the rental
properties produces losses for financial statement and tax purposes 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 income tax which would otherwise be paid on such taxable income.
Tax credits may be claimed over a ten-year period on a straight-line basis
once the underlying multi-family residential properties are placed in service.
Tax credits claimed 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.
Investments made pursuant to the affordable housing tax credit program of
the Code are subject to numerous risks resulting from changes in the Code. For
example, the Balanced Budget Act of 1995, which was vetoed by the President of
the United States in December 1995 for reasons which were unrelated to the tax
credit program, generally would have established a sunset date for the
affordable housing tax credit program of the Code for housing placed in service
after December 31, 1997 and would have required a favorable vote by Congress to
extend the credit program. Although this change 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 in
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 will be
subject to future legislation and, if so, what the contents of such legislation
will be and its effects, if any, on the Company.
SOURCES OF FUNDS
GENERAL. Deposits, FHLB advances, reverse repurchase agreements, securities
financings, maturities, resolutions and principal repayments on securities and
loans and proceeds from the sale of securities, loans and real estate owned 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 sources which are 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 Company ("brokered deposits"). Such deposits
amounted to $1.34 billion or 63.6% of the Company's total deposits at March 31,
1997. In addition, during 1995 the Company commenced a program to obtain
certificates of deposit from customers
84
<PAGE>
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.
At March 31, 1997, $388.8 million or 18.4% of the Company's deposits were
obtained in this manner through over 100 regional and local investment banking
firms. The Company also solicits certificates of deposit from institutional
investors and high net worth individuals identified by the Company. At March 31,
1997, $218.3 million or 10.4% of the Company's total deposits consisted of
deposits obtained by the Company from such efforts.
The Company's brokered deposits at March 31, 1997 were net of $12.3 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.
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 in matching liabilities with comparably maturing assets. At March
31, 1997, $969.8 million or 48.8% of the Company's certificates of deposits were
scheduled to mature within one year.
Although management of the Company believes that brokered and other
wholesale deposits are advantageous in certain respects, 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
various regulatory 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Regulatory Developments"
and "Regulation--The Bank-- Regulatory Capital Requirements." There can be no
assurances, however, that the Company will not become subject to such
limitations in the future.
As a result of the Company's reliance on brokered and other wholesale
deposits, significant changes in the prevailing interest rate environment, in
the availability of alternative investments for individual and institutional
investors or in the Company's financial condition, among other factors, could
affect the Company's liquidity and results of operations much more significantly
than might be the case with an institution that obtained a greater portion of
its funds from retail or core deposits attracted through a branch network.
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, 1997, the
deposits which were allocated to this office amounted to $53.4 million or 2.5%
of the Company's deposits.
85
<PAGE>
The following table sets forth information related to the Company's deposits
at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
MARCH 31,
1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ----------------------
AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE
----------- --------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Non-interest bearing
checking accounts... $ 95,166 --% $ 96,563 --% $ 48,482 --% $ 35,943 --%
NOW and money market
checking accounts... 22,651 4.13 22,208 2.99 17,147 3.37 18,934 2.17
Savings accounts...... 2,073 2.30 2,761 2.30 3,471 2.30 24,007 2.30
----------- ----------- ----------- -----------
119,890 121,532 69,100 78,884
----------- ----------- ----------- -----------
Certificates of
deposit(1).......... 1,999,194 1,809,098 1,440,240 950,817
Unamortized deferred
fees................ (12,255) (10,888) (7,694) (6,433)
----------- ----------- ----------- -----------
Total certificates of
deposit............. 1,986,939 5.85 1,798,210 5.80 1,432,546 5.68 944,384 5.50
----------- ----------- ----------- -----------
Total deposits........ $ 2,106,829 5.56 $ 1,919,742 5.47 $ 1,501,646 5.46 $ 1,023,268 5.17
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------
(1) At March 31, 1997 and December 31, 1996, 1995 and 1994, certificates of
deposit issued on an uninsured basis amounted to $267.2 million, $147.5
million, $80.0 million and $21.1 million, respectively. Of the $267.2
million of uninsured deposits at March 31, 1997, $138.4 million were from
states and political subdivisions in the United States and secured or
collateralized as required under state law.
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, --------------------------------------
1997 1996 1995 1994
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
2.99% or less.............................................. $ 681 $ 1,442 $ 222 $ 3,613
3.00-3.50%................................................. 4 4 39 642
3.51-4.50.................................................. 137 1,149 42,751 221,459
4.51-5.50.................................................. 522,748 595,730 454,653 242,383
5.51-6.50.................................................. 1,262,607 990,621 660,745 310,898
6.51-7.50.................................................. 200,271 208,774 273,655 165,197
7.51-8.50.................................................. 491 490 481 192
------------ ------------ ------------ ----------
$ 1,986,939 $ 1,798,210 $ 1,432,546 $ 944,384
------------ ------------ ------------ ----------
------------ ------------ ------------ ----------
</TABLE>
86
<PAGE>
The following table sets forth the amount and maturities of the certificates
of deposit in the Company at March 31, 1997.
<TABLE>
<CAPTION>
OVER SIX MONTHS ONE YEAR
SIX MONTHS AND LESS THAN THROUGH TWO OVER TWO
AND LESS ONE YEAR YEARS YEARS TOTAL
----------- ---------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
2.99% or less............................. $ 652 $ -- $ 29 $ -- $ 681
3.00-3.50%................................ -- -- 4 -- 4
3.51-4.50................................. 94 24 13 6 137
4.51-5.50................................. 231,278 173,110 68,428 49,932 522,748
5.51-6.50................................. 322,122 183,211 324,780 432,494 1,262,607
6.51-7.50................................. 4,979 54,375 50,633 90,284 200,271
7.51-8.50................................. -- -- 99 392 491
----------- -------- ------------ ---------- ------------
$ 559,125 $ 410,720 $ 443,986 $ 573,108 $ 1,986,939
----------- -------- ------------ ---------- ------------
----------- -------- ------------ ---------- ------------
</TABLE>
At March 31, 1997, the Company had $267.2 million of certificates of deposit
in amounts of $100,000 or more outstanding maturing as follows: $128.7 million
within three months; $39.6 million over three months through six months; $46.4
million over six months through 12 months; and $52.5 million thereafter.
For additional information related to the Company's deposits, see Note 16 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 mortgage-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 mortgage-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 notes, subordinated debentures and
other interest-bearing obligations. At March 31, 1997, this category of
borrowings consisted primarily of $100.0 million of the Bank's Debentures and
$125.0 million of the Company's Notes. In November 1996, the Company acquired
the first mortgage payable on the hotel located in Columbus, Ohio which the
Company owns. From time to time, the Company privately raises funds by issuing
short-term notes to certain executives and stockholders of the Company. Such
notes were repaid during 1996 and amounted to $8.6 million and $1.0 million at
December 31, 1995 and 1994, respectively.
87
<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, ---------------------------------
1997 1996 1995 1994
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FHLB advances..................................................... $ 399 $ 399 $ 70,399 $ 5,399
Reverse repurchase agreements..................................... 39,224 74,546 84,761 --
Notes, debentures and other interest-bearing obligations:
Notes........................................................... 125,000 125,000 -- --
Debentures...................................................... 100,000 100,000 100,000 --
Hotel mortgage payable.......................................... 573 573 8,427 19,099
Short-term notes................................................ -- -- 8,627 1,012
---------- ---------- ---------- ---------
225,573 225,573 117,054 20,111
---------- ---------- ---------- ---------
$ 265,196 $ 300,518 $ 272,214 $ 25,510
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</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>
THREE MONTHS DECEMBER 31,
ENDED MARCH 31, ---------------------------------
1997 1996 1995 1994
---------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
FHLB advances:
Average amount outstanding during the period.............. $ 21,521 $ 71,221 $ 14,866 $ 26,476
Maximum month-end balance outstanding during the period... $ 86,399 $ 81,399 $ 100,399 $ 57,399
Weighted average rate:
During the period......................................... 5.26% 5.69% 7.57% 4.65%
At end of period.......................................... 6.95% 7.02% 5.84% 9.59%
Reverse repurchase agreements:
Average amount outstanding during the period.............. $ 20,934 $ 19,581 $ 16,754 $ 254,457
Maximum month-end balance outstanding during the period... $ 39,700 $ 84,321 $ 84,761 $ 537,457
Weighted average rate:
During the period......................................... 5.20% 5.62% 5.68% 4.09%
At end of period.......................................... 5.60% 5.46% 5.70% --%
</TABLE>
For additional information relating to the Company's borrowings, see Notes
17, 18 and 19 to the Consolidated Financial Statements.
SUBSIDIARIES
Set forth below is a brief description of the operations of the Company's
significant non-banking subsidiaries.
IMI. Through subsidiaries, IMI owns and manages the Westin Hotel in
Columbus, Ohio and residential units in cooperative buildings which were
acquired in connection with foreclosure on loans held by the Bank or by
deed-in-lieu thereof. Recently, IMI sold a 69% partnership interest in the
Westin Hotel for a small gain.
88
<PAGE>
OFS. OFS was formed by the Company under Florida law in October 1996 for
the purpose of purchasing substantially all of the assets of Admiral, the
Company's primary correspondent mortgage banking firm for sub-prime
single-family residential loans, and assuming all of the Bank's sub-prime
single-family residential lending operations. In connection with the acquisition
of substantially all of the assets of Admiral, in a transaction which closed on
May 1, 1997, the Company agreed to pay Admiral $6.8 million and to transfer to
Admiral 20% of the voting stock of OFS. In addition, OFS assumed specified
liabilities of Admiral in connection with this transaction, including a $3.0
million unsecured loan which was made by the Bank to Admiral at the time OFS
entered into an agreement to acquire substantially all of the assets of Admiral,
which loan was repaid with the proceeds from a $30.0 million unsecured,
subordinated credit facility provided by the Company to OFS at the time of the
closing of such acquisition. See "Business-- Lending Activities--Single-Family
Residential Loans."
OCC. OCC is a wholly-owned subsidiary of the Company which was recently
formed under Florida law to manage the day-to-day operations of OAIC, subject to
supervision by OAIC's Board of Directors. The directors and executive officers
of OCC consist solely of William C. Erbey, Chairman, President and Chief
Executive Officer, and other executive officers of the Company. OAIC is a
newly-organized Virginia corporation which will elect to be taxed as a REIT
under the Code. In May 1997, OAIC conducted an initial public offering of
17,250,000 shares of its common stock, which resulted in estimated net proceeds
of $283.8 million, inclusive of the $27.9 million contributed by the Company for
an additional 1,875,000 shares, or 9.8% of the outstanding shares of OAIC common
stock. The OAIC common stock is traded on the Nasdaq National Market under the
symbol "OAIC."
Pursuant to a management agreement between OCC and OAIC, and subject to
supervision by OAIC's Board of Directors, OCC formulates operating strategies
for OAIC, arranges for the acquisition of assets by OAIC, arranges for various
types of financing for OAIC, monitors the performance of OAIC's assets and
provides certain administrative and managerial services in connection with the
operation of OAIC. For performing these services, OCC receives (i) a base
management fee in an amount equal to 1% per annum, calculated and paid quarterly
based upon the average invested assets, as defined, of OAIC, which is intended
to cover OCC's cost of providing management services to the Company, and (ii) a
quarterly incentive fee in an amount equal to the product of (A) 25% of the
dollar amount by which (1)(a) funds from operations, as defined, of OCC per
share of OAIC common stock plus (b) gains (or minus losses) from debt
restructuring and sales of property per share of OAIC common stock, exceed (2)
an amount equal to (a) the weighted average of the initial public offering price
of the OAIC common stock and the prices per share of any secondary offerings of
OAIC common stock by OAIC multiplied by (b) the ten-year U.S. Treasury rate plus
5% per annum, multiplied by (B) the weighted average number of shares of OAIC
common stock outstanding. The Board of Directors of OAIC may adjust the base
management fee in the future if necessary to align the fee more closely with the
actual costs of such services. OCC also may be reimbursed for the costs of
certain due diligence tasks performed by it on behalf of OAIC, and will be
reimbursed for the out-of-pocket expenses incurred by it on behalf of OAIC.
Recently, the Company transferred the lending operations associated with its
large multi-family residential and commercial real estate loans to OCC. See
"Business-General." Currently, OCC is emphasizing originating loans for OAIC (in
order to enable OAIC to leverage the proceeds from the initial public offering
of OAIC's common stock) and not the Company.
EMPLOYEES
At March 31, 1997, the Company had 583 full-time equivalent employees,
excluding employees of the hotel and certain other real estate owned and
operated by the Company. In addition, the Company employed 131 full-time
equivalent employees in connection with the acquisition of substantially all of
the assets of Admiral on April 30, 1997. See "Business--Subsidiaries."
89
<PAGE>
OFFICES
At March 31, 1997, the Company conducted business from its executive and
administrative offices located in West Palm Beach, Florida and a full-service
banking office located in northern New Jersey.
The following table sets forth information relating to the Company's
executive and main offices at March 31, 1997.
<TABLE>
<CAPTION>
NET BOOK VALUE OF
PROPERTY
OR LEASEHOLD
LOCATION OWNED/LEASED IMPROVEMENTS
- ------------------------------------------------------------------------ ------------- -------------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Executive Offices:
1675 Palm Beach Lakes Blvd.
West Palm Beach, FL................................................... Leased $ 4,904
Main Office:
2400 Lemoine Ave
Fort Lee, NJ.......................................................... Leased $ --
</TABLE>
In addition to the above offices, OFS maintains 17 loan production offices
in six states, including 11 offices in California. These offices are operated
pursuant to leases with up to three-year terms.
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.
90
<PAGE>
REGULATION
Financial institutions and their holding companies are extensively regulated
under federal and state laws. As a result, the business, financial condition and
prospects of the Company 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 are 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 currently in effect. This discussion is not intended to constitute
and does not purport to be a complete statement of all legal restrictions and
requirements applicable to the Company and the Bank and all such descriptions
are qualified in their entirety by reference to applicable statutes, regulations
and other regulatory pronouncements.
THE COMPANY
GENERAL. The Company is a registered savings and loan holding company under
the Home Owner's Loan Act ("HOLA"). As such, the Company is subject to
regulation, supervision and examination by the OTS.
ACTIVITIES RESTRICTION. 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 saving 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 and
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" below.
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
91
<PAGE>
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof any business activity, other than:
(i) furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. Those activities described in clause
(vii) above also must be approved by the Director of the OTS prior to being
engaged in by a multiple savings and loan holding company.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state only if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office located in the state of the institution to be acquired as of March
5, 1987; (ii) the acquirer 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."
THE BANK
GENERAL. The Bank is a federally-chartered savings bank organized under the
HOLA. As such, the Bank is subject to regulation, supervision and examination by
the OTS. The deposit accounts of the Bank are insured up to applicable limits by
the SAIF administered by the FDIC and, as a result, the Bank also is subject to
regulation, supervision and examination by the FDIC.
The business and affairs of the Bank are regulated in a variety of ways.
Regulations apply to, among other things, insurance of deposit accounts, capital
ratios, payment of dividends, liquidity requirements, the nature and amount of
the investments that the Bank may make, transactions with affiliates, community
and consumer lending laws, internal policies and controls, reporting by and
examination of the Bank and changes in control of the Bank.
INSURANCE OF ACCOUNTS. Pursuant to legislation enacted in September 1996, a
one-time fee was paid by all SAIF-insured institutions at the rate of $0.657 per
$100 of deposits held by such institutions at March 31, 1995. The money
collected recapitalized the SAIF reserve to the level of 1.25% of insured
deposits as required by law. In September 1996, the Bank recorded a pre-tax
accrual of $7.1 million for this assessment, which was subsequently paid in
November 1996.
92
<PAGE>
The new legislation also provides for the merger, subject to certain
conditions, of the SAIF into the Bank Insurance Fund ("BIF") administered by the
FDIC by 1999 and also requires BIF-insured institutions to share in the payment
of interest on the bonds issued by a specially created government entity
("FICO"), the proceeds of which were applied toward resolution of the thrift
industry crisis in the 1980s. Beginning on January 1, 1997, in addition to the
insurance premiums that will be paid by SAIF-insured institutions to maintain
the SAIF reserve at its required level pursuant to the current risk
classification system, SAIF-insured institutions will pay deposit insurance
premiums at the annual rate of 6.4 basis points of their insured deposits and
BIF-insured institutions will pay deposit insurance premiums at the annual rate
of 1.3 basis points of their insured deposits towards the payment of interest on
the FICO bonds. Under the current risk classification system, 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 0 basis points for well capitalized, healthy institutions
to 27 basis points for undercapitalized institutions with substantial
supervisory concerns.
The recapitalization of the SAIF is expected to result in lower deposit
insurance premiums in the future for most SAIF-insured financial institutions,
including the Bank.
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
subject to three capital requirements of general applicability: 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 (as defined in the regulations). For purposes of the
regulation, tangible capital is core capital less all intangibles other than
qualifying purchased mortgage servicing rights, of which the Bank had $2.2
million at March 31, 1997. 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 Bank's
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
93
<PAGE>
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, 1997.
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 Company 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.
In addition to regulatory capital requirements of general applicability, a
federally-insured savings association may be required to meet increased
individual minimum capital requirements established by the OTS on a case-by-case
basis upon a determination that a savings association's capital is or may become
inadequate in view of its circumstances. Higher capital levels may be imposed by
the OTS on a savings association (i) receiving special supervisory attention;
(ii) that has or is expected to have losses resulting in capital inadequacy;
(iii) that has a high degree of exposure to interest rate risk, prepayment risk,
credit risk, concentration of credit risk, certain risks arising from
nontraditional activities, or a high proportion of off-balance sheet risk; (iv)
that has poor liquidity or cash flows; (v) growing, either internally or through
acquisitions, at such a rate that supervisory problems are presented that are
not dealt with adequately by other OTS regulations or guidance; (vi) that may be
adversely affected by the activities or condition of its holding company or
affiliates; (vii) with a portfolio reflecting weak credit quality or a
significant likelihood of financial loss, or that has loans in nonperforming
status or on which borrowers fail to comply with repayment terms; or (ix) that
has a record of operating losses that exceeds the average of other, similarly
situated, savings associations; has management deficiencies, including failure
to adequately monitor and control financial and operating risks, particularly
the risks presented by concentration of credit and nontraditional activities, or
has a poor record of supervisory compliance. The appropriate minimum capital
94
<PAGE>
level for an individual savings association is necessarily based, in part, on
subjective judgment ground in OTS expertise. The factors to be considered in the
determinations will vary in each case and may include, for example, (i) the
conditions or circumstances leading to the determination that a higher minimum
capital requirement is appropriate or necessary for the savings association;
(ii) the exigency of those circumstances or potential problems; (iii) the
overall condition, management strength and future prospects of the savings
association and, if applicable, its holding company, subsidiaries and
affiliates; (iv) the savings association's liquidity, capital and other
indicators of financial stability, particularly as compared with those of
similarly situated savings associations; and (v) the policies and practices of
the savings association's directors, officers and senior management, as well as
the internal control and internal audit systems for implementation of such
adopted policies and practices.
At March 31, 1997, the Bank's regulatory capital substantially exceeded the
requirements of general applicability and the Bank was not subject to an
individual minimum capital requirement under OTS regulations. Based on
discussions with the OTS following a recent examination of the Bank, however,
the Bank has committed to the OTS to maintain regulatory capital at levels which
exceed those of general applicability, commencing on June 30, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Regulatory Developments."
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 1
risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of
5.0% or more and is not subject to any written agreement, order, capital
directive or prompt corrective action directive 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 1 risk-based capital
ratio of 4.0% or more and a Tier 1 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 1 risk-based capital ratio that is less
than 4.0% or a Tier 1 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 1 risk-based capital
ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less
than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to adjusted total assets that is equal to or less than 2.0%. The
regulations also permit the appropriate Federal banking regulator to downgrade
an institution to the next lower category (provided that a significantly
undercapitalized institution may not be downgraded to critically
undercapitalized) if the regulator determines (i) after notice and opportunity
for hearing or response, that the institution is in an unsafe or unsound
condition or (ii) that the institution has received (and not corrected) a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent exam. At March 31, 1997,
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.
95
<PAGE>
QUALIFIED THRIFT LENDER TEST. All savings associations are required to meet
the qualified thrift lender test ("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). The Bank met the QTL test throughout 1996
and the first quarter of 1997.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. The OTS has promulgated a regulation
governing capital distributions by savings associations, which include cash
dividends, stock redemptions or repurchases, cash-out mergers, interest payments
on certain convertible debt and other transactions charged to the capital
account of a savings association as a capital distribution. Generally, the
regulation creates three tiers of associations based on regulatory capital, with
the top two tiers providing a safe harbor for specified levels of capital
distributions from associations so long as such associations notify the OTS and
receive no objection to the distribution from the OTS. Associations that do not
qualify for the safe harbor provided for the top two tiers of associations are
required to obtain prior OTS approval before making any capital distributions.
Tier 1 associations may make the highest amount of capital distributions,
and are defined as savings associations that before and after the proposed
distribution meet or exceed their fully phased-in regulatory capital
requirements, as set forth in OTS regulations. See "--Regulatory Capital
Requirements" above. 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, 1997, management believes
that the Bank was a Tier 1 association under the OTS capital distribution
regulation. Notwithstanding the foregoing, however, management of the Company
believes that the Bank's ability to make capital distributions as a Tier 1
association pursuant to the OTS capital distribution regulation are limited by
the regulatory capital levels which it has committed to the OTS it would
maintain, commencing on June 30, 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-- Recent Regulatory
Developments." Taking into account such commitments and applicable laws and
regulations, management estimates that the Bank could dividend to the Company
$6.5 million as of March 31, 1997.
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 "--Prompt Corrective Action" above.
LOAN-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
96
<PAGE>
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, 1997, the Bank's unimpaired capital and surplus for purposes of
the loans-to-one borrower regulation amounted to $364.7 million, resulting in a
general loans-to-one borrower limitation of $54.7 million under applicable laws
and regulations. At the same date, the Bank had $138.3 million, $104.5 million
and $159.5 million of loans (including unfunded commitments) to one borrower
(including related entities) with principal balances which aggregated $40
million or more but less than $54.7 million, $30 million or more but less than
$40 million and $20 million or more but less than $30 million, respectively.
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. In addition,
the term "deposit broker" includes any insured depository institution, and any
employee of any insured depository institution, which engages, directly or
indirectly , in the solicitation of deposits by offering rates of interest (with
respect to such deposits) which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
having the same type of charter in such depository institution's normal market
area. As a result of the definition of "deposit broker," all of the Bank's
brokered deposits, as well as possibly its deposits obtained through customers
of regional and local investment banking firms and the deposits obtained from
the Bank's direct solicitation efforts of institutional investors and high net
worth individuals, are potentially subject to the restrictions described below.
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, 1997, the Bank was a
well-capitalized institution which was not subject to restrictions on brokered
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. Currently, the required liquid asset ratio is 5%.
In May 1997, however, the OTS proposed to amend its liquidity regulation to,
among other things, provide that a savings association shall maintain liquid
assets of not less than 4% of the amount of its liquidity base at the end of the
preceding calendar quarter, as well as to provide that each savings association
must maintain sufficient liquidity to ensure its safe and sound operation.
Historically,
97
<PAGE>
the Bank has operated in compliance with applicable liquidity requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity, Commitments and Off-Balance Sheet Risks."
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 to 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, Equal Credit
Opportunity Act, Fair Credit Reporting Act and the Community Reinvestment Act.
SAFETY AND SOUNDNESS. Other regulations of the OTS which are applicable to
the Bank (i) set forth real estate lending standards for insured institutions,
which provide guidelines concerning loan-to-value ratios for various types of
real estate loans; (ii) require depository institutions to develop and implement
internal procedures to evaluate and control credit and settlement exposure to
their correspondent banks; and (iii) address various "safety and soundness"
issues, including operations and managerial standards, standards for asset
quality, earnings and stock valuations, and compensation standards for the
officers, directors, employees and principal stockholders of the insured
institution.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and all of 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.
For taxable years beginning prior to January 1, 1996, a savings institution
such as the Bank that met certain definitional tests relating to the composition
of its assets and the sources of its income (a "qualifying savings institution")
was permitted to establish reserves for bad debts and to claim annual tax
deductions for additions to such reserves. A qualifying savings institution was
permitted to make annual
98
<PAGE>
additions to such reserves based on the institution's loss experience.
Alternatively, a qualifying savings institution could elect, on an annual basis,
to use the "percentage of taxable income" method to compute its addition to its
bad debt reserve on qualifying real property loans (generally, loans secured by
an interest in improved real estate). The percentage of taxable income method
permitted the institution to deduct a specified percentage of its taxable income
before such deduction, regardless of the institution's actual bad debt
experience, subject to certain limitations. From 1988 to 1995, the Bank has
claimed bad debt deductions under the percentage of taxable income method
because that method produced a greater deduction than did the experience method.
On August 20, 1996, President Clinton signed the Small Business Job
Protection Act (the "Act") into law. One provision of the Act repealed the
reserve method of accounting for bad debts for savings institutions effective
for taxable years beginning after 1995 and provides for recapture of a portion
of the reserves existing at the close of the last taxable year beginning before
January 1, 1996. See Note 21 to the Consolidated Financial Statements for a
discussion of the effect of this legislation on the Bank. For its tax years
beginning on or after January 1, 1996, the Bank will be required to account for
its bad debts under the specific charge-off method. Under this method,
deductions may be claimed only as and to the extent that loans become wholly or
partially worthless.
ALTERNATIVE MINIMUM TAX. In addition to the regular corporate income tax,
corporations, including qualifying savings institutions, are subject to an
alternative minimum tax. The 20% tax is computed on Alternative Minimum Taxable
Income ("AMTI") and applies if it exceeds the regular tax liability. AMTI is
equal to regular taxable income with certain adjustments. For taxable years
beginning after 1989, AMTI includes an adjustment for 75% of the excess of
"adjusted current earnings" over regular taxable income. Net operating loss
carrybacks and carryforwards are permitted to offset only 90% of AMTI.
Alternative minimum tax paid can be credited against regular tax due in later
years.
TAX RESIDUALS. From time to time the Company acquires tax residuals., which
are included in the Company's deferred tax assets. Although a tax residual has
little or no future economic cash flows from the REMIC from which it has been
issued, the tax residual does bear the income tax liability or benefit resulting
from the difference between the interest rate paid on the securities 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 acquisition 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. The Company defers all fees received and recognizes
such fees in interest income on a level yield basis over the expected life of
the deferred tax asset related to tax residuals. The Company also adjusts the
recognition in interest income of fees deferred based upon the changes in the
actual prepayment rates of the underlying mortgages held by the REMIC and
periodic reassessments of the expected life of the deferred tax asset related to
tax residuals. At December 31, 1996, the Company's gross deferred tax assets
included $3.7 million which was attributable to the Company's tax residuals and
related deferred income. The Company's current portfolio of tax residuals
generally have a negative tax basis and are not expected to generate future
taxable income. Because of the manner in which REMIC residuals are treated for
tax purposes, at December 31, 1996, the Company had approximately $10.2 million
of net operating loss carryforwards for Federal income tax purposes which were
attributable to sales of tax residuals. See Note 21 to the Consolidated
Financial Statements.
INVESTMENTS IN LOW-INCOME-HOUSING TAX CREDIT INTERESTS. For a discussion of
the tax effects of investments in low-income-housing tax credit interests, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Income Tax Expenses" and "Business-Investment
Activities-Investment in Low-Income Housing Tax Credit Interests."
99
<PAGE>
EXAMINATIONS. The most recent examination by the Internal Revenue Service
of the Company's Federal income tax returns was of the tax returns filed for
1991 and 1992. 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
and 1992 (due to a waiver of the statute of limitations) and 1993 through 1995
are open for examination. The Internal Revenue Service currently is completing
an examination of the Company's Federal income tax returns for 1993 and 1994;
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.
STATE TAXATION
The Company's income is subject to tax by the State of Florida, which has a
statutory tax rate of 5.5%, and is determined based on certain apportionment
factors. The Company is taxed in New Jersey on income, net of expenses, earned
in New Jersey at a statutory rate of 3.0%. 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 its tax returns.
100
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth certain information about the directors and
executive officers of the Company. Directors are elected annually and hold
office until the earlier of the election and qualification of their successors
or their resignation or removal. Executive officers of the Company are elected
annually by the Board of Directors and generally serve at the discretion of the
Board. There are no arrangements or understandings between the Company and any
person pursuant to which such person was elected as a director or executive
officer of the Company. Other than William C. Erbey and John R. Erbey, who are
brothers, no director or executive officer is related to any other director or
executive officer of the Company or any of its subsidiaries by blood, marriage
or adoption.
DIRECTORS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE(1) POSITION DIRECTOR SINCE
- --------------------------- ----------- ------------------------------------------------------------ ---------------
<S> <C> <C> <C>
William C. Erbey 47 Chairman, President and Chief Executive Officer 1988
Hon. Thomas F. Lewis 72 Director 1997
W. C. Martin 48 Director 1996
Howard H. Simon 56 Director 1996
Barry N. Wish 54 Chairman, Emeritus 1988
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<TABLE>
<CAPTION>
NAME AGE(1) POSITION
- --------------------------- ----------- ----------------------------------------------------------------------------
<S> <C> <C>
John R. Barnes 54 Senior Vice President
Joseph A. Dlutowski 32 Senior Vice President
John R. Erbey 56 Managing Director and Secretary
Robert E. Koe 51 Managing Director
Christine A. Reich 35 Managing Director
Mark S. Zeidman 45 Senior Vice President and Chief Financial Officer
</TABLE>
- ------------------------
(1) As of March 31, 1997.
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, as Chief Investment Officer of the
Company since January 1992 and as Chairman of the Board of the Company since
September 1996. Mr. Erbey has served as Chairman of the Board of the Bank since
February 1988 and as President and Chief Executive Officer of the Bank since
June 1990. From 1983 to 1995, Mr. Erbey served as a Managing General Partner of
The Oxford Financial Group ("Oxford"), a private investment company, in charge
of merchant banking. From 1975 to 1983, he served at General Electric Capital
Corporation ("GECC") in various capacities, most recently as President and Chief
Operating Officer of General Electric Mortgage Insurance Corporation, a
subsidiary of the General Electric Company engaged in the mortgage insurance
business. Mr. Erbey also served as program general manager of GECC's Commercial
Financial Services Department and its subsidiary Acquisition Funding
Corporation.
HON. THOMAS F. LEWIS. Mr. Lewis served as a United States Congressman,
representing the 12th District of Florida from 1983 to 1995. Prior to 1983, Mr.
Lewis served in the House and Senate of the Florida State Legislature at various
times. Mr. Lewis is a principal of Lewis Properties, Vice President of Marian V.
Lewis Real Estate and Investments and a director of T&M Ranch & Nursery. In
addition,
101
<PAGE>
Mr. Lewis serves as a United States delegate to the North Atlantic Treaty
Organization and as a member of the Presidents Advisory Commission on Global
Trade Policies. He also is a member of the Economic Council of Palm Beach
County.
W. C. MARTIN. Mr. Martin has served as a director of the Company and the
Bank since July 1996 and June 1996, respectively. Since 1982, Mr. Martin has
been associated with Holding Capital Group ("HCG") and has been engaged in the
acquisition and turnaround of businesses in a broad variety of industries. Since
March 1993, Mr. Martin also has served as President and Chief Executive Officer
of Solitron Vector Microwave Products, Inc., a company he formed along with
other HCG investors to acquire the assets of the former Microwave Division of
Solitron Devices, Inc. Prior to 1982, Mr. Martin was a Manager in Touche Ross &
Company's Management Consulting Division, and prior to that he held positions in
financial management with Chrysler Corporation.
HOWARD H. SIMON. Mr. Simon has served as a director of the Company since
July 1996. Mr. Simon is the Managing Director of Simon, Master & Sidlow, P.A., a
certified public accounting firm which Mr. Simon founded in 1978 and which is
based in Wilmington, Delaware. He has served as a director of the Company since
1987. Mr. Simon is a past Chairman and current member of the Board of Directors
of CPA Associates International, Inc. Prior to 1978, Mr. Simon was a Partner of
Touche Ross & Company.
BARRY N. WISH. Mr. Wish has served as Chairman, Emeritus of the Company
since September 1996, and he previously served as Chairman of the Board of the
Company from January 1988 to September 1996. 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.
The background for the last five years of each executive officer of the
Company who is not a director, as well as certain other information, is set
forth below.
JOHN R. BARNES. Mr. Barnes has served as Senior Vice President of the
Company and the Bank since May 1994 and served as Vice President of the same
from October 1989 to May 1994. Mr. Barnes was a Tax Partner in the firm of
Deloitte Haskins & Sells from 1986 to 1989 and in the firm of Arthur Young & Co.
from 1979 to 1986. Mr. Barnes was the Partner in Charge of the Cleveland Office
Tax Department of Arthur Young & Co. from 1979 to 1984.
JOSEPH A. DLUTOWSKI. Mr. Dlutowski was elected a Senior Vice President of
the Company and the Bank in March 1997. Mr. Dlutowski joined the Bank in October
1992 and served as a Vice President from May 1993 until March 1997. From 1989 to
1991, Mr. Dlutowski was associated with the law firm of Baker and Hostetler.
JOHN R. ERBEY. Mr. Erbey has served as a Managing Director of the Company
since January 1993 and as Secretary of the Company since June 1989, and served
as Senior Vice President of the Company from June 1989 until January 1993. Mr.
Erbey has served as a director of the Bank since 1990, as a Managing Director of
the Bank since May 1993 and as Secretary of the Bank since July 1989.
Previously, he served as Senior Vice President of the Bank from June 1989 until
May 1993. From 1971 to 1989 he was a member of the Law Department of
Westinghouse Electric Corporation and held various management positions,
including Associate General Counsel and Assistant Secretary from 1984 to 1989.
Previously, he held the positions of Assistant General Counsel of the Industries
and International Group and Assistant General Counsel of the Power Systems Group
of Westinghouse.
ROBERT E. KOE. Mr. Koe was elected as a Managing Director of the Company
and the Bank on July 1, 1996. Mr. Koe has served as a director of the Bank since
1994. Mr. Koe formerly was Chairman, President and Chief Executive Officer of
United States Leather, Inc. ("USL"), which includes Pfister & Vogel Leather,
Lackawanna Leather, A.L. Gebhardt and Caldwell/Moser Leather. Prior to joining
USL in 1990,
102
<PAGE>
he was Vice Chairman of Heller Financial Inc., and served as a member of the
board of its parent company, Heller International Corp. ("Heller"), as well as
Heller Overseas Corp. Mr. Koe came to Heller in 1984 from General Electric
Capital Corp. ("GECC"), where he held positions which included Vice President
and General Manager of Commercial Financial Services, Vice President and General
Manager of Commercial Equipment Financing, and President of Acquisition Funding
Corp. Before joining GECC, Mr. Koe held various responsibilities with its
parent, the General Electric Company, from 1967 to 1975.
CHRISTINE A. REICH. Ms. Reich has served as a Managing Director of the
Company since June 1994. Ms. Reich served as Chief Financial Officer of the
Company from January 1990 to May 1997, as Senior Vice President of the Company
from January 1993 until June 1994 and as Vice President of the Company from
January 1990 until January 1993. Ms. Reich has served as a director of the Bank
since 1993, as a Managing Director of the Bank since June 1994 and as Chief
Financial Officer of the Bank since May 1990. Ms. Reich served as Senior Vice
President of the Bank from May 1993 to June 1994 and Vice President of the Bank
from January 1990 to May 1993. From 1987 to 1990, Ms. Reich served as an officer
of another subsidiary of the Company. Prior to 1987, Ms. Reich was employed by
KPMG Peat Marwick LLP, most recently in the position of Manager.
MARK S. ZEIDMAN. Mr. Zeidman joined the Company in May 1997 as Senior Vice
President and Chief Financial Officer. From 1986 until May 1997, Mr. Zeidman was
employed by Nomura Securities International, Inc., most recently as Managing
Director. Prior to 1986, Mr. Zeidman held positions with Shearson Lehman
Brothers and Coopers & Lybrand. Mr. Zeidman is a Certified Public Accountant.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors of the Company held a total of three meetings during
1996. No director of the Company attended fewer than 75% of the aggregate total
number of meetings of the Board of Directors held while he was a member of the
Board of Directors during 1996 and the total number of meetings held by all
committees thereof during the period which he served on such committees during
1996.
The Board of Directors of the Company has 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. This committee did not meet during 1996.
The Audit Committee of the Board of Directors reviews and advises the Board
of Directors with respect to reports by the Company's independent auditors and
monitors the Company's compliance with laws and regulations applicable to the
Company's operations. Currently, the members of the Audit Committee are
Directors Simon (Chairman) and Martin. This committee met one time during 1996.
The Nominating and Compensation Committee evaluates and makes
recommendations to the Board of Directors for the election of directors, as well
as handles personnel and compensation matters relating to the executive officers
of the Company. Currently, the members of the Nominating and Compensation
committee are Directors Martin (Chairman) and Simon. This committee met one time
during 1996.
BOARD OF DIRECTORS COMPENSATION
Pursuant to a Directors Stock Plan adopted by the Board of Directors and
stockholders of the Company in July 1996, the Company compensates directors by
delivering a total annual value of $10,000 payable in shares of Common Stock
(which may be prorated for a director serving less than a full one-year term, as
in the case of a director joining the Board after an annual meeting of
stockholders), subject to review and adjustment by the Board of Directors from
time to time. Except for 1996, such payment will be made after the annual
organizational meeting of the Board of Directors which follows the annual
meeting
103
<PAGE>
of stockholders of the Company. An additional annual fee payable in shares of
Common Stock, which is $2,000 beginning in 1996, subject to review and
adjustment by the Board of Directors from time to time, will be paid to
committee chairs after the annual organizational meeting of the Board of
Directors. For 1996, four directors of the Company and three committee chairs
received shares of Common Stock issuable under the Directors Stock Plan upon
consummation of the initial public offering of the Common Stock by certain
stockholders of the Company on September 25, 1996.
Shares issued pursuant to the Directors Stock Plan are based on their "fair
market value" on the date of grant. The term "fair market value" is defined in
the Directors Stock Plan to mean the mean of the high and low prices of the
Common Stock as reported by the Nasdaq Stock Market's National Market on the
relevant date, or if no sale of Common Stock shall have been reported for that
day, the average of such prices on the next preceding day and the next following
day for which there are reported sales.
Shares issued pursuant to the Directors Stock Plan, other than the committee
fee shares, are subject to forfeiture during the 12 full calendar months
following election or appointment to the Board of Directors or a committee
thereof if the director does not attend an aggregate of at least 75% of all
meetings of the Board of Directors and committees thereof of which he is a
member during such period.
Barry N. Wish, who served as Chairman of the Board of Directors of the
Company until September 1996, and continues to serve as a director of the
Company and the Bank received $150,000 of cash compensation in 1996 for his
services to the Company as Chairman. Beginning January 1, 1997, Mr. Wish
receives compensation only as a non-employee director of both the Company and
the Bank.
REMUNERATION OF EXECUTIVE OFFICERS--SUMMARY COMPENSATION TABLE
The following table discloses compensation received by the Company's chief
executive officer and the four other most highly paid directors and executive
officers of the Company for the years indicated.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
-------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY($) BONUS($)(1) AWARDS($)(2) OPTIONS(#)(5) COMPENSATION
- ---------------------------------------- ---- --------- ----------- ------------ ------------- ------------
William C. Erbey, 1996 $ 150,000 $ 650,000 12,00$0 ---- 115,790 $3,000(4)
Chairman of the Board, 1995 150,000 -- -- 3,000(4)
Chief Executive 1994 150,000 1,171,675 269,400 3,000(4)
Officer and President
John R. Erbey, 1996 150,000 525,000 ------ 89,474 3,000(4)
Managing Director and 1995 150,000 50,000 44,500 3,000(4)
Secretary 1994 150,000 800,000 175,970 3,000(4)
Robert E. Koe, 1996 75,000(5) 250,000(5) -- 31,579(5) 7,973(5)
Managing Director
Christine A. Reich, 1996 150,000 487,500 -- 81,579 3,000(4)
Managing Director and 1995 150,000 50,000 -- 44,500 3,000(4)
Chief Financial 1994 147,917 487,500 -- 97,410 3,000(4)
Officer
John R. Barnes 1996 125,000 212,500 -- 23,684 3,000(4)
Senior Vice President 1995 125,000 100,000 -- 22,240 3,000(4)
1994 113,542 206,250 -- 26,720 3,000(4)
</TABLE>
- ------------------------
(1) The indicated bonuses were paid in the first quarter of the following year
for services rendered in the year indicated.
(2) Reflects the issuance of 801 shares of Common Stock to Mr. Erbey under the
Directors Stock Plan.
104
<PAGE>
(3) Consists of options granted pursuant to the Stock Option Plan which, in
accordance with their terms, provide recipients with the option to purchase
shares of Common Stock.
(4) Consists of contributions by the Company pursuant to the Ocwen Financial
Corporation 401(k) Savings Plan.
(5) The indicated compensation amounts are applicable to the period of July 1,
1996 through December 31, 1996, the period during which Mr. Koe served as a
Managing Director. Mr. Koe received other compensation of $7,943 related to
reimbursement of relocation expenses as well as $7,000 in director fees
related to the period from January 1, 1996 through June 30, 1996, during
which Mr. Koe served as a director of the Bank but not as an employee of the
Company.
ANNUAL INCENTIVE PLAN
Since 1990, the Company has maintained an annual incentive plan for the
management and other salaried employees of the Company and its subsidiaries. The
plan provides the participants with bonuses each year paid from a pool based
upon the Company's consolidated operating income for that year. Accordingly, the
plan provides management and other personnel with a significant incentive to
contribute to the Company's financial success by allowing them to share in a
portion of the consolidated operating income of the Company and its
subsidiaries.
The aggregate bonus pool payable under the plan may not exceed 20% of income
before taxes and incentive awards of the Company plus pre-tax equivalent income
generated by tax advantaged investments. The plan is administered by the
President of the Company and may be amended or terminated at any time by the
Board of Directors of the Company.
Incentive awards are paid to participants following the end of each fiscal
year after the determination of the Company's income. Incentive awards may be
paid in cash or in any other form approved by the Company's Board of Directors.
Since 1990, certain executive officers and other eligible participants have
received a portion of their annual incentive award in the form of options to
acquire Common Stock of the Company pursuant to the Stock Option Plan.
STOCK OPTION PLAN
The Company maintains a non-qualified stock option plan which is designed to
advance the interests of the Company, its subsidiaries (including the Bank) and
the Company's stockholders by affording certain officers and other key employees
of the Company, the Bank and other Company 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 6,388,550 shares of Common
Stock were authorized for issuance at December 31, 1996 under the Stock Option
Plan. As of December 31, 1996, options to acquire 260,090 shares of Common Stock
were outstanding under the Stock Option Plan. In addition, options to acquire
573,686 shares of Common Stock were granted in January 1997 for services
rendered in 1996. Options granted pursuant to the Stock Option Plan frequently
have had exercise prices which are at a substantial discount to the book value
and market value of the Common Stock. At December 31, 1996, the average exercise
price of the outstanding options granted under the Stock Option Plan was $16.89
and the market value per share of Common Stock was $26.75.
The Stock Option Plan currently is administered and interpreted by either
the Board of Directors of the Company or, to the extent authority is delegated,
the Nominating and Compensation Committee thereof.
105
<PAGE>
OPTION GRANTS FOR 1996
The following table provides information relating to option grants made
pursuant to the Stock Option Plan in January 1997 to the individuals named in
the Summary Compensation Table for services rendered in 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
RATES OF
STOCK
PERCENT PRICE
NUMBER OF OF SECURITIES MARKET VALUE PER APPRECIATION
SECURITIES UNDERLYING SHARE OF THE FOR OPTION
UNDERLYING TOTAL OPTIONS COMPANY TERM(3)
OPTIONS GRANTED TO EXERCISE COMMON STOCK AT EXPIRATION ---------
NAME GRANTED#)(1)(2) EMPLOYEES(2) PRICE ($/SH) DECEMBER 31, 1996 DATE 0%($)
- ------------------------- ----------------- --------------- ------------- ------------------- ------------- ---------
William C. Erbey......... 115,790 20.2% $ 22.00 $ 26.75 2007 $ 550,000
John R. Erbey............ 89,474 15.6 22.00 26.75 2007 425,000
Robert E. Koe............ 31,579 5.5 22.00 26.75 2007 150,000
Christine A. Reich....... 81,579 14.2 22.00 26.75 2007 387,500
John R. Barnes........... 23,684 4.1 22.00 26.75 2007 112,500
<CAPTION>
<S> <C> <C>
NAME 5%($) 10%($)
- ------------------------- ---------- ----------
William C. Erbey......... $2,497,590 $5,486,130
John R. Erbey............ 1,929,954 4,239,278
Robert E. Koe............ 681,159 1,496,213
Christine A. Reich....... 1,759,659 3,865,213
John R. Barnes........... 510,864 1,122,148
</TABLE>
- ------------------------
(1) All options are to purchase shares of Common Stock and vest and become
exercisable in January 1998.
(2) Indicated grants were made in January 1997 for services rendered in 1996.
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 573,686 shares of Common Stock
granted to employees of the Company under the Stock Option Plan in January
1997.
(3) Assumes future prices of shares of Common Stock of $26.75, $43.57 and $69.38
at compounded rates of return of 0%, 5% and 10%, respectively.
AGGREGATED OPTION EXERCISES IN 1996 AND YEAR-END OPTION VALUES
The following table provides information relating to option exercises in
1996 by the individuals named in the Summary Compensation Table and the value of
each such individual's unexercised options at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1996(1) DECEMBER 31, 1996(2)
-------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF
SHARES
ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- -------------- ------------- ----------- ------------- ----------- -------------
William C. Erbey................... 924,640 $ 5,121,525 -- 115,790 $ -- $ 550,003
John R. Erbey...................... 747,880 4,116,767 44,500 89,474 934,055 425,002
Robert E. Koe...................... -- -- -- 31,579 -- 150,000
Christine A. Reich................. 222,650 1,151,863 44,500 81,579 934,055 387,500
John R. Barnes..................... 83,250 438,509 22,150 23,684 464,929 112,499
</TABLE>
- ------------------------
(1) All options are to purchase shares of Common Stock and were granted pursuant
to the Stock Option Plan. Options listed as "exercisable" include options
granted in January 1996 which became exercisable in January 1997, and
options listed as "unexercisable" consist of options granted in January 1997
which become exercisable in January 1998.
(2) Based on the $26.75 market value of a share of Common Stock at December 31,
1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1996, the Company held a residential mortgage loan with an
interest rate of 8.5% which was made by the Company to Howard H. Simon, a
director of the Company. The principal balance of this loan amounted to $116,484
at December 31, 1996, and the highest principal balance of this loan during 1996
was $131,150. The principal balance of this loan amounted to $108,000 at June
30, 1997.
106
<PAGE>
From time to time the Company raises funds by privately issuing short-term
notes to its stockholders. In 1996, the Company had a maximum of $7.6 million of
such short-term notes outstanding, including $1.0 million and $250,000 which
were held by William C. Erbey and John R. Erbey (or their affiliates),
respectively. All of such short-term notes had interest rates of 10.5% per annum
and were repaid in full in November 1996.
In September 1996, the Company loaned $6.7 million to certain of its and the
Bank's current and former officers and directors to fund their exercise of
vested stock options to purchase an aggregate of 2,713,660 shares of Common
Stock, including 924,640 shares, 175,970 shares, 747,880 shares, 222,650 shares
and 83,250 shares acquired by William C. Erbey, Barry N. Wish, John R. Erbey,
Christine A. Reich and John R. Barnes, respectively, who issued notes to the
Company in the amount $2.2 million, $423,000, $1.8 million, $583,000 and
$263,000, respectively. The aggregate amount of the foregoing indebtedness
outstanding at December 31, 1996 amounted to $3.8 million, including $1.2
million, $0, $1.6 million, $583,000 and $263,000 in the case of William C.
Erbey, Barry N. Wish, John R. Erbey, Christine A. Reich and John R. Barnes,
respectively. Such notes bear interest at 10.5% per annum, are payable in two
equal installments on March 1, 1998 and March 1, 1999 and are secured by the
related shares of Common Stock. At the time of the issuance of the foregoing
notes, the Company also agreed to loan the issuers thereof up to an additional
$1.7 million to fund the payment of additional taxes owed in connection with the
exercise of the above-referenced stock options, including $594,000, $478,000 and
$134,000 in the case of William C. Erbey, John R. Erbey and Christine A. Reich,
respectively. Notes in these amounts were issued by these persons in April 1997
and have the same terms as the above-referenced notes. At June 30, 1997, the
aggregate amount of the indebtedness of William C. Erbey, Barry N. Wish, John R.
Erbey, Christine A. Reich and John R. Barnes under the above-discussed notes was
$0, $0, $1.7 million, $717,000 and $263,000, respectively.
107
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date indicated by (i) each director and
named executive officer of the Company, (ii) all directors and current executive
officers of the Company as a group and (iii) all persons known by the Company to
own beneficially 5% or more of the outstanding Common Stock. The table is based
upon information supplied to the Company by directors, officers and principal
stockholders. Other than Mr. Harold 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.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AS OF
MARCH 31, 1997
---------------------------
<S> <C> <C>
NAME OF BENEFICIAL OWNER AMOUNT(1) PERCENT(1)
- -------------------------------------------------------------- ------------ -------------
Harold Price.................................................. 1,720,928(2) 6.4%
Directors and executive officers:
William C. Erbey............................................ 9,853,671(3) 36.8%
Barry N. Wish............................................... 5,054,117(4) 18.9%
Hon. Thomas F. Lewis........................................ -- *
W.C. Martin................................................. 2,501(5) *
Howard H. Simon............................................. 801 *
John R. Barnes.............................................. 94,400(6) *
John R. Erbey............................................... 1,020,980(7) 3.8%
Robert E. Koe............................................... 40,350(8) *
Christine A. Reich.......................................... 267,150(9) 1.0%
All directors, nominees for director and executive
officers as a group (11 persons)........................ 16,356,940 10) 60.8%
</TABLE>
- ------------------------
* Less than 1%
(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 or she 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, (i) an individual has
sole voting power and sole investment power with respect to the indicated
shares and (ii) individual holdings amount to less than 1% of the
outstanding shares of Common Stock.
(2) Includes 1,436,990 shares held by HAP Investment Partnership, the partners
of which are Harold 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 283,938 shares held by Mr. Price as nominee for
various trusts for the benefit of members of his family.
(3) Includes 6,848,790 shares held by FF Plaza Partners, a Delaware partnership
of which the partners are William C. Erbey, his spouse, E. Elaine Erbey, and
Delaware Permanent Corporation, a corporation wholly owned by William C.
Erbey. Mr. and Mrs. William C. Erbey share voting and dispositive power with
respect to the shares owned by FF Plaza Partners. Also includes 3,004,080
shares held by Erbey Holding Corporation, a corporation wholly owned by
William C. Erbey.
(4) Includes 4,807,480 shares held by Wishco, Inc., a corporation controlled by
Barry N. Wish pursuant to his ownership of 93.0% of the common stock
thereof; 175,970 shares held by B.N.W. Partners, a Delaware partnership of
which the partners are Mr. Wish and B.N.W., Inc., a corporation wholly owned
by Mr. Wish; and 70,000 shares held by the Barry Wish Family Foundation,
Inc., a charitable foundation of which Mr. Wish is a director.
108
<PAGE>
(5) Includes 1,700 shares held by Martin & Associates Management Consultants
Inc. Defined Contribution Pension Plan & Trust.
(6) Includes 83,250 shares held by a partnership controlled by Mr. Barnes. Also
includes options to acquire 11,150 shares of Common Stock which were
exercisable at or within 60 days of March 31, 1997.
(7) Includes 953,665 shares held by John R. Erbey Family Limited Partnership, a
Georgia limited partnership whose general partner is a corporation wholly
owned by John R. Erbey and whose limited partners consists of John R. Erbey,
his spouse and children. Also includes options to acquire 44,500 shares of
Common Stock which were exercisable at or within 60 days of March 31, 1997.
(8) Does not include 5,050 shares held by Mr. Koe's son and daughter.
(9) Includes 222,650 shares held by CPR Family Limited Partnership, a Georgia
limited partnership whose general partner is a corporation wholly owned by
Christine A. Reich and whose limited partners are Christine A. Reich and her
spouse. Also includes options to acquire 44,500 shares of Common Stock which
were exercisable at or within 60 days of March 31, 1997.
(10) Includes options to acquire 102,690 shares of Common Stock which were
exercisable at or within 60 days of March 31, 1997.
109
<PAGE>
DESCRIPTION OF CAPITAL SECURITIES
Pursuant to the terms of the Declaration, the Regular Trustees on behalf of
the Trust will issue the Capital Securities and the Common Securities. The
Capital Securities will represent undivided beneficial ownership interests in
the assets of the Trust and the holders thereof will be entitled to a preference
in certain circumstances with respect to Distributions and amounts payable on
redemption or liquidation over the Common Securities, as well as other benefits
as described in the Declaration. This summary of certain provisions of the
Capital Securities and the Declaration does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the provisions
of the Declaration, including the definitions therein of certain terms, and the
Trust Indenture Act. Wherever particular defined terms of the Declaration (as
supplemented or amended from time to time) are referred to herein, the
definitions of such defined terms are incorporated herein by reference.
GENERAL
The Capital Securities will rank PARI PASSU, and payments will be made
thereon pro rata, with the Common Securities except as described under
"--Subordination of Common Securities." Legal title to the Junior Subordinated
Debentures will be held by the Property Trustee in trust for the benefit of the
holders of the Capital Securities and the Common Securities. The Guarantee
executed by the Company for the benefit of the holders of the Capital Securities
will be a guarantee on a subordinated basis with respect to the Capital
Securities but will not guarantee payment of Distributions or amounts payable on
redemption or liquidation of the Capital Securities when the Trust does not have
sufficient funds available to make such payments. See "Description of
Guarantee." In such event, a holder of Capital Securities may vote to direct the
Property Trustee to enforce the Property Trustee's rights under the Junior
Subordinated Debentures. See "--Voting Rights; Amendment of the Declaration"
below. In addition, the holder of Capital Securities may, in certain
circumstances, institute a direct action against the Company for payment. See
"Description of Junior Subordinated Debentures--Enforcement of Certain Rights by
Holders of Capital Securities." The Company's obligations under the Guarantee,
taken together with its obligations under the Junior Subordinated Debentures and
the Indenture, including its obligation to pay all costs, expenses and
liabilities of the Trust (other than with respect to the Capital Securities and
the Common Securities), constitute a full and unconditional guarantee of all of
the Trust's obligations under the Capital Securities.
Holders of the Capital Securities have no preemptive or similar rights.
DISTRIBUTIONS
Distributions on each Capital Security will be payable at the annual rate of
% of the liquidation amount of $1,000, payable semi-annually in arrears on
and of each year. Distributions will accumulate from ,
1997, the date of original issuance, and commence on , 1997. The
amount of Distributions payable for any period will be computed on the basis of
a 360-day year of twelve 30-day months.
Distributions on the Capital Securities must be paid on the dates payable to
the extent that the Trust has funds available for the payment of such
Distributions. The revenue of the Trust available for distribution to holders of
its Capital Securities will be limited to payments under the Junior Subordinated
Debentures in which the Trust will invest the proceeds from the issuance and
sale of the Capital Securities and the Common Securities. See "Description of
Junior Subordinated Debentures." If the Company does not make interest payments
on the Junior Subordinated Debentures, the Property Trustee will not have funds
available to pay Distributions on the Capital Securities.
The Company will have the right under the Indenture to defer the payment of
interest on the Junior Subordinated Debentures at any time or from time to time
for a period not exceeding 10 consecutive semi-annual periods (each, an
"Extension Period"), provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures. As a consequence of any
such extension, semi-
110
<PAGE>
annual Distributions on the Capital Securities will be deferred by the Trust
during any such Extension Period. Accordingly, there could be multiple Extension
Periods of varying lengths throughout the term of the Junior Subordinated
Debentures. Distributions to which holders of the Capital Securities are
entitled will accumulate and compound semi-annually at the rate (to the extent
permitted by applicable law) per annum of % thereof from the relevant payment
date for such Distributions. The term "Distributions" as used herein shall
include any such compounded amounts unless the context otherwise requires.
During any such Extension Period, the Company may not, and may not permit any
subsidiary of the Company to, (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect to,
any of the Company's capital stock or (ii) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank PARI PASSU with or junior to the Junior
Subordinated Debentures or make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any subsidiary of the Company
if such guarantee ranks PARI PASSU with or junior in interest to the Junior
Subordinated Debentures (other than (a) dividends or distributions in common
stock of the Company, (b) payments under the Guarantee, (c) any declaration of a
dividend in connection with the implementation of a shareholders' rights plan,
or the issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (d) as a result of
reclassification of the Company's capital stock into one or more other classes
or series of the Company's capital stock or the exchange or conversion of one
class or series of the Company's capital stock for another class or series of
the Company's capital stock, (e) the purchase of fractional interests in the
shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged
and (f) purchases of common stock related to the issuance of common stock or
rights under any of the Company's benefit plans or any of the Company's dividend
reinvestment plans). Prior to the termination of any such Extension Period, the
Company may further extend the Extension Period, provided that no Extension
Period may exceed 10 consecutive semi-annual periods or extend beyond the Stated
Maturity of the Junior Subordinated Debentures. Upon the termination of any such
Extension Period and the payment of all amounts then due on any Interest Payment
Date, the Company may elect to begin a new Extension Period, subject to the
foregoing requirements. See "Description of the Junior Subordinated
Debentures--Option to Extend Interest Payment Period." The Company has no
current intention of exercising its right to defer payments of interest by
extending the interest payment period of the Junior Subordinated Debentures.
In the event that any date on which Distributions are payable on the Capital
Securities is not a Business Day, then payment of the Distributions payable on
such date will be made on the next succeeding day that is a Business Day (and
without any additional Distributions or other payment in respect of any such
delay), with the same force and effect as if made on the date such payment was
originally payable (each date on which Distributions are payable in accordance
with the foregoing, a "Distribution Date"). A "Business Day" shall mean any day
other than a Saturday or a Sunday, or a day on which banking institutions in The
City of New York are authorized or required by law or executive order to remain
closed or a day on which the corporate trust office of the Property Trustee or
the Indenture Trustee (as defined herein) is closed for business.
Distributions on the Capital Securities (other than distributions on a
Redemption Date) will be payable to the holders thereof as they appear on the
register of the Trust on the relevant record dates, which shall be the 15th day
of the month prior to the relevant Distribution Date. Distributions payable on
any Capital Securities that are not punctually paid on any Distribution Date
will cease to be payable to the person in whose name such Capital Securities are
registered on the relevant record date, and such defaulted Distribution will
instead be payable to the person in whose name such Capital Securities are
registered on the special record date or other specified date determined in
accordance with the Declaration.
111
<PAGE>
REDEMPTION
MANDATORY REDEMPTION. Unless a Special Event has occurred, the Capital
Securities will not be redeemable prior to , 2007. Upon the repayment or
redemption, in whole or in part, of the Junior Subordinated Debentures, whether
at Stated Maturity or upon earlier redemption as provided in the Indenture, the
proceeds from such repayment or redemption shall be applied by the Property
Trustee to redeem Capital Securities and Common Securities on a pro rata basis,
upon not less than 30 nor more than 60 days notice prior to the date fixed for
repayment or redemption. If less than all of the Junior Subordinated Debentures
are to be repaid or redeemed on a Redemption Date, then the proceeds from such
repayment or redemption shall be allocated to the redemption pro rata of the
Capital Securities and the Common Securities.
SPECIAL EVENT REDEMPTION OR DISTRIBUTION OF JUNIOR SUBORDINATED
DEBENTURES. If a Special Event shall occur and be continuing, the Company will
have the right, subject to the receipt of any necessary prior regulatory
approval, to either (i) redeem within 90 days following the occurrence of such
Special Event the Junior Subordinated Debentures outstanding on the date of
redemption (the "Redemption Date") in whole (but not in part) at a redemption
price with respect to the Capital Securities equal to the Special Event
Redemption Price (which is equal to the Special Event Prepayment Price (as
defined herein) in respect of the Junior Subordinated Debentures) or (ii)
dissolve the Trust within 90 days following the occurrence of such Special Event
and, after satisfaction of the claims of creditors of the Trust as provided by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Capital Securities in liquidation of the Trust. Under current
United States federal income tax law and interpretations thereof and assuming,
as expected, the Trust is treated as a grantor trust, a distribution of the
Junior Subordinated Debentures should not be a taxable event to holders of the
Capital Securities. Should there be a change in law, a change in legal
interpretation, certain Tax Events or other circumstances, however, the
distribution could be a taxable event to holders of the Capital Securities. See
"Certain United States Federal Income Tax Consequences--Distribution of Junior
Subordinated Debentures or Cash Upon Liquidation of the Trust."
If the Company does not elect either option described above, the Capital
Securities will remain outstanding until the repayment of the Junior
Subordinated Debentures whether at Stated Maturity or their earlier redemption,
and in the event a Tax Event has occurred and is continuing, the Company will be
obligated to pay any additional taxes, duties, assessments and other
governmental charges (other than withholding taxes) to which the Trust has
become subject as a result of a Tax Event.
"Special Event" means a Tax Event, Regulatory Capital Event or an Investment
Company Event. "Tax Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of any
amendment to, change in or announced proposed change in the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is adopted or which proposed
change, pronouncement or decision is announced on or after the date of original
issuance of the Capital Securities under the Declaration, there is more than an
insubstantial risk that (i) the Trust is, or will be within 90 days of the date
of such opinion, subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, (ii) interest
payable by the Company on such Junior Subordinated Debentures is not, or within
90 days of the date of such opinion, will not be, deductible by the Company, in
whole or in part, for United States federal income tax purposes, or (iii) the
Trust is, or will be within 90 days of the date of such opinion, subject to more
than a DE MINIMIS amount of other taxes, duties or other governmental charges.
"Regulatory Capital Event" means that the Company shall have received an opinion
of independent bank regulatory counsel experienced in such matters to the effect
that, as a result of (a) any amendment to or change (including any announced
prospective change) in the laws (or any regulations thereunder) of the United
States or any rules, guidelines or policies of the appropriate regulatory
authorities or (b) any official administrative pronouncement or judicial
decision interpreting or
112
<PAGE>
applying such laws or regulations, which amendment or change is effective or
such pronouncement or decision is announced on or after the date of original
issuance of the Capital Securities, the Capital Securities do not constitute, or
within 90 days of the date thereof, will not constitute Tier I capital or its
then equivalent, applied as if the Company or its successor were a bank holding
company (as that concept is used in the guidelines or regulations issued by the
Board of Governors of the Federal Reserve System (as then in effect); provided,
however, that the distribution of the Junior Subordinated Debentures in
connection with the liquidation of the Trust by the Company shall not in and of
itself constitute a Regulatory Capital Event unless such liquidation shall have
occurred in connection with a Tax Event or an Investment Company Event.
"Investment Company Event" means the receipt by the Trust of an opinion of
counsel, rendered by a law firm experienced in such matters to the effect that,
as a result of the occurrence of a change in law or regulation or a change in
interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in 1940 Act Law"),
the Trust is or will be considered an "investment company" that is required to
be registered under the Investment Company Act of 1940, as amended ("Investment
Company Act"), which Change in 1940 Act Law becomes effective on or after the
date of original issuance of the Capital Securities.
REDEMPTION PROCEDURES
Capital Securities redeemed on each Redemption Date shall be redeemed at the
redemption price in respect of the Junior Subordinated Debentures (the
"Redemption Price") with the applicable proceeds from the contemporaneous
redemption or payment at Stated Maturity of the Junior Subordinated Debentures.
Redemptions of the Capital Securities shall be made and the Redemption Price
shall be payable on each Redemption Date only to the extent that the Trust has
sufficient funds available for the payment of such Redemption Price. See also
"--Subordination of Common Securities."
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Capital Securities to be
redeemed at its registered address. If the Trust gives a notice of redemption in
respect of the Capital Securities, then, by 12:00 noon, New York City time, on
the Redemption Date, to the extent funds are available, the Property Trustee
will deposit irrevocably with The Depository Trust Company ("DTC") or its
nominee funds sufficient to pay the applicable Redemption Price and will give
DTC irrevocable instructions and authority to pay the Redemption Price to the
holders of the Capital Securities. See "--Book-Entry Issuance." If any Capital
Securities are no longer in book-entry form, the Trust, to the extent funds are
available, will irrevocably deposit with the paying agent for the Capital
Securities funds sufficient to pay the applicable Redemption Price and will give
the paying agent irrevocable instructions and authority to pay the Redemption
Price to the holders thereof upon surrender of their certificates evidencing the
Capital Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the Redemption Date for any Capital Security called for redemption
shall be payable to the holders of such Capital Security on the relevant record
dates for the related Distribution Dates. If notice of redemption shall have
been given and funds deposited as required, then upon the date of such deposit,
all rights of the holders of such Capital Securities so called for redemption
will cease, except the right of the holders of such Capital Securities to
receive the Redemption Price, but without interest on such Redemption Price, and
such Capital Securities will cease to be outstanding. In the event that any date
fixed for redemption of Capital Securities is not a Business Day, then payment
of the Redemption Price payable on such date will be made on the next succeeding
day which is a Business Day (and without any interest or other payment in
respect of any such delay), except that, if such Business Day falls in the next
calendar year, such payment will be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on the date such
payment was originally payable. In the event that payment of the Redemption
Price in respect of Capital Securities called for redemption is improperly
withheld or refused and not paid either by the Trust or by the Company pursuant
to the Guarantee as described under "Description of Guarantee," Distributions on
such Capital Securities will continue to accrue at the then applicable rate,
from the Redemption Date originally established by the
113
<PAGE>
Trust for the Capital Securities to the date such Redemption Price is actually
paid, in which case the actual payment date will be the date fixed for
redemption for purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Capital Securities by tender, in the open
market or by private agreement.
The Trust may not redeem fewer than all of the outstanding Capital
Securities unless all accrued and unpaid Distributions have been paid on all
Capital Securities for all semi-annual distribution periods terminating on or
prior to the date of redemption. If less than all of the Capital Securities and
Common Securities issued by the Trust are to be redeemed on a Redemption Date,
then the aggregate amount of such Capital Securities and Common Securities to be
redeemed shall be allocated pro rata among the Capital Securities and the Common
Securities. If the Capital Securities are in book-entry form, they will be
redeemed as described below under "--Book-Entry Issuance." If not, the
particular Capital Securities to be redeemed shall be selected on a pro rata
basis not more than 60 days prior to the Redemption Date by the Property Trustee
from the outstanding Capital Securities not previously called for redemption, by
such method as the Property Trustee shall deem fair and appropriate and which
may provide for the selection for redemption of portions (equal to $1,000 or an
integral multiple of $1,000 in excess thereof) of the liquidation amount of
Capital Securities of a denomination larger than $1,000. The Property Trustee
shall promptly notify the Trust registrar in writing of the Capital Securities
selected for redemption and, in the case of any Capital Security selected for
partial redemption, the liquidation amount thereof to be redeemed. For all
purposes of the Declaration, unless the context otherwise requires, all
provisions relating to the redemption of Capital Securities shall relate, in the
case of any Capital Security redeemed or to be redeemed only in part, to the
portion of the aggregate liquidation amount of Capital Securities which has been
or is to be redeemed.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Capital
Securities and the Common Securities, as applicable, shall be made pro rata
based on the liquidation amount of such Capital Securities and Common
Securities; provided, however, that if on any Distribution Date or Redemption
Date an Indenture Event of Default (as defined herein) shall have occurred and
be continuing, no payment of any Distribution on, or Redemption Price of, any of
the Common Securities, and no other payment on account of the redemption,
liquidation or other acquisition of such Common Securities, shall be made unless
payment in full in cash of all accumulated and unpaid Distributions on all of
the outstanding Capital Securities for all Distribution periods terminating on
or prior thereto, or in the case of payment of the Redemption Price the full
amount of such Redemption Price on all of the outstanding Capital Securities
then called for redemption, shall have been made or provided for, and all funds
available to the Property Trustee shall first be applied to the payment in full
in cash of all Distributions on, or Redemption Price of, the Capital Securities
then due and payable.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
Pursuant to the Declaration, the Trust shall automatically terminate upon
expiration of its term and shall dissolve on the first to occur of: (i) certain
events of bankruptcy, dissolution or liquidation of the Company; (ii) the
distribution of the Junior Subordinated Debentures to the holders of the Capital
Securities and Common Securities; (iii) the repayment of all of the Capital
Securities in connection with the maturity or redemption of all of the Junior
Subordinated Debentures; and (iv) the entry by a court of competent jurisdiction
of an order for the dissolution of the Trust.
If an early dissolution occurs as described in clause (i), (ii) or (iv)
above, the Trust shall be liquidated by the Trustees as expeditiously as the
Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, to the
holders of the Capital Securities and Common Securities their pro rata interest
in the Junior Subordinated Debentures, unless such distribution is determined by
the Property Trustee not to be practicable, in which event such holders will be
114
<PAGE>
entitled to receive out of the assets of the Trust available for distribution to
holders, after satisfaction of liabilities to creditors of the Trust as provided
by applicable law, an amount equal to, in the case of holders of Capital
Securities, the aggregate of the liquidation amount plus accrued and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then the amounts payable directly by the Trust on the
Capital Securities shall be paid on a pro rata basis. The holder(s) of the
Common Securities will be entitled to receive distributions upon any such
liquidation pro rata with the holders of the Capital Securities, except that if
an Indenture Event of Default has occurred and is continuing, the Capital
Securities shall have a priority over the Common Securities.
After the liquidation date is fixed for any distribution of Junior
Subordinated Debentures to holders of the Capital Securities (i) the Capital
Securities will no longer be deemed to be outstanding, (ii) DTC or its nominee,
as a record holder of Capital Securities, will receive a registered global
certificate or certificates representing the Junior Subordinated Debentures to
be delivered upon such distribution and (iii) any certificates representing
Capital Securities held in certificated form will be deemed to represent Junior
Subordinated Debentures having a principal amount equal to the liquidation
amount of such Capital Securities, and bearing accrued and unpaid interest in an
amount equal to the accrued and unpaid Distributions on such Capital Securities,
until such certificates are presented for cancellation, whereupon the Company
will issue to such holder, and the Indenture Trustee will authenticate, a
certificate representing such Junior Subordinated Debentures.
TRUST ENFORCEMENT EVENTS
An Indenture Event of Default constitutes a Trust Enforcement Event under
the Declaration with respect to the Trust Securities, provided that pursuant to
the Declaration, the holder of the Common Securities will be deemed to have
waived any Trust Enforcement Event with respect to the Common Securities until
all Trust Enforcement Events with respect to the Capital Securities have been
cured, waived or otherwise eliminated. Until such Trust Enforcement Event with
respect to the Capital Securities has been so cured, waived or otherwise
eliminated, the Property Trustee will be deemed to be acting solely on behalf of
the holders of the Capital Securities and only the holders of the Capital
Securities will have the right to direct the Property Trustee with respect to
certain matters under the Declaration, and therefore the Indenture.
Upon the occurrence of a Trust Enforcement Event, the Indenture Trustee (as
defined herein) or the Property Trustee as the holder of the Junior Subordinated
Debentures will have the right under the Indenture to declare the principal of
and interest on the Junior Subordinated Debentures to be immediately due and
payable. Each of the Company and the Trust is required to file annually with the
Property Trustee an officer's certificate as to its compliance with all
conditions and covenants under the Declaration. If the Property Trustee fails to
enforce its rights with respect to the Junior Subordinated Debentures held by
the Trust, any record holder of Capital Securities may, to the fullest extent
permitted by applicable law, institute legal proceedings directly against the
Company to enforce the Property Trustee's rights under such Junior Subordinated
Debentures without first instituting any legal proceedings against such Property
Trustee or any other person or entity. In addition, if a Trust Enforcement Event
has occurred and is continuing and such event is attributable to the failure of
the Company to pay interest, principal or other required payments on the Junior
Subordinated Debentures issued to the Trust on the date such interest, principal
or other payment is otherwise payable, then a record holder of Capital
Securities may, on or after the respective due dates specified in the Junior
Subordinated Debentures, institute a proceeding directly against the Company for
enforcement of payment on Junior Subordinated Debentures having a principal
amount equal to the aggregate liquidation amount of the Capital Securities held
by such holder (a "Direct Action"). In connection with such Direct Action, the
Company will be subrogated to the rights of such record holder of Capital
Securities to the extent of any payment made by the Company to such record
holder of Capital Securities.
115
<PAGE>
VOTING RIGHTS; AMENDMENT OF THE DECLARATION
Except as provided below and under "Description of Guarantee--Amendments and
Assignment" and as otherwise required by law and the Declaration, the holders of
the Capital Securities will have no voting rights.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee or
executing any trust or power conferred on the Property Trustee with respect to
such Junior Subordinated Debentures, (ii) waive any past default that is
waivable under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Junior Subordinated Debentures shall
be due and payable or (iv) consent to any amendment, modification or termination
of the Indenture or such Junior Subordinated Debentures, where such consent
shall be required, without, in each case, obtaining the prior approval of the
holders of a majority in aggregate liquidation amount of all outstanding Capital
Securities; provided, however, that where a consent under the Indenture would
require the consent of each holder of Junior Subordinated Debentures affected
thereby, no such consent shall be given by the Property Trustee without the
prior consent of each holder of Capital Securities. The Trustees shall not
revoke any action previously authorized or approved by a vote of the holders of
the Capital Securities except pursuant to a subsequent vote of the holders of
the Capital Securities. The Property Trustee shall notify each holder of record
of the Capital Securities of any notice of default which it receives with
respect to the Junior Subordinated Debentures. In addition to obtaining the
foregoing approvals of the holders of the Capital Securities, prior to taking
any of the foregoing actions, the Trustees shall receive an opinion of counsel
experienced in such matters to the effect that the Trust will not be classified
as other than a grantor trust for United States federal income tax purposes on
account of such action.
The Declaration may be amended from time to time by the Company and a
majority of the Regular Trustees (and in certain circumstances the Property
Trustee and the Delaware Trustee), without the consent of the holders of the
Capital Securities, (i) to cure any ambiguity, correct or supplement any
provisions in the Declaration that may be inconsistent with any other provision,
or to make any other provisions with respect to matters or questions arising
under the Declaration that shall not be inconsistent with the other provisions
of the Declaration, or (ii) to modify, eliminate or add to any provisions of the
Declaration to such extent as shall be necessary to ensure that the Trust will
be classified as a grantor trust for United States federal income tax purposes
at all times that any Capital Securities and Common Securities are outstanding
or to ensure that the Trust will not be required to register as an "investment
company" under the Investment Company Act, provided, however, that such action
shall not adversely affect in any material respect the interests of any holder
of Capital Securities or Common Securities, and any amendments of the
Declaration shall become effective when notice thereof is given to the holders
of Capital Securities and Common Securities. The Declaration may be amended by
the Company and a majority of the Regular Trustees with (i) the consent of
holders representing not less than a majority (based upon liquidation amounts)
of the outstanding Capital Securities and Common Securities and (ii) receipt by
the Regular Trustees of an opinion of counsel to the effect that such amendment
or the exercise of any power granted to the Regular Trustees in accordance with
such amendment will not affect the Trust's status as a grantor trust for United
States federal income tax purposes or the Trust's exemption from status of an
"investment company" under the Investment Company Act, provided, further that
without the consent of each holder of Capital Securities and Common Securities
affected thereby, the Declaration may not be amended to (i) change the amount or
timing of any Distribution on the Capital Securities and Common Securities or
otherwise adversely affect the amount of any Distribution required to be made in
respect of the Capital Securities and Common Securities as of a specified date
or (ii) restrict the right of a holder of Capital Securities or Common
Securities to institute suit for the enforcement of any such payment on or after
such date.
Any required approval of holders of Capital Securities may be given at a
meeting of holders of Capital Securities convened for such purpose or pursuant
to written consent. The Regular Trustees will cause a
116
<PAGE>
notice of any meeting at which holders of Capital Securities are entitled to
vote, or of any matter upon which action by written consent of such holders is
to be taken, to be given to each holder of record of Capital Securities in the
manner set forth in the Declaration.
No vote or consent of the holders of Capital Securities will be required for
the Trust to redeem and cancel its Capital Securities in accordance with the
Declaration.
Notwithstanding that holders of Capital Securities are entitled to vote or
consent under any of the circumstances described above, any of the Capital
Securities that are owned by the Company, the Trustees or any affiliate of the
Company or any Trustees, shall, for purposes of such vote or consent, be treated
as if they were not outstanding.
EXPENSES AND TAXES
In the Indenture, the Company, as borrower, has agreed to pay all debts and
other obligations (other than with respect to the Capital Securities) and all
costs and expenses of the Trust (including costs and expenses relating to the
organization of the Trust, the fees and expenses of the Trustees and the costs
and expenses relating to the operation of the Trust) and to pay any and all
taxes and all costs and expenses with respect thereto (other than withholding
taxes) to which the Trust might become subject. The foregoing obligations of the
Company under the Indenture are for the benefit of, and shall be enforceable by,
any person to whom any such debts, obligations, costs, expenses and taxes are
owed (a "Creditor") whether or not such Creditor has received notice thereof.
Any such Creditor may enforce such obligations of the Company directly against
the Company, and the Company has irrevocably waived any right or remedy to
require that any such Creditor take any action against the Trust or any other
person before proceeding against the Company. The Company has also agreed in the
Indenture to execute such additional agreements as may be necessary or desirable
to give full effect to the foregoing.
BOOK-ENTRY ISSUANCE
DTC will act as securities depositary for all of the Capital Securities. The
Capital Securities will be issued only as fully-registered securities registered
in the name of Cede & Co. (DTC's nominee). One or more fully-registered global
certificates will be issued for the Capital Securities, representing in the
aggregate the total number of Capital Securities, and will be deposited with
DTC.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others,
such as securities brokers and dealers, banks and trust companies that clear
through or maintain custodial relationships with Direct Participants, either
directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its Participants are on file with the Commission.
Purchases of Capital Securities within the DTC system must be made by or
through Direct Participants, which will receive a credit for the Capital
Securities on DTC's records. The ownership interest of each actual purchaser of
each Capital Security ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
117
<PAGE>
Participants through which the Beneficial Owners purchased Capital Securities.
Transfers of ownership interests in the Capital Securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in Capital Securities, except in the event that use of
the book-entry system for the Capital Securities of the Trust is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Capital
Securities; DTC's records reflect only the identity of the Direct Participants
to whose accounts such Capital Securities are credited, which may or may not be
the Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Redemption notices shall be sent to Cede & Co. as the registered holder of
the Capital Securities. If less than all of the Capital Securities are being
redeemed, DTC's current practice is to determine by lot the amount of the
interest of each Direct Participant to be redeemed.
Although voting with respect to the Capital Securities is limited to the
holders of record of the Capital Securities, in those instances in which a vote
is required, neither DTC nor Cede & Co. will itself consent or vote with respect
to Capital Securities. Under its usual procedures, DTC would mail an omnibus
proxy (the "Omnibus Proxy") to the Property Trustee as soon as possible after
the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting
rights to those Direct Participants to whose accounts such Capital Securities
are credited on the record date (identified in a listing attached to the Omnibus
Proxy).
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and Beneficial Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Distribution payments on the Capital Securities will be made by the Property
Trustee to DTC. DTC's practice is to credit Direct Participants' accounts on the
relevant payment date in accordance with their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive payments
on such payment date. Payments by Participants to Beneficial Owners will be
governed by standing instructions and customary practices and will be the
responsibility of such Participant and not of DTC, the Property Trustee, the
Trust or the Company, subject to any statutory or regulatory requirements as may
be in effect from time to time. Payment of Distributions to DTC is the
responsibility of the Property Trustee, disbursement of such payments to Direct
Participants is the responsibility of DTC, and disbursements of such payments to
the Beneficial Owners is the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depositary with
respect to any of the Capital Securities at any time by giving reasonable notice
to the Property Trustee and the Company. In the event that a successor
securities depositary is not obtained, definitive Capital Securities
certificates representing such Capital Securities are required to be printed and
delivered. The Company, at its option, may decide to discontinue use of the
system of book-entry transfers through DTC (or a successor depositary). After an
Indenture Event of Default, the holders of a majority in liquidation amount of
Capital Securities may determine to discontinue the system of book-entry
transfers through DTC. In any such event, definitive certificates for the
Capital Securities will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Trust or the Company believe to be
accurate, but the Trust and the Company assume no responsibility for the
accuracy thereof. None of the Trustees, the Trust or the Company has any
responsibility for the performance by DTC or its Participants of their
respective obligations as described herein or under the rules and procedures
governing their respective operations.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Capital Securities.
118
<PAGE>
Registration of transfers of Capital Securities will be effected without
charge by or on behalf of the Trust, but upon payment of any tax or other
governmental charges that may be imposed in connection with any transfer or
exchange. The Trust will not be required (i) to register or cause to be
registered the transfer or exchange of the Capital Securities during a period
beginning at the opening of business 15 days before the day of the mailing of
the relevant notice of redemption and ending at the close of business on the day
of mailing of such notice of redemption or (ii) to register or cause to be
registered the transfer or exchange of any Capital Securities so selected for
redemption, except in the case of any Capital Securities being redeemed in part,
any portion thereof not to be redeemed.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance of a
Trust Enforcement Event, undertakes to perform only such duties as are
specifically set forth in the Declaration and, after such Trust Enforcement
Event, must exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Declaration at the request of any holder of Capital
Securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that might be incurred thereby. If no Trust Enforcement Event
has occurred and is continuing and the Property Trustee is required to decide
between alternative causes of action, construe ambiguous provisions in the
Declaration or is unsure of the application of any provision of the Declaration,
and the matter is not one on which holders of Capital Securities are entitled
under the Declaration to vote, then the Property Trustee may, but shall be under
no duty to, take such action as is directed by the Company and, if not so
directed, shall take such action as it deems advisable and in the best interests
of the holders of the Capital Securities and the Common Securities and will have
no liability except for its own bad faith, negligence or willful misconduct.
PAYMENT AND PAYING AGENCY
Payments in respect of the Capital Securities shall be made to DTC, which
shall credit the relevant accounts at DTC on the applicable Distribution Dates
or, if the Capital Securities are not held by DTC, such payments shall be made
by check mailed to the address of the holder entitled thereto as such address
shall appear on the Register. The paying agent (the "Paying Agent") shall
initially be the Property Trustee and any co-paying agent chosen by the Property
Trustee and acceptable to the Regular Trustees and the Company. The Paying Agent
shall be permitted to resign as Paying Agent upon 30 days' written notice to the
Property Trustee and the Company. In the event that the Property Trustee shall
no longer be the Paying Agent, the Regular Trustees shall appoint a successor
(which shall be a bank or trust company acceptable to the Regular Trustees and
the Company) to act as Paying Agent.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other Person, except as
described below. The Trust may, at the request of the Company, with the consent
of the Regular Trustees and without the consent of the holders of the Capital
Securities, the Delaware Trustee or the Property Trustee merge with or into,
consolidate, amalgamate, be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to a trust organized as such
under the laws of any State; provided that (i) such successor entity (if not the
Trust) either (a) expressly assumes all of the obligations of the Trust with
respect to the Capital Securities or (b) substitutes for the Capital Securities
other securities having substantially the same terms as the Capital Securities
(the "Successor Securities") so long as the Successor Securities rank the same
as the Capital Securities rank in priority with respect to distributions and
payments upon liquidation, redemption and otherwise, (ii) if the Trust is not
the Successor Entity, the Company expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee as the
holder of the Junior Subordinated Debentures, (iii) the
119
<PAGE>
Successor Securities are listed, or any Successor Securities will be listed upon
notification of issuance, on any national securities exchange or other
organization on which the Capital Securities are then listed, if any, (iv) such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease
does not cause the Capital Securities (including any Successor Securities) to be
downgraded by any nationally-recognized statistical rating organization, (v)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
holders of the Capital Securities (including any Successor Securities) in any
material respect, (vi) such successor entity has a purpose substantially
identical to that of the Trust, (vii) prior to such merger, consolidation,
amalgamation, replacement, conveyance, transfer, or lease, the Company has
received an opinion from independent counsel to the Trust experienced in such
matters to the effect that (a) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Capital Securities (including
any Successor Securities) in any material respect and (b) following such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, (1)
neither the Trust nor such successor entity will be required to register as an
investment company under the Investment Company Act and (2) the Trust or the
successor entity will continue to be classified as a grantor trust for United
States federal income tax purposes, (viii) the Company or any permitted
successor or assignee owns all of the Common Securities of such successor entity
and guarantees the obligations of such successor entity under the Successor
Securities at least to the extent provided by the Guarantee and (ix) such
successor entity (if not the Trust) expressly assumes all of the obligations of
the Trust with respect to the Trustees. Notwithstanding the foregoing, the Trust
shall not, except with the consent of holders of 100% in aggregate liquidation
amount of the Capital Securities, consolidate, amalgamate, merge with or into,
be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the Trust or the successor entity to be classified as other than a
grantor trust for United States federal income tax purposes.
MERGER OR CONSOLIDATION OF TRUSTEES
Any entity into which the Property Trustee, the Delaware Trustee or any
Regular Trustee that is not a natural person may be merged or converted or with
which it may be consolidated, or any entity resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
entity succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee under the Declaration,
provided such entity shall be otherwise qualified and eligible.
MISCELLANEOUS
The Regular Trustees are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust will not be deemed to be
an "investment company" required to be registered under the Investment Company
Act or classified as other than a grantor trust for United States federal income
tax purposes and so that the Junior Subordinated Debentures will be treated as
indebtedness of the Company for United States federal income tax purposes. In
this connection, the Company and the Regular Trustees are authorized to take any
action, not inconsistent with applicable law, the Certificate of Trust or the
Declaration, that the Company and the Regular Trustees determine in their
discretion to be necessary or desirable for such purposes, as long as such
action does not materially adversely affect the interests of the holders of the
Capital Securities.
The Trust may not borrow money nor issue debt nor mortgage or pledge any of
its assets.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under an Indenture (the
"Indenture"), between the Company and The Chase Manhattan Bank, as trustee (the
"Indenture Trustee"). This summary of certain terms and provisions of the Junior
Subordinated Debentures and the Indenture does not purport to
120
<PAGE>
be complete and is subject to, and is qualified in its entirety by reference to,
the Indenture, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, and to the Trust Indenture Act.
Whenever particular defined terms of the Indenture are referred to herein, such
defined terms are incorporated herein by reference.
GENERAL
Concurrently with the issuance of the Capital Securities, the Trust will
invest the proceeds thereof and the consideration paid by the Company for the
Common Securities in the Junior Subordinated Debentures issued by the Company.
The Junior Subordinated Debentures will be in the principal amount equal to the
aggregate liquidation amount of the Capital Securities plus the Company's
concurrent investment in the Common Securities. The Junior Subordinated
Debentures will bear interest at the annual rate of % of the principal amount
thereof, payable semi-annually in arrears on and of each year (each,
an "Interest Payment Date"), commencing , 1997, to the person in
whose name each Junior Subordinated Debenture is registered, subject to certain
exceptions, at the close of business on the 15th day of the month preceding the
relevant Interest Payment Date. It is anticipated that, until the liquidation,
if any, of the Trust, each Junior Subordinated Debenture will be held in the
name of the Property Trustee in trust for the benefit of the holders of the
Capital Securities and the Common Securities. The amount of interest payable for
any period will be computed on the basis of a 360-day year of twelve 30-day
months. In the event that any date on which interest is payable on the Junior
Subordinated Debentures is not a Business Day, then payment of the interest
payable on such date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
with the same force and effect as if made on the date such payment was
originally payable. Accrued interest that is not paid on the applicable Interest
Payment Date will bear additional interest on the amount thereof (to the extent
permitted by law) at the rate per annum of % thereof, compounded
semi-annually. The term "interest" as used herein shall include semi-annual
interest payments and interest on semi-annual interest payments not paid on the
applicable Interest Payment Date, as applicable.
The Junior Subordinated Debentures will mature on , 2027.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Indebtedness (as defined
below) of the Company. See "Description of Junior Subordinated
Debentures--Subordination."
The federal banking agencies possess broad powers to take corrective action
as deemed appropriate for an insured depositary institution, including without
limitation, under certain circumstances, the ability to prohibit the payment of
principal or interest on subordinated debt.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
So long as no Indenture Event of Default has occurred and is continuing, the
Company has the right under the Indenture to defer the payment of interest at
any time or from time to time for a period not exceeding 10 consecutive
semi-annual periods with respect to each Extension Period, provided that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. At the end of such Extension Period, the Company must
pay all interest then accrued and unpaid (together with interest thereon at the
annual rate of %, compounded semi-annually, to the extent permitted by
applicable law). During an Extension Period, interest will continue to accrue
and holders of Junior Subordinated Debentures (or holders of Capital Securities
while the Capital Securities are outstanding) will be required to accrue
interest income (as OID) for United States federal income tax purposes. See
"Certain United States Federal Income Tax Consequences--Original Issue
Discount."
During any such Extension Period, the Company may not, and may not permit
any subsidiary of the Company to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock or (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the
121
<PAGE>
Company that rank PARI PASSU with or junior in interest to the Junior
Subordinated Debentures or make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any subsidiary of the Company
if such guarantee ranks PARI PASSU or junior in interest to the Junior
Subordinated Debentures (other than (a) dividends or distributions in common
stock of the Company, (b) payments under the Guarantee, (c) any declaration of a
dividend in connection with the implementation of a shareholders' rights plan,
or the issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, (d) as a result of
reclassification of the Company's capital stock into one or more other classes
or series of the Company's capital stock or the exchange or conversion of one
class or series of the Company's capital stock for another class or series of
the Company's capital stock, (e) the purchase of fractional interests in the
shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged
and (f) purchases of common stock related to the issuance of common stock or
rights under any of the Company's benefit plans or any of the Company's dividend
reinvestment plans). Prior to the termination of any such Extension Period, the
Company may further extend the Extension Period, provided that no Extension
Period may exceed 10 consecutive semi-annual periods or extend beyond the Stated
Maturity of the Junior Subordinated Debentures. Upon the termination of any such
Extension Period and the payment of all amounts then due on any Interest Payment
Date, the Company may elect to begin a new Extension Period subject to the above
requirements. No interest shall be due and payable during an Extension Period,
except at the end thereof. The Company must give the Property Trustee, the
Regular Trustees and the Indenture Trustee notice of its election of such
Extension Period at least one Business Day prior to the earlier of (i) the date
the Distributions on the Capital Securities would have been payable except for
the election to begin such Extension Period or (ii) the date the Regular
Trustees are required to give notice to an applicable self-regulatory
organization or to holders of such Capital Securities of the record date or the
date such Distributions are payable, but in any event not less than one Business
Day prior to such record date. The Property Trustee shall give notice of the
Company's election to begin a new Extension Period to the holders of the Capital
Securities.
As a holding company, the ability of the Company to make payments of
interest and principal on the Junior Subordinated Debentures will be dependent
primarily upon the receipt of dividends and other distributions from the Bank,
which is the Company's principal subsidiary. There are various regulatory and
contractual restrictions on the ability of the Bank to pay dividends or make
other payments to the Company. At March 31, 1997, the Bank could pay an
aggregate of $6.5 million in dividends to the Company without prior regulatory
approval or violating any contractual restrictions or the regulatory capital
levels committed to be maintained by the Bank as of June 30, 1997 (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Regulatory Developments"). In addition, the right of the
Company to participate in any distribution of assets of any subsidiary,
including the Bank, upon such subsidiary's liquidation or reorganization or
otherwise (and thus the ability of holders of the Capital Securities to benefit
indirectly from such distribution), will be subject to the prior claims of
creditors of that subsidiary, except to the extent that any claims of the
Company as a creditor of such subsidiary may be recognized as such. Accordingly,
the Capital Securities will effectively be subordinated to all existing and
future liabilities and obligations of the Company's subsidiaries, and holders of
the Capital Securities should look only to the assets of the Company for
payments on the Capital Securities. As of March 31, 1997, the Company's
consolidated subsidiaries had indebtedness and other liabilities of
approximately $2.3 billion. See "Risk Factors--Limited Sources for Payments on
Junior Subordinated Debentures and Other Indebtedness and Funding of Non-Banking
Activities."
122
<PAGE>
REDEMPTION
The Junior Subordinated Debentures are not redeemable prior to , 2007
unless a Special Event has occurred. The Junior Subordinated Debentures are
redeemable prior to maturity at the option of the Company, subject to the
receipt of any necessary prior regulatory approval, on or after , 2007, in
whole or in part at any time at the redemption prices (expressed as percentages
of principal amount) set forth below plus accrued and unpaid interest, if any,
to the date of redemption, if redeemed during the twelve-month period beginning
on 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------------------------------------------------------ -------------
<S> <C>
2007.................................................................................................. %
2008.................................................................................................. %
2009.................................................................................................. %
2010.................................................................................................. %
2011.................................................................................................. %
2012.................................................................................................. %
2013.................................................................................................. %
2014.................................................................................................. %
2015.................................................................................................. %
2016.................................................................................................. %
</TABLE>
On or after , 2017, the redemption price will be 100%, plus accrued
and unpaid interest, if any, to the date of redemption.
The Junior Subordinated Debentures are also redeemable at any time in whole
(but not in part), within 90 days of the occurrence of a Special Event, at a
redemption price (the "Special Event Prepayment Price") equal to the greater of
(i) 100% of the principal amount of such Junior Subordinated Debentures or (ii)
as determined by a Quotation Agent (as defined below), the sum of the present
values of the principal amount and premium payable with respect to an optional
redemption on such Junior Subordinated Debentures on , 2007, together with
scheduled payments of interest from the prepayment date to , 2007 (the
"Remaining Life") discounted to the prepayment date on a semi-annual basis
(assuming a 360-day year consisting of 30-day months) at the Adjusted Treasury
Rate, plus, in each case, accrued interest thereon to the date of prepayment.
"Adjusted Treasury Rate" means, with respect to any prepayment date, the
Treasury Rate plus (i) % if such prepayment date occurs on or before ,
1998 or (ii) % if such prepayment date occurs after , 1998.
"Treasury Rate" means (i) the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor publication which is
published weekly by the Federal Reserve and which establishes yields on actively
traded United States Treasury securities adjusted to constant maturity under the
caption "Treasury Constant Maturities," for the maturity corresponding to the
Remaining Life (if no maturity is within three months before or after the
Remaining Life, yields for the two published maturities most closely
corresponding to the Remaining Life shall be determined and the Treasury Rate
shall be interpolated or extrapolated from such yields on a straight-line basis,
rounding to the nearest month) or (ii) if such release (or any successor
release) is not published during the week preceding the calculation date or does
not contain such yields, the rate per annum equal to the semi-annual equivalent
yield to maturity of the Comparable Treasury Issue, calculated using a price for
the Comparable Treasury Issue (expressed as a percentage of its principal
amount) equal to the Comparable Treasury Price for such prepayment date. The
Treasury Rate shall be calculated on the third business day preceding the
prepayment date.
123
<PAGE>
"Comparable Treasury Issue" means with respect to any prepayment date the
United States Treasury security selected by the Quotation Agent as having a
maturity comparable to the Remaining Life that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the Remaining
Life. If no United States treasury security has a maturity which is within a
period from three months before to three months after , 2007, the two most
closely corresponding United States Treasury securities shall be used as the
Comparable Treasury Issue, and the Treasury Rate shall be interpolated or
extrapolated on a straight-line basis, rounding to the nearest month using such
securities.
"Quotation Agent" means (i) Lehman Brothers Inc. and its respective
successors; provided, however, that if the foregoing shall cease to be a primary
U.S. Government securities dealer in New York City (a "Primary Treasury
Dealer"), the Company shall substitute therefor another Primary Treasury Dealer;
and (ii) any other Primary Treasury Dealer selected by the Indenture Trustee
after consultation with the Company.
"Comparable Treasury Price" means (i) the average of five Reference Treasury
Dealer Quotations for such prepayment date, after excluding the highest and
lowest such Reference Treasury Dealer Quotations, or (ii) if the Indenture
Trustee obtains fewer than three such Reference Treasury Dealer Quotations, the
average of all such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any prepayment date, the average, as determined by the
Indenture Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Indenture Trustee by such Reference Treasury Dealer at 5:00 p.m.
New York City time, on the third business day preceding such prepayment date.
If the Junior Subordinated Debentures are redeemed, the Trust must redeem
the Capital Securities having an aggregate liquidation preference equal to the
aggregate principal amount of Junior Subordinated Debentures so redeemed. See
"Description of Capital Securities--Mandatory Redemption."
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each Holder of Junior Subordinated
Debentures to be redeemed at its registered address. Unless the Company defaults
in payment of the redemption price, on and after the redemption date interest
ceases to accrue on such Junior Subordinated Debentures or portions thereof
called for redemption.
CERTAIN COVENANTS OF THE COMPANY
The Indenture will contain, among others, the following covenants:
PAYMENT OF EXPENSES. The Company will covenant in the Indenture that if and
so long as the Trust is the holder of all Junior Subordinated Debentures, the
Company, as borrower, will pay to the Trust all fees and expenses related to the
Trust and the offering of the Capital Securities and will pay, directly or
indirectly, all ongoing costs, expenses and liabilities of the Trust (including
any taxes, duties, assessments or governmental charges of whatever nature (other
than withholding taxes) imposed by the United States or any domestic taxing
authority upon the Trust) but excluding obligations under the Capital
Securities.
LIMITATIONS ON INDEBTEDNESS. 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, and after
giving effect to, such event either the principal amount of total Funded
Indebtedness of the Company (which includes the Junior Subordinated Debentures)
would not exceed 150% of the Company's Consolidated Tangible Net Worth.
124
<PAGE>
The Bank will not, and will not permit any of its Subsidiaries to, create or
incur any Indebtedness or issue any Preferred Stock that in either case would
qualify as regulatory capital for the Bank under 12 C.F.R. Part 567 or any
successor regulation, except to the extent that after giving effect to the
creation or incurrence of such Indebtedness or the issuance of such Preferred
Stock the total of the Bank's Indebtedness and Preferred Stock that qualifies as
capital under 12 C.F.R. Part 567 does not exceed 65% of the Bank's tangible
common equity.
RESTRICTIONS ON ISSUANCE AND SALE OR DISPOSITION OF CAPITAL STOCK OF THE
BANK. The Indenture provides that the Company shall not sell, transfer or
otherwise dispose of shares of Capital Stock of the Bank or permit the Bank to
issue, sell or otherwise dispose of shares of its Capital Stock (other than
shares of Preferred Stock which do not constitute Voting Stock as permitted in
the last paragraph under "Limitations on Indebtedness" above, and except that
the Company may sell the shares of the Bank's Series A Non-Cumulative Preferred
Stock that it owns as of the date of this Prospectus) unless in either case the
Bank remains a Wholly-Owned Subsidiary of the Company. In addition, the
Indenture provides that the Company shall not permit the Bank to merge or
consolidate with any other entity (other than the Company or another
Wholly-Owned Subsidiary of the Company) unless the surviving entity is the
Company or a Wholly-Owned Subsidiary of the Company, or permit the Bank to
convey or transfer its properties and assets substantially as an entirety to any
Person except to the Company or any Wholly-Owned Subsidiary of the Company.
LIMITATION ON RESTRICTED PAYMENTS. The Company will covenant that it will
not, and will not permit any subsidiary of the Company to, (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal, interest or premium, if any, on or repay or
repurchase or redeem any debt securities of the Company that rank PARI PASSU
with or junior in interest to the Junior Subordinated Debentures or make any
guarantee payments with respect to any guarantee by the Company of the debt
securities of any subsidiary of the Company if such guarantee ranks PARI PASSU
with or junior in interest to the Junior Subordinated Debentures (other than (a)
dividends or distributions in common stock of the Company, (b) payments under
the Guarantee, (c) any declaration of a dividend in connection with the
implementation of a shareholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (d) as a result of reclassification of the Company's capital
stock into one or more other classes or series of the Company's capital stock or
the exchange or conversion of one class or series of the Company's capital stock
for another class or series of the Company's capital stock, (e) the purchase of
fractional interests in the shares of the Company's capital stock pursuant to
the conversion or exchange provisions of such capital stock or the security
being converted or exchanged and (f) purchases of common stock related to the
issuance of common stock or rights under any of the Company's benefit plans or
any of the Company's dividend reinvestment plans) if at such time (x) there
shall have occurred any event of which the Company has actual knowledge that (I)
with the giving of notice or the lapse of time, or both, would constitute an
Indenture Event of Default with respect to Junior Subordinated Debentures and
(II) in respect of which the Company shall not have taken reasonable steps to
cure, (y) the Company shall be in default with respect to its payment of any
obligations under the Guarantee or (z) the Company shall have given notice of
its election of an Extension Period as provided in the Indenture and shall not
have rescinded such notice, or such Extension Period, or any extension thereof,
shall be continuing.
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 or
any other interest or participation in, or measured by, its profits;
(b) make payments in respect of any Indebtedness owed to the Company or any
other Subsidiary;
125
<PAGE>
(c) make loans or advances to the Company or any Subsidiary or to guarantee
Indebtedness of the Company or any other Subsidiary; or
(d) sell, lease or transfer any of its properties or assets to the Company
or any of its Subsidiaries;
other than, in the case of (a), (b), (c) and (d),
(1) restrictions imposed by applicable law;
(2) restrictions existing under agreements in effect on the date of the
Indenture;
(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 and other contracts for the sale of assets;
(5) restrictions on the transfer of assets which are subject to Liens;
(6) restrictions existing under agreements evidencing Indebtedness of
any Subsidiary that is formed for the sole purpose of originating,
acquiring, holding or managing a portfolio of assets, if such Indebtedness
(i) is made without recourse to, and with no cross-collateralization against
the assets of, the Company or any other Subsidiary, and (ii) upon complete
or partial liquidation of which the Indebtedness must be correspondingly
repaid in whole or in part, as the case may be;
(7) restrictions existing under agreements evidencing Indebtedness which
is incurred after the date of the Indenture as permitted by the covenant
described under "Limitation on Indebtedness," provided that the terms and
conditions of any such restrictions are no more restrictive than those
contained in the indenture pursuant to which the Bank's 12% Subordinated
Debentures due 2005 (whether or not such issue remains outstanding) were
issued;
(8) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in
clause (d) above;
(9) secured Indebtedness otherwise permitted to be incurred pursuant to
the covenants described under "Limitations on Indebtedness" that limit the
right of the debtor to dispose of the assets securing such Indebtedness;
(10) customary provisions contained in leases entered into in the
ordinary course of business; and
(11) 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 transaction or series of related transactions is on terms that are no less
favorable to the Company or such Subsidiary, as the case may be, than would be
available in a comparable transaction in an arm's length dealing with a Person
that is not such an Affiliate or, in the absence of such a comparable
transaction, on terms that the Board of Directors determines in good faith would
be offered to a Person that is not an Affiliate; (ii) with respect to any
transaction or series of related transactions involving aggregate payments in
excess of $1 million, the Company delivers an officers' certificate to the
Trustee
126
<PAGE>
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 transactions involving aggregate payments in excess of $5
million, or in the event that no members of the Board of Directors are
Disinterested Directors with respect to any transaction or series of
transactions included in clause (ii), (x) in the case of a transaction involving
real property, the aggregate rental or sale price of such real property shall be
the Fair Market Value of such real property as determined in a written opinion
by a nationally recognized expert with experience in appraising the terms and
conditions of the type of transaction or series of transactions for which
approval is required and (y) in all other cases, the Company delivers to the
Trustee a written opinion of a nationally-recognized expert with experience in
appraising the terms and conditions of the type of transaction or series of
transactions for which approval is required to the effect that the transaction
or series of transactions are fair to the Company or such Subsidiary from a
financial point of view. The limitations set forth in this paragraph will not
apply to (i) transactions entered into pursuant to any agreement already in
effect on the date of the Indenture and any renewals or extensions thereof not
involving modifications adverse to the Company or any Subsidiary, (ii) normal
banking relationships with an Affiliate on an arms' length basis, (iii) any
employment agreement, stock option, employee benefit, indemnification,
compensation, business expense reimbursement or other employment-related
agreement, arrangement or plan entered into by the Company or any of its
Subsidiaries either (A) in the ordinary course of business and consistent with
the past practice of the Company or such Subsidiary or (B) which agreement,
arrangement or plan was adopted by the Board of Directors of the Company or such
Subsidiary (including a majority of the Disinterested Directors), as the case
may be, (iv) residential mortgage, credit card and other consumer loans to an
Affiliate who is an officer, director or employee of the Company or any of its
Subsidiaries and which comply with the applicable provisions of 12 U.S.C.
Section 1468(b) and any rules and regulations of the OTS thereunder, (v) any
payment made in accordance with the covenant entitled "--Limitation on
Restricted Payments," or (vi) any transaction or series of transactions in which
the total amount involved does not exceed $250,000.
LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS. The Company will not,
directly or indirectly, incur any Indebtedness that is subordinate in right of
payment to any Indebtedness of the Company unless such Indebtedness is either
(a) PARI PASSU in right of payment with the Junior Subordinated Debentures or
(b) subordinate in right of payment to the Junior Subordinated Debentures.
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
Trust to distribute to such Holder such Holder's pro rata share of the Junior
Subordinated Debentures held by the Trust in exchange for such Holder's Capital
Securities. Such Holder will then have a right to require the Company to
repurchase such Junior Subordinated Debentures at a purchase price in cash equal
to 101% of the principal amount of such Junior Subordinated Debentures, plus
accrued and unpaid interest, if any, to the date of repurchase. There can be no
assurance that the Company will have the funds available to repurchase Junior
Subordinated Debentures and Capital Securities in the event of a Change of
Control Event.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of Junior Subordinated Debentures and Capital Securities upon the occurrence of
a Change of Control Event. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of the Indenture, the Company
will comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations described in the Indenture by virtue
thereof.
EFFECTIVENESS OF COVENANTS. The covenants described under "--Limitation on
Indebtedness," "-- Restrictions on Issuance and Sale or Disposition of Capital
Stock of the Bank," "--Limitations on Dividends and Other Payment Restrictions
Affecting Subsidiaries," "--Limitation on Transactions with
127
<PAGE>
Affiliates," "--Limitation on Senior Subordinated Indebtedness" and "--Change of
Control" will no longer be in effect upon the Company reaching Investment Grade
Status.
CERTAIN DEFINITIONS
"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 10% or more of the Voting Stock of such specified
Person. Notwithstanding the foregoing, no Securitization Entity shall be deemed
an Affiliate of the Company.
"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 which Person, including, with respect to a
corporation, common stock, Preferred Stock and other corporate stock and, with
respect to a partnership, partnership interests, whether general or limited, and
any rights (other than debt securities convertible into corporate stock,
partnership interests or other capital stock), warrants or options exchangeable
for or convertible into such corporate stock, partnership interests or other
capital stock.
"Change of Control Event" means an event or series of events by which
(a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than the Existing Principal
Stockholders, is or becomes after the date of issuance of the Capital
Securities 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" (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 the beneficial owner of more than 40% of
the total voting power of all Voting Stock of the surviving or transferee
corporation of such transaction or series of transactions;
(c) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Company's Board of Directors, or
whose nomination for election by the Company's shareholders was approved by
a vote of a majority of the Directors then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved, cease for any reason to constitute
a majority of the Directors then in office;
(d) (1) the Company sells, transfers or otherwise disposes of more than
20% of the outstanding 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 more than 20% of the outstanding shares of its Capital Stock (or
securities convertible into or exercisable for more than 20%
128
<PAGE>
of the outstanding shares of its Capital Stock), (ii) conveys, transfers or
leases all or substantially all its assets to any "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act), or
(iii) merges with or into any other entity, except in the case of any event
described in this clause (2) with the Company or a Wholly-Owned Subsidiary;
or
(e) the shareholders of the Company shall approve any plan or proposal
for the liquidation or dissolution of the Company.
"Consolidated 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 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.
"Default" means an event or condition the occurrence of which would, with
the lapse of time or the giving of notice or both, become an Event of Default.
"Disqualified Capital Stock" means any Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or exchangeable), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
holder thereof, in whole or in part on, or prior to, or is exchangeable for debt
securities of the Company or its Subsidiaries prior to, the final Stated
Maturity of principal of the Junior Subordinated Debentures; 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
129
<PAGE>
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.
"FDIC" means the Federal Deposit Insurance Corporation or any successor
thereto.
"Funded Indebtedness" means, with respect to any Person as of the date of
determination, Indebtedness which by its terms has a Maturity, or is extendable
or renewable at the option of such Person to a date, which is more than twelve
months after the date of creation or incurrence of such Indebtedness.
"GAAP" means generally accepted accounting principles.
"Guaranteed Indebtedness" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any manner
by such Person, or in effect guaranteed directly or indirectly by such person
through an agreement (i) to pay or purchase such Indebtedness or to advance or
supply funds for the payment or purchase of such Indebtedness, (ii) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to
supply funds to, or in any other manner invest in, the debtor (including any
agreement to pay for property or services without requiring that such property
be received or such services be rendered), (iv) to maintain working capital or
equity capital of the debtor, or otherwise to maintain the net worth, solvency
or other financial condition of the debtor, or (v) otherwise to assure a
creditor with respect to Indebtedness against loss; provided that the term
"guarantee" shall not include endorsements for collection of deposit, in either
case in the ordinary course of business.
"Holders" means the registered holders of the Capital Securities.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
and in connection with any agreement by such Person to purchase, redeem,
exchange, convert or otherwise acquire for value any Capital Stock of such
Person now or hereafter outstanding, (ii) all obligations of such Person
evidenced by bonds, notes, debentures or other similar instruments, (iii) all
indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even if the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), but
excluding trade payables arising in the ordinary course of business, (iv) all
obligations under interest rate agreements of such Person, (v) all Capital Lease
Obligations of such Person, (vi) all Indebtedness referred to in clauses (i)
through (v) above of other Persons and all dividends payable by other Persons,
the payment of which is secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien, upon
or with respect to property (including, without limitation, accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such Indebtedness (the amount of such
obligations being deemed to be the lesser of the value of such property or asset
or the amount of the obligations so secured), (vii) all guarantees by such
Person of Guaranteed Indebtedness, (viii) all Disqualified Capital Stock (valued
at the greater of book value and voluntary or involuntary maximum fixed
repurchase price plus accrued and unpaid dividends) of such Person, and (ix) any
amendment, supplement, modification, deferral, renewal, extension, refunding or
refinancing or any liability of the types referred to in clauses (i) through
(viii) above. For purposes hereof, (x) the "maximum fixed repurchase price" of
any Disqualified Capital Stock which does not have a fixed repurchase price
shall be
130
<PAGE>
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value is to be determined in good faith by the
board of directors (or any duly authorized committee thereof) of the issuer of
such Disqualified Capital Stock, and (y) Indebtedness is deemed to be incurred
pursuant to a revolving credit facility each time an advance is made thereunder.
"Investment Grade Status," with respect to the Company, shall occur when the
senior unsecured notes of the Company (and any other unsecured senior
indebtedness) receives or would have received such a rating if such indebtedness
were outstanding a rating of "BBB-" or higher from Standard & Poor's Ratings
Group or a rating of "Baa3" or higher from Moody's Investors Service, Inc.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothetical or other encumbrance upon or with respect to any
property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired.
"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.
"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. Part
567 (and any amendment to either thereof) or any successor law or regulation, or
such higher amount of capital as the Bank, individually, is required to maintain
in order to meet any individual minimum capital standard applicable to the Bank
pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R. Section 567.3 (and any
amendment to either thereof) or any successor law or regulation.
"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.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of Voting
Stock thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of such Person or a
combination thereof.
"Voting Stock" means Capital Stock of the class or classes of which the
holders have (i) in respect of a corporation, the general voting power under
ordinary circumstances to elect at least a majority of the board of directors,
managers or trustees of such corporation (irrespective of whether or not at the
time Capital Stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency) or (ii) in respect of a
partnership, the general voting power under ordinary circumstances to elect the
board of directors or other governing board of such partnership or of the Person
which is a general partner of such partnership.
131
<PAGE>
"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.
SUBORDINATION
In the Indenture, the Company has covenanted and agreed that any Junior
Subordinated Debentures issued thereunder will be subordinated and junior in
right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets of the Company upon any
liquidation, dissolution, winding-up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Company, the holders of Senior Indebtedness will
first be entitled to receive payment in full of principal of and premium, if
any, and interest, if any, on such Senior Indebtedness before the holders of
Junior Subordinated Debentures or the Property Trustee on behalf of the holders
of Capital Securities will be entitled to receive or retain any payment in
respect of the principal of and premium, if any, or interest, if any, on the
Junior Subordinated Debentures; provided, however, that holders of Senior
Indebtedness shall not be entitled to receive payment of any such amounts to the
extent that such holders would be required by the subordination provisions of
such Senior Indebtedness to pay such amounts over to the obligees on trade
accounts payable or other liabilities arising in the ordinary course of the
Company's business.
In the event of the acceleration of the maturity of any Junior Subordinated
Debentures, the holders of all Senior Indebtedness outstanding at the time of
such acceleration will first be entitled to receive payment in full of all
amounts due thereon (including any amounts due upon acceleration) before the
holders of Junior Subordinated Debentures will be entitled to receive or retain
any payment in respect of the principal of or premium, if any, or interest, if
any, on the Junior Subordinated Debentures; provided, however, that holders of
Senior Indebtedness shall not be entitled to receive payment of any such amounts
to the extent that such holders would be required by the subordination
provisions of such Senior Indebtedness to pay such amounts over to the obligees
on trade accounts payable or other liabilities arising in the ordinary course of
the Company's business.
No payments on account of principal (or premium, if any) or interest, if
any, in respect of the Junior Subordinated Debentures may be made if there shall
have occurred and be continuing a default in any payment with respect to Senior
Indebtedness, or an event of default with respect to any Senior Indebtedness
resulting in the acceleration of the maturity thereof, or if any judicial
proceeding shall be pending with respect to any such default.
"Senior Indebtedness" means, with respect to any person, whether recourse is
to all or a portion of the assets of such person and whether or not contingent,
(i) every obligation of such person for money borrowed; (ii) every obligation of
such person evidenced by bonds, debentures, notes or other similar instruments
of such person, including obligations incurred in connection with the
acquisition of property, assets or businesses; (iii) every reimbursement
obligation of such person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such person; (iv)
every obligation of such person issued or assumed as the deferred purchase price
of property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business); (v) every capital lease
obligation of such person; (vi) every obligation of such person for claims (as
defined in Section 101(4) of the United States Bankruptcy Code of 1978, as
amended) in respect of derivative products such as interest and foreign exchange
rate contracts, commodity contracts and similar arrangements; and (vii) every
obligation of the type referred to in clauses (i) through (vi) above of another
person and all dividends of another person the payment of which, in either case,
such person has guaranteed or is responsible or liable for, directly or
indirectly, as obligor or otherwise, provided, however, that Senior Indebtedness
shall not be deemed to include (i) any indebtedness of the Company that is by
its terms subordinated to or PARI PASSU with the Junior Subordinated Debentures;
(ii) any indebtedness of the Company which when incurred and without respect to
any election under Section 1111(b) of the United States Bankruptcy Code of 1978,
as
132
<PAGE>
amended, was without recourse to the Company; (iii) any indebtedness of the
Company to any of its subsidiaries; (iv) indebtedness to any employee of the
Company; or (v) any Indebtedness in respect of debt securities issued to any
trust, or a trustee of such trust, partnership or other entity affiliated with
the Company that is a financing entity of the Company in connection with the
issuance by such financing entity of securities that are similar to the Capital
Securities.
For a description of covenants in the Indenture which restrict the
incurrence of Funded Indebtedness by the Company, see "Description of Junior
Subordinated Debentures--Certain Covenants of the Company." The Indenture places
no limitation on the amount of indebtedness or other liabilities that may be
incurred by the Company's banking subsidiaries. As of March 31, 1997, Senior
Indebtedness of the Company aggregated $125 million, and the Company's
consolidated subsidiaries had indebtedness and other liabilities of
approximately $2.3 billion to which the Junior Subordinated Debentures would be
effectively subordinated.
INDENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes an "Indenture Event of Default" with respect to the
Junior Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures when due (subject to the deferral of any due date in the case of
an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated Debentures
when due whether at maturity, upon redemption, by declaration of
acceleration or otherwise, provided, however, that an extension of the
maturity of the Junior Subordinated Debentures in accordance with the terms
of the Indenture shall not constitute an Indenture Event of Default; or
(iii) failure to observe or perform any other covenant contained in the
Indenture for 90 days after written notice to the Company from the Indenture
Trustee or the holders of at least 25% in aggregate outstanding principal
amount of outstanding Junior Subordinated Debentures; or
(iv) certain events of bankruptcy or insolvency of the Company or the
Bank.
The holders of a majority in aggregate outstanding principal amount of
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee. The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of Junior Subordinated Debentures may declare the
principal (and premium, if any) due and payable immediately upon an Indenture
Event of Default, and, should the Indenture Trustee or such holders of such
Junior Subordinated Debentures fail to make such declaration, the holders of at
least 25% in aggregate liquidation amount of the Capital Securities shall have
such right. The holders of a majority in aggregate outstanding principal amount
of Junior Subordinated Debentures may annul such declaration and waive the
default if the default (other than the non-payment of the principal of Junior
Subordinated Debentures which has become due solely by such acceleration) has
been cured and a sum sufficient to pay all matured installments of interest and
principal (and premium, if any) due otherwise than by acceleration has been
deposited with the Indenture Trustee, and should the holders of such Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate liquidation amount of the Capital
Securities shall have such right.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures affected thereby may, on behalf of the holders of
all the Junior Subordinated Debentures, waive any past default, except a default
in the payment of principal (and premium, if any) or interest (unless such
default has been cured and a sum sufficient to pay all matured installments of
interest and principal (and premium, if any) due otherwise than by acceleration
has been deposited with the Indenture Trustee) or a default in respect of a
covenant or provision which under the Indenture cannot be modified
133
<PAGE>
or amended without the consent of the holder of each outstanding Junior
Subordinated Debentures, and should the holders of such Junior Subordinated
Debentures fail to waive such default, the holders of a majority in aggregate
liquidation amount of the Capital Securities shall have such right. The Company
is required to file annually with the Indenture Trustee a certificate as to
whether or not the Company is in compliance with all the conditions and
covenants applicable to it under the Indenture.
In case an Indenture Event of Default shall occur and be continuing, the
Property Trustee will have the right to declare the principal of and the
interest on such Junior Subordinated Debentures and any other amounts payable
under the Indenture to be forthwith due and payable and to enforce its other
rights as a creditor with respect to such Junior Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CAPITAL SECURITIES
If an Indenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest or principal
on the Junior Subordinated Debentures on the date such interest or principal is
otherwise payable, a holder of Capital Securities may institute a Direct Action
for payment. The Company may not amend the Indenture to remove the foregoing
right to bring a Direct Action without the prior written consent of the holders
of all of the Capital Securities. Notwithstanding any payment made to such
holder of Capital Securities by the Company in connection with a Direct Action,
the Company shall remain obligated to pay the principal of or interest on the
Junior Subordinated Debentures held by the Trust or the Property Trustee and the
Company shall be subrogated to the rights of the holder of such Capital
Securities with respect to payments on the Capital Securities to the extent of
any payments made by the Company to such holder in any Direct Action. The
holders of Capital Securities will not be able to exercise directly any other
remedy available to the holders of the Junior Subordinated Debentures.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, unless (i) in case the Company
consolidates with or merges into another Person or conveys, transfers or leases
its properties and assets substantially as an entirety to any Person, the
successor Person is organized under the laws of the United States or any state
or the District of Columbia, and such successor Person expressly assumes the
Company's obligations on the Junior Subordinated Debentures issued under the
Indenture; (ii) immediately after giving effect thereto, no Indenture Event of
Default, and no event which, after notice or lapse of time or both, would become
an Indenture Event of Default, shall have happened and be continuing; (iii) if
at the time any Capital Securities are outstanding, such transaction is
permitted under the Declaration and Guarantee and does not give rise to any
breach or violation of the Declaration or Guarantee; (iv) any such lease shall
provide that it will remain in effect so long as any Junior Subordinated
Debentures are outstanding; and (v) certain other conditions as prescribed in
the Indenture are met.
MODIFICATION OF INDENTURE
From time to time the Company and the Indenture Trustee may, without the
consent of the holders of the Junior Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies (provided that any such action
does not materially adversely affect the interest of the holders of Junior
Subordinated Debentures or any outstanding Capital Securities) and qualifying,
or maintaining the qualification of, the Indenture under the Trust Indenture
Act. The Indenture contains provisions permitting the Company and the Indenture
Trustee, with the consent of the holders of not less than a majority in
principal amount of outstanding Junior Subordinated Debentures affected, to
modify the Indenture in a manner affecting the rights of the holders of such
Junior Subordinated Debentures; provided that no such modification may, without
the consent of the holder of each outstanding Junior Subordinated Debenture so
affected, (i) change the Stated Maturity of the Junior Subordinated Debentures,
or reduce the principal amount thereof, or reduce
134
<PAGE>
the rate or extend the time of payment of interest thereon (except such
extension as is contemplated hereby) or (ii) reduce the percentage of principal
amount of Junior Subordinated Debentures, the holders of which are required to
consent to any such modification of the Indenture, provided that, so long as any
Capital Securities remain outstanding, no such modification may be made that
adversely affects the holders of such Capital Securities in any material
respect, and no termination of the Indenture may occur, and no waiver of any
Indenture Event of Default or compliance with any covenant under the Indenture
may be effective, without the prior consent of the holders of at least a
majority of the aggregate liquidation amount of the Capital Securities unless
and until the principal of the Junior Subordinated Debentures and all accrued
and unpaid interest thereon have been paid in full and certain other conditions
are satisfied.
DISTRIBUTIONS OF JUNIOR SUBORDINATED DEBENTURES; BOOK-ENTRY ISSUANCE
Under certain circumstances involving the termination of the Trust, Junior
Subordinated Debentures may be distributed to the holders of the Capital
Securities in liquidation of the Trust after satisfaction of liabilities to
creditors of the Trust as provided by applicable law. If distributed to holders
of Capital Securities in liquidation, the Junior Subordinated Debentures will
initially be issued in the form of global securities and certificated
securities. DTC, or any successor depositary for the Capital Securities, will
act as depositary for such global securities. It is anticipated that the
depositary arrangements for such global securities would be substantially
identical to those in effect for the Capital Securities. For a description of
DTC and the terms of the depositary matters, see "Description of Capital
Securities--Book-Entry Issuance."
If the Junior Subordinated Debentures are distributed to the holders of
Capital Securities upon the liquidation of the Trust, the Company will use its
best efforts to list the Junior Subordinated Debentures on such stock exchanges,
if any, on which the Capital Securities are then listed. There can be no
assurance as to the market price of any Junior Subordinated Debentures that may
be distributed to the holders of Capital Securities.
PAYMENT AND PAYING AGENTS
The Company initially will act as Paying Agent with respect to the Junior
Subordinated Debentures except that, if the Junior Subordinated Debentures are
distributed to the holders of the Capital Securities in liquidation of such
holders' interests in the Trust, the Indenture Trustee will act as the Paying
Agent. The Company at any time may designate additional Paying Agents or rescind
the designation of any Paying Agent or approve a change in the office through
which any Paying Agent acts, except that the Company will be required to
maintain a Paying Agent at the place of payment.
Any moneys deposited with the Indenture Trustee or any Paying Agent, or then
held by the Company in trust, for the payment of the principal of and premium,
if any, or interest on any Junior Subordinated Debentures and remaining
unclaimed for two years after such principal and premium, if any, or interest
has become due and payable shall, at the request of the Company, be repaid to
the Company and the holder of such Junior Subordinated Debentures shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of New York.
DEFEASANCE AND DISCHARGE
The Indenture provides that the Company, at the Company's option: (a) will
be discharged from any and all obligations in respect of the Junior Subordinated
Debentures (except for certain obligations to register the transfer or exchange
of Junior Subordinated Debentures, replace stolen, lost or mutilated
135
<PAGE>
Junior Subordinated Debentures, maintain paying agencies and hold moneys for
payment in trust) or (b) need not comply with certain restrictive covenants of
the Indenture, in each case if the Company deposits, in trust with the Indenture
Trustee, money or U.S. Government Obligations which through the payment of
interest thereon and principal thereof in accordance with their terms will
provide money, in an amount sufficient to pay all the principal of, and interest
and premium, if any, on the Junior Subordinated Debentures on the dates such
payments are due in accordance with the terms of such Junior Subordinated
Debentures. To exercise any such option, the Company is required to deliver to
the Indenture Trustee and the Defeasance Agent, if any, an opinion of counsel to
the effect that (i) the deposit and related defeasance would not cause the
holders of the Junior Subordinated Debentures to recognize income, gain or loss
for U.S. federal income tax purposes and, in the case of a discharge pursuant to
clause (a), such opinion shall be accompanied by a private letter ruling to the
effect received by the Company from the United States Internal Service or
revenue ruling pertaining to a comparable form of transaction to the effect
published by the United States Internal Revenue Service, and (ii) if listed on
any national securities exchange, such Junior Subordinated Debentures would not
be delisted from such exchange as a result of the exercise of such option.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Indenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Company concurrently
with the issuance by the Trust of the Capital Securities for the benefit of the
holders from time to time of such Capital Securities. The Chase Manhattan Bank
will act as indenture trustee ("Guarantee Trustee") under the Guarantee for the
purposes of compliance with the Trust Indenture Act and the Guarantee will be
qualified as an Indenture under the Trust Indenture Act. This summary of certain
provisions of the Guarantee does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all of the provisions of the
Guarantee, including the definitions therein of certain terms, and the Trust
Indenture Act. The form of the Guarantee has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The Guarantee
Trustee will hold the Guarantee for the benefit of the holders of the Capital
Securities.
GENERAL
The Company will irrevocably and unconditionally agree to pay in full on a
subordinated basis, to the extent set forth herein, the Guarantee Payments (as
defined below) to the holders of the Capital Securities, as and when due,
regardless of any defense, right of set-off or counterclaim that the Trust may
have or assert other than the defense of payment. The following payments with
respect to the Capital Securities, to the extent not paid by or on behalf of the
Trust (the "Guarantee Payments"), will be subject to the Guarantee: (i) any
accumulated and unpaid Distributions required to be paid on the Capital
Securities, to the extent that the Trust has funds on hand available therefor at
the time, (ii) the Redemption Price with respect to any Capital Securities
called for redemption, to the extent that the Trust has funds on hand available
therefor at such time, or (iii) upon a voluntary or involuntary dissolution,
winding up or liquidation of the Trust (unless the Junior Subordinated
Debentures are distributed to holders of the
136
<PAGE>
Capital Securities), the lesser of (a) the aggregate of the liquidation amount
and all accrued and unpaid Distributions to the date of payment and (b) the
amount of assets of the Trust remaining available for distribution to holders of
Capital Securities. The Company's obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by the Company to the
holders of the applicable Capital Securities or by causing the Trust to pay such
amounts to such holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis of
the Trust's obligations under the Capital Securities, but will apply only to the
extent that the Trust has funds on hand available to make such payments, and is
not a guarantee of collection.
If the Company does not make interest payments on the Junior Subordinated
Debentures held by the Trust, the Trust will not be able to pay Distributions on
the Capital Securities and will not have funds legally available therefor. The
Guarantee will rank subordinate and junior in right of payment to all general
liabilities of the Company. See "--Status of the Guarantee." The Guarantee does
not limit the incurrence or issuance of other secured or unsecured debt of the
Company, whether under the Indenture or any existing or other indenture that the
Company may enter into in the future or otherwise.
The Company has, through the Guarantee, the Junior Subordinated Debentures
and the Indenture, taken together, fully and unconditionally guaranteed all of
the Trust's obligations under the Capital Securities. No single document
standing alone or operating in conjunction with fewer than all of the other
documents constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full and unconditional guarantee of
the Trust's obligations under the Capital Securities. See "Relationship Among
the Capital Securities, the Junior Subordinated Debentures and the
Guarantee--General."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Indebtedness
of the Company. The Guarantee (unlike the Indenture) does not place a limitation
on the amount of additional Senior Indebtedness that may be incurred by the
Company.
The Guarantee will constitute a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held for the benefit of the holders of the Capital Securities.
The Guarantee will not be discharged except by payment of the Guarantee Payments
in full to the extent not paid by the Trust or upon distribution of the Junior
Subordinated Debentures to the holders of the Capital Securities in exchange for
all of the Capital Securities.
The obligations of the Company under the Guarantee will be structurally
subordinated to all liabilities and obligations of the Company's subsidiaries.
See "Risk Factors--Limited Sources for Payments on Junior Subordinated
Debentures and Non-Banking Activities."
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the Capital Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate liquidation amount of the
outstanding Capital Securities. The manner of obtaining any such approval will
be as set forth under "Description of Capital Securities--Voting Rights;
Amendment of the Declaration." All guarantees and agreements contained in the
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Company and shall inure to the benefit of the holders of
the Capital Securities then outstanding.
137
<PAGE>
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate liquidation amount of the
Capital Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Capital Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Trust, the Guarantee Trustee or
any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of a
default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in each Guarantee and, after
default with respect to the Guarantee, must exercise the same degree of care and
skill as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to this provision, the Guarantee Trustee is under no obligation
to exercise any of the powers vested in it by the Guarantee at the request of
any holder of any Capital Security unless it is offered reasonable indemnity
against the costs, expenses and liabilities that might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon full
payment of the Redemption Price of the Capital Securities, upon full payment of
the amounts payable upon liquidation of the Trust or upon distribution of Junior
Subordinated Debentures to the holders of the Capital Securities in exchange for
all of the Capital Securities. The Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of the Capital
Securities must restore payment of any sums paid under the Capital Securities or
the Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
138
<PAGE>
RELATIONSHIP AMONG THE CAPITAL SECURITIES,
THE JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
Payments of Distributions and other amounts due on the Capital Securities
(to the extent the Trust has funds available for the payment of such
Distributions and other amounts) are irrevocably guaranteed by the Company as
and to the extent set forth under "Description of Guarantee." If and to the
extent that the Company does not make payments under the Junior Subordinated
Debentures, the Trust will not pay Distributions or other amounts due on the
Capital Securities. The Guarantee does not cover payment of Distributions when
the Trust does not have sufficient funds to pay such Distributions. In such
event, a holder of Capital Securities may institute a legal proceeding directly
against the Company to enforce payment of such Distributions to such holder
after the respective due dates. Taken together, the Company's obligations under
the Junior Subordinated Debentures, the Indenture and the Guarantee provide, in
the aggregate, a full and unconditional guarantee of payments of distributions
and other amounts due on the Capital Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these documents
that has the effect of providing a full and unconditional guarantee of the
Trust's obligations under the Capital Securities. The obligations of the Company
under the Guarantee and the Junior Subordinated Debentures are subordinate and
junior in right of payment to all Senior Indebtedness of the Company.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Capital Securities, primarily
because (i) the aggregate principal amount of the Junior Subordinated Debentures
will be equal to the sum of the aggregate stated liquidation amount of the
Capital Securities and the Common Securities; (ii) the interest rate and
interest and other payment dates on the Junior Subordinated Debentures will
match the Distribution rate and Distribution and other payment dates for the
related Capital Securities; (iii) the Company shall pay for all and any costs,
expenses and liabilities of the Trust except the Trust's obligations under the
Capital Securities; and (iv) the Declaration further provides that the Trust
will not engage in any activity that is not consistent with the limited purposes
of the Trust.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF CAPITAL SECURITIES
A holder of Capital Securities may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Trust or any
other person or entity.
A default or event of default under any Senior Indebtedness of the Company
will not constitute a default or Indenture Event of Default. In addition, in the
event of payment defaults under, or acceleration of, Senior Indebtedness of the
Company, the subordination provisions of the Indenture provide that no payments
may be made in respect of the Junior Subordinated Debentures until such Senior
Indebtedness has been paid in full or any payment default thereunder has been
cured or waived. Failure to make required payments on the Junior Subordinated
Debentures would constitute an Indenture Event of Default under the Indenture.
LIMITED PURPOSE OF TRUST
The Capital Securities evidence a beneficial interest in the Trust, and the
Trust exists for the sole purpose of issuing the Capital Securities and the
Common Securities and investing the proceeds thereof in Junior Subordinated
Debentures. A principal difference between the rights of a holder of a Capital
139
<PAGE>
Securities and a holder of a Junior Subordinated Debentures is that a holder of
a Junior Subordinated Debentures is entitled to receive from the Company the
principal amount of and interest accrued on Junior Subordinated Debentures held,
while a holder of Capital Securities is entitled to receive Distributions from
the Trust (or from the Company under the Guarantee) if and to the extent the
Trust has funds available for the payment of such Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
the Trust involving the liquidation of the Junior Subordinated Debentures, the
holders of the Capital Securities will be entitled to receive, out of assets
held by the Trust, the liquidation distribution in cash. See "Description of
Capital Securities--Liquidation Distribution Upon Dissolution." Upon any
voluntary or involuntary liquidation or bankruptcy of the Company, the Property
Trustee, as holder of the Junior Subordinated Debentures, would be a
subordinated creditor of the Company, subordinated in right of payment to all
Senior Indebtedness, but entitled to receive payment in full of principal and
interest before any stockholders of the Company receive payments or
distributions. Since the Company is the guarantor under the Guarantee and has
agreed to pay for all costs, expenses and liabilities of the Trust (other than
the Trust's obligations to the holders of the Capital Securities), the positions
of a holder of Capital Securities and a holder of the Junior Subordinated
Debentures relative to other creditors and to stockholders of the Company in the
event of liquidation or bankruptcy of the Company would be substantially the
same.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C.,
special United States federal income tax counsel to the Company and the Trust
("Tax Counsel"), the following summary accurately describes the material United
States federal income tax consequences that may be relevant to the purchase,
ownership and disposition of the Capital Securities. Unless otherwise stated,
this summary deals only with Capital Securities held as capital assets by United
States Persons (defined below) who purchase the Capital Securities upon original
issuance at their original offering price. As used herein, a "United States
Person" means (i) a person that is a citizen or resident of the United States,
(ii) a corporation, partnership or other entity created or organized in or under
the laws of the United States or any political subdivision thereof, (iii) an
estate the income of which is subject to United States federal income taxation
regardless of its source, or (iv) a trust if a court within the United States is
able to exercise primary supervision over the administration of such trust and
one or more United States fiduciaries have the authority to control all the
substantial decisions of such trust. The tax treatment of a holder may vary
depending on such holder's particular situation. This summary does not address
all the tax consequences that may be relevant to a particular holder or to
holders who may be subject to special tax treatment, such as banks, real estate
investment trusts, regulated investment companies, insurance companies, dealers
in securities or currencies, or tax-exempt investors. In addition, this summary
does not include any description of any alternative minimum tax consequences or
the tax laws of any state, local or foreign government that may be applicable to
a holder of Capital Securities. This summary is based on the Code, the Treasury
regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis.
The authorities on which this summary is based are subject to various
interpretations and the opinions of Tax Counsel are not binding on the Internal
Revenue Service ("IRS") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought from the IRS with
respect to the transactions described herein. Accordingly, there can be no
assurance that the IRS will not challenge the opinions expressed herein or that
a court would not sustain such a challenge. Nevertheless, Tax Counsel has
advised that it is of the view that, if challenged, the opinions expressed
herein would be sustained by a court with jurisdiction in a properly presented
case.
140
<PAGE>
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE CAPITAL
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN, AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR
OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE CAPITAL
SECURITIES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS SEE "DESCRIPTION OF CAPITAL
SECURITIES--REDEMPTION--SPECIAL EVENT REDEMPTION OR DISTRIBUTION OF JUNIOR
SUBORDINATED DEBENTURES."
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Capital Securities, Tax Counsel is of
the opinion that under current law and assuming full compliance with the terms
of the Declaration, the Trust will be classified as a grantor trust and not as
an association taxable as a corporation for United States federal income tax
purposes. Accordingly, for United States federal income tax purposes, each
beneficial owner (a "Holder") of Capital Securities will be treated as owning an
undivided beneficial interest in the Junior Subordinated Debentures and, thus,
will be required to include in gross income its pro rata share of OID that will
accrue on the Junior Subordinated Debentures.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
In connection with the classification of the Junior Subordinated Debentures,
Tax Counsel is of the opinion that such securities will be classified for United
States federal income tax purposes as indebtedness of the Company under current
law, and thus the payments designated as interest under the terms of the Junior
Subordinated Debentures will be deductible by the Company for federal income tax
purposes, and, by acceptance of a Capital Security, each Holder covenants to
treat the Junior Subordinated Debentures as indebtedness of the Company for all
United States tax purposes. No assurance can be given, however, that the IRS
will not challenge such classification. The remainder of this discussion assumes
that the Junior Subordinated Debentures will be classified as indebtedness of
the Company for such purposes.
ORIGINAL ISSUE DISCOUNT
Under the Indenture, the Company has the right to defer the payment of
stated interest on the Junior Subordinated Debentures at any time or from time
to time for a period not exceeding 10 consecutive semi-annual periods with
respect to each Extension Period, provided that no Extension Period may extend
beyond the stated maturity of the Junior Subordinated Debentures. Because of
this deferral option, all stated interest payable on the Junior Subordinated
Debentures will be treated as OID for United States federal income tax purposes.
Accordingly, a Holder will be required to include its allocable share of the
stated interest on the Junior Subordinated Debentures in gross income (in the
form of OID) on a daily economic accrual basis (using the
constant-yield-to-maturity method described in Section 1272(a) of the Code) over
the term of the Junior Subordinated Debentures (including any Extension Period),
regardless of the Holder's method of tax accounting and in advance of receipt of
the cash attributable to such income. (Subsequent uses of the term "interest" in
this summary shall include income in the form of OID.)
As a result, during an Extension Period, Holders will include the stated
interest on the Junior Subordinated Debentures in gross income in advance of the
receipt of cash attributable to such interest income and any Holders who dispose
of their Capital Securities prior to the record date for the payment of
Distributions following such Extension Period will include the stated interest
on the Junior Subordinated Debentures in gross income but will not receive any
cash related thereto from the Trust. Any amount of OID included in gross income
by a Holder (whether or not during an Extension Period) will increase such
Holder's adjusted tax basis in its Capital Securities, and the amount of
Distributions received by such Holder in respect of such Capital Securities will
reduce such Holder's adjusted tax basis in such Capital Securities.
141
<PAGE>
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE
TRUST
As described under the caption "Description of Junior Subordinated
Debentures--Distribution of Junior Subordinated Debentures," Junior Subordinated
Debentures may be distributed to Holders in exchange for the Capital Securities
and in liquidation of the Trust. Under current law, such a distribution would be
non-taxable, and will result in the Holder receiving directly its pro rata share
of the Junior Subordinated Debentures previously held indirectly through the
Trust, with a holding period and aggregate tax basis equal to the holding period
and an aggregate tax basis such Holder had in its Capital Securities before such
distribution. If, however, the liquidation of the Trust were to occur because
the Trust is subject to United States federal income tax with respect to income
accrued or received on the Junior Subordinated Debentures, the distribution of
the Junior Subordinated Debentures to Holders would be a taxable event to the
Trust and to each Holder and a Holder would recognize gain or loss as if the
Holder had exchanged its Capital Securities for the Junior Subordinated
Debentures it received upon liquidation of the Trust.
A Holder would accrue the OID in respect of the Junior Subordinated
Debentures received from the Trust in the manner described above under
"--Original Issue Discount."
Under certain circumstances described herein (see "Description of Capital
Securities--Special Event Redemption or Distribution of Junior Subordinated
Debentures"), the Junior Subordinated Debentures may be redeemed for cash, with
the proceeds of such redemption distributed to Holders in redemption of their
Capital Securities. Under current law, such a redemption would constitute a
taxable disposition of the redeemed Capital Securities for United States federal
income tax purposes, and a Holder would recognize gain or loss as if it sold
such redeemed Capital Securities for cash. See "--Sales of Capital Securities."
SALES OF CAPITAL SECURITIES
A Holder that sells Capital Securities will recognize gain or loss equal to
the difference between the amount realized by such Holder on the sale of the
Capital Securities and the Holder's adjusted tax basis in the Capital Securities
sold or redeemed. Such gain or loss generally will be taxable as a capital gain
or loss and generally will be a long-term capital gain or loss if the Capital
Securities have been held for more than one year. Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States federal income tax purposes.
PROPOSED TAX LAW CHANGES
Legislation was proposed by the United States Department of Treasury on
February 6, 1997 as part of President Clinton's Fiscal 1998 Budget Proposal that
contains a provision which generally would deny an interest deduction for
interest paid or accrued on an instrument issued by a corporation that (i) has a
maximum term of more than 15 years and (ii) is not shown as indebtedness on the
separate balance sheet of the issuer or, where the instrument is issued to a
related party (other than a corporation), where the holder or some other related
party issues a related instrument that is not shown as indebtedness on the
consolidated balance sheet that includes the issuer and the holder. The
Administration's Proposal was proposed to be effective generally for instruments
issued on or after the date of the first Congressional committee action taken on
the Administration's Proposal. If the Administration's Proposal were to apply to
the Junior Subordinated Debentures, the Company would not be able to deduct the
interest on the Junior Subordinated Debentures. Legislative proposals approved
by the U.S. House of Representatives and the U.S. Senate on June 26 and 27,
1997, respectively, did not include the Administration's Proposal, and on June
30, 1997 the Clinton Administration announced a new budget proposal which also
does not appear to include such proposal. There can be no assurance, however,
that current or future legislative proposals or final legislation will not
adversely affect the ability of the Company to deduct interest on the Junior
Subordinated Debentures or otherwise affect the tax treatment of the
transactions described herein. Moreover, such legislation could give rise to a
Tax Event, which would permit the Company to cause a redemption of the Capital
Securities, as described more fully herein under the caption "Description of
Capital Securities-Redemption."
142
<PAGE>
NON-UNITED STATES HOLDERS
As used herein, the term "Non-United States Holder" means any Holder that is
not a United States Person (as defined above). As discussed above, the Capital
Securities will be treated as evidence of an indirect beneficial ownership
interest in the Junior Subordinated Debentures. See "--Classification of the
Trust." Thus, assuming the Junior Subordinated Debentures are classified as
indebtedness of the Company for United States federal income tax purposes, under
present United States federal income tax law, and subject to the discussion
below concerning backup withholding:
(a) no withholding of United States federal income tax will be required
with respect to the payment by the Company or any paying agent of principal
or interest (which for purposes of this discussion includes any OID) with
respect to the Capital Securities (or on the Junior Subordinated Debentures)
to a Non-United States Holder, provided (i) that the beneficial owner of the
Capital Securities ("Beneficial Owner") does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock
of the Company entitled to vote within the meaning of section 871(h)(3) of
the Code and the regulations thereunder, (ii) the Beneficial Owner is not a
controlled foreign corporation that is related to the Company through stock
ownership, (iii) the Beneficial Owner is not a bank whose receipt of
interest with respect to the Capital Securities (or on the Junior
Subordinated Debentures) is described in section 881(c)(3)(A) of the Code
and (iv) the Beneficial Owner satisfies the statement requirement (described
generally below) set forth in section 871(h) and section 881(c) of the Code
and the regulations thereunder; and
(b) no withholding of United States federal income tax will be required
with respect to any gain realized by a Non-United States Holder upon the
sale or other disposition of the Capital Securities (or the Junior
Subordinated Debentures).
To satisfy the requirement referred to in (a)(iv) above, the Beneficial
Owner, or a financial institution holding the Capital Securities (or the Junior
Subordinated Debentures) on behalf of such owner, must provide, in accordance
with specified procedures, to the Trust or its paying agent, a statement to the
effect that the Beneficial Owner is not a United States Holder. Pursuant to
current temporary Treasury regulations, these requirements will be met if (1)
the Beneficial Owner provides his name and address, and certifies, under
penalties of perjury, that it is not a United States person (which certification
may be made on an IRS Form W-8 (or successor form)) or (2) a financial
institution holding the Capital Securities (or the Junior Subordinated
Debentures) on behalf of the Beneficial Owner certifies, under penalties of
perjury, that such statement has been received by it and furnishes a paying
agent with a copy thereof.
If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of premium, if
any, and interest (including any OID) made to such Non-United States Holder will
be subject to a 30% withholding tax unless the Beneficial Owner provides the
Company or its paying agent, as the case may be, with a properly executed (1)
IRS Form 1001 (or successor form) claiming an exemption from, or a reduction of,
such withholding tax under the benefit of a United States income tax treaty or
(2) IRS Form 4224 (or successor form) stating that interest paid with respect to
the Capital Securities (or on the Junior Subordinated Debentures) is not subject
to withholding tax because it is effectively connected with the Beneficial
Owner's conduct of a trade or business in the United States.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest paid with respect to the Capital Securities (or on
the Junior Subordinated Debentures) is effectively connected with the conduct of
such trade or business, the Non-United States Holder, although exempt from the
withholding tax discussed above, will be subject to United States federal income
tax on such interest income on a net income basis in the same manner as if it
were a United States Person. In addition, if such Non-United States Holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30% of
its effectively connected earnings and profits for the taxable year, subject to
adjustments. For this purpose, such interest income would be included in such
foreign corporation's earnings and profits.
143
<PAGE>
Any gain realized upon the sale or other disposition of the Capital
Securities (or the Junior Subordinated Debentures) generally will not be subject
to United States federal income tax unless (i) such gain is effectively
connected with a trade or business in the United States of the Non-United States
Holder, (ii) in the case of a Non-United States Holder who is an individual,
such individual is present in the United States for 183 days or more in the
taxable year of such sale, exchange or retirement, and certain other conditions
are met, and (iii) in the case of any gain representing accrued interest on the
Junior Subordinated Debentures, the requirements described above are not
satisfied.
The discussion set forth herein assumes that the Junior Subordinated
Debentures will be classified as indebtedness for United States federal income
tax purposes. If, however, the Internal Revenue Service were to assert
successfully that, under current law, the Junior Subordinated Debentures should
be classified as equity (rather than indebtedness) of the Company for such
purpose (or if the Junior Subordinated Debentures were classified as equity
under the Administration's Proposal discussed above), the income derived by
Non-United States Holders on the Capital Securities (or the Junior Subordinated
Debentures) would be characterized as dividend (rather than interest) income to
the extent of the Company's current and accumulated earnings and profits.
Dividend income is not eligible for the "portfolio interest" exception described
in (a) above. Consequently, in this instance, Non-United States Holders would be
subject to a 30% United States federal withholding tax on the gross income
derived by a Non-United States Holder on the Capital Securities (or the Junior
Subordinated Debentures) unless a reduction or elimination of such tax was
available under an applicable United States tax treaty or such income was
effectively connected with a trade or business carried on in the United States
by such Non-United States Holder.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Income on the Capital Securities (or on the Junior Subordinated Debentures)
held of record by United States Holders (other than corporations and other
exempt holders) will be reported annually to such holders and to the IRS. The
Regular Trustees currently intend to deliver such reports to holders of record
prior to January 31 following each calendar year. It is anticipated that persons
who hold Capital Securities (or on the Junior Subordinated Debentures) as
nominees for beneficial holders will report the required tax information to
beneficial holders on Form 1099.
"Backup withholding" at a rate of 31% will apply to payments of interest
with respect to the Capital Securities (or on the Junior Subordinated
Debentures) paid to non-exempt United States Persons unless the Holder furnishes
its taxpayer identification number in the manner prescribed in applicable
Treasury regulations, certifies that such number is correct, certifies as to no
loss of exemption from backup withholding and meets certain other conditions.
No information reporting or backup withholding will be required with respect
to payments made by the Trust or any paying agent to Non-United States Holders
if a statement described in (a)(iv) under "Non-United States Holders" has been
received and the payor does not have actual knowledge that the beneficial owner
is a United States person.
In addition, backup withholding and information reporting will not apply if
payments of the principal, interest, OID or premium with respect to the Capital
Securities (or on the Junior Subordinated Debentures) are paid or collected by a
foreign office of a custodian, nominee or other foreign agent on behalf of the
Beneficial Owner, or if a foreign office of a broker (as defined in applicable
Treasury regulations) pays the proceeds of the sale of the Capital Securities to
the owner thereof. If, however, such nominee, custodian, agent or broker is, for
United States federal income tax purposes, a United States person, a controlled
foreign corporation or a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States, such payments will not be subject to backup withholding but will be
subject to information reporting, unless (1) such custodian, nominee, agent
144
<PAGE>
or broker has documentary evidence in its records that the Beneficial Owner is
not a United States person and certain other conditions are met or (2) the
Beneficial Owner otherwise establishes an exemption.
Payment of the proceeds from disposition of Capital Securities (or the
Junior Subordinated Debentures) to or through a United States office of a broker
is subject to information reporting and backup withholding unless the holder or
beneficial owner establishes an exemption from information reporting and backup
withholding.
Any amounts withheld from a Holder of the Capital Securities (or the Junior
Subordinated Debentures) under the backup withholding rules will be allowed as a
refund or a credit against such holder's United States federal income tax
liability, provided the required information is furnished to the IRS.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company and the Trust have agreed that the Trust will sell to each of the
Underwriters named below, and each of such Underwriters, for whom Lehman
Brothers Inc., Friedman, Billings, Ramsey & Co., Inc. and Morgan Stanley & Co.
Incorporated are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Trust the respective liquidation amount of
Capital Securities set forth opposite its name below:
<TABLE>
<CAPTION>
LIQUIDATION AMOUNT OF
CAPITAL SECURITIES
---------------------
<S> <C>
Lehman Brothers Inc........................................................................
Friedman, Billings, Ramsey & Co., Inc......................................................
Morgan Stanley & Co. Incorporated..........................................................
---------------------
Total...................................................................................... $ 125,000,000
---------------------
---------------------
</TABLE>
Under the terms and conditions set forth in the Underwriting Agreement, the
Underwriters are committed to take and pay for all such Capital Securities
offered hereby, if any are taken.
The Underwriters propose to offer the Capital Securities in part directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and in part to certain securities dealers at such price less a
concession of $ per Capital Security. The Underwriters may allow, and
such dealers may reallow, a concession not to exceed $ per Capital
Security to certain brokers and dealers. After the Capital Securities are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the Representatives.
In view of the fact that the proceeds from the sale of the Capital
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Company, the Underwriting Agreement provides that the Company will pay as
Underwriters' Compensation for the Underwriters' arranging the investment
therein of such proceeds an amount of $ per Capital Security for the
accounts of the several Underwriters.
The Company and the Trust have agreed that, during the period beginning from
the date of the Underwriting Agreement and continuing to and including the
earlier of (i) the termination of trading restrictions on the Capital
Securities, as communicated to the Company by the Representatives, and (ii) 90
days following the Closing Date, they will not offer, sell, contract to sell or
otherwise dispose of any additional securities of the Trust or the Company
substantially similar to the Capital Securities or any securities convertible
into or exchangeable for or that represent the right to receive any such similar
securities, without the consent of the Representatives.
145
<PAGE>
Because NASD Regulation, Inc. (the "NASD") views the Capital Securities
offered hereby as interests in a direct participation program, this offering is
being made in compliance with Rule 2810 of the NASD Conduct Rules. Offers and
sales of the Capital Securities will be made only to (i) "qualified
institutional buyers," as defined in Rule 144A under the Securities Act, and
(ii) institutional "accredited investors," as defined in Rule 501(a)(1)-(3) of
Regulation D under the Securities Act. The Underwriters will not confirm sales
to any accounts over which they exercise discretionary authority without the
prior written approval of the transaction by the customer.
Prior to this offering, there has been no public market for the Capital
Securities. Each of the Representatives has advised the Company that it intends
to make a market in the Capital Securities but it is not obligated to do so and
may discontinue market making at any time without notice. No assurance can be
given as to the liquidity of or the existence of the trading market for the
Capital Securities.
The Company and the Trust have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or commercial banking
services to the Company and its affiliates, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions.
LEGAL MATTERS
The validity of the Junior Subordinated Debentures and the Guarantee will be
passed upon for the Company and the Trust by Elias, Matz, Tiernan & Herrick
L.L.P., Washington, D.C. and for the Underwriters by Simpson Thacher & Bartlett
(a partnership which includes professional corporations), New York, New York.
Certain United States federal income taxation matters also will be passed upon
for the Company and the Trust by Elias, Matz, Tiernan & Herrick L.L.P.,
Washington, D.C. Certain matters of Delaware law relating to the validity of the
Capital Securities will be passed upon for the Trust and the Company by
Richards, Layton & Finger, Wilmington, Delaware.
EXPERTS
The consolidated financial statements of Ocwen Financial Corporation as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 and the financial statements of BCBF, L.L.C. as of December
31, 1996 and for the period March 13, 1996 through December 31, 1996, included
in the Prospectus have been so included in reliance on the reports of Price
Waterhouse LLP, independent certified public accountants, given upon the
authority of said firm as experts in auditing and accounting.
146
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Ocwen Financial Corporation:
Audited Consolidated Financial Statements:
Report of Independent Certified Public Accountants....................................................... F-2
Consolidated Statements of Financial Condition at December 31, 1996 and 1995............................. F-3
Consolidated Statements of Operations for each of the three years in the period ended December 31,
1996................................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period
ended December 31, 1996................................................................................ F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
1996................................................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-8
Interim Consolidated Financial Statements (Unaudited):
Consolidated Statements of Financial Condition at March 31, 1997 and December 31, 1996................... F-54
Consolidated Statements of Operations for the three months ended March 31, 1997 and 1996................. F-55
Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 1997..... F-56
Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996................. F-57
Notes to Interim Consolidated Financial Statements....................................................... F-59
BCBF, L.L.C.:
Audited Financial Statements:
Report of Independent Certified Public Accountants....................................................... F-66
Statement of Financial Condition at December 31, 1996.................................................... F-67
Statement of Operations for the period March 13, 1996 through December 31, 1996.......................... F-68
Statement of Changes in Owners' Equity for the period March 13, 1996 through December 31, 1996........... F-69
Statement of Cash Flows for the period March 31, 1996 through December 31, 1996.......................... F-70
Notes to Financial Statements............................................................................ F-71
Interim Financial Statements (Unaudited):
Statement of Financial Condition at March 31, 1997 and December 31, 1996................................. F-78
Statement of Operations for the three months ended March 31, 1997........................................ F-79
Statement of Changes in Owners' Equity for the period March 13, 1996 through December 31, 1996 and for
the three months ended March 31, 1997.................................................................. F-80
Statement of Cash Flows for the three months ended March 31, 1997........................................ F-81
Notes to Interim Financial Statements.................................................................... F-82
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Ocwen Financial Corporation
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of operations, of changes in
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Ocwen Financial Corporation and its subsidiaries (the
"Company") at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, 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.
<TABLE>
<S> <C>
/s/ PRICE WATERHOUSE LLP
------------------------------------------
PRICE WATERHOUSE LLP
</TABLE>
Fort Lauderdale, Florida
January 21, 1997
F-2
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions..................................... $ 6,878 $ 4,200
Interest bearing deposits............................................................. 13,341 50,432
Federal funds sold and repurchase agreements.......................................... 32,000 --
Securities held for trading........................................................... 75,606 --
Securities available for sale, at market value........................................ 354,005 337,480
Loans available for sale, at lower of cost or market.................................. 126,366 251,790
Investment securities, net............................................................ 8,901 18,665
Loan portfolio, net................................................................... 402,582 295,605
Discounted loan portfolio, net........................................................ 1,060,953 669,771
Principal, interest and dividends receivable.......................................... 16,821 12,636
Investments in low income housing tax credit interests................................ 93,309 81,362
Investment in joint venture........................................................... 67,909 --
Real estate owned, net................................................................ 103,704 166,556
Investment in real estate............................................................. 41,033 11,957
Premises and equipment, net........................................................... 14,619 13,402
Income taxes receivable............................................................... 15,115 1,005
Deferred tax asset.................................................................... 5,860 22,263
Other assets.......................................................................... 44,683 36,466
------------ ------------
$ 2,483,685 $ 1,973,590
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits............................................................................ $ 1,919,742 $ 1,501,646
Advances from the Federal Home Loan Bank............................................ 399 70,399
Securities sold under agreements to repurchase...................................... 74,546 84,761
Notes, debentures and other interest bearing obligations............................ 225,573 117,054
Accrued expenses, payables and other liabilities.................................... 59,829 60,183
------------ ------------
Total liabilities................................................................. 2,280,089 1,834,043
------------ ------------
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized;0 shares issued and
outstanding....................................................................... -- --
Common stock, $.01 par value; 200,000,000 shares authorized; 26,744,170 and
23,812,270 shares issued and outstanding at December 31, 1996 and 1995,
respectively...................................................................... 267 238
Additional paid-in capital.......................................................... 23,258 10,449
Retained earnings................................................................... 180,417 130,275
Unrealized gain (loss) on securities available for sale, net of taxes............... 3,486 (1,415)
Notes receivable on exercise of common stock options................................ (3,832) --
------------ ------------
Total stockholders' equity........................................................ 203,596 139,547
------------ ------------
$ 2,483,685 $ 1,973,590
------------ ------------
------------ ------------
</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,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Federal funds sold and repurchase agreements.................................. $ 4,681 $ 3,502 $ 8,861
Securities available for sale................................................. 26,932 18,391 27,988
Securities held for trading................................................... 1,216 -- --
Loans available for sale...................................................... 17,092 15,608 19,353
Mortgage-related securities held for investment............................... -- 4,313 6,930
Loans......................................................................... 36,818 15,430 5,924
Discounted loans.............................................................. 103,165 75,998 52,560
Investment securities and other............................................... 3,990 4,033 9,842
---------- ---------- ----------
193,894 137,275 131,458
---------- ---------- ----------
Interest expense:
Deposits...................................................................... 93,773 71,853 44,961
Securities sold under agreements to repurchase................................ 1,101 951 10,416
Securities sold but not yet purchased......................................... -- 1,142 2,780
Advances from the Federal Home Loan Bank...................................... 4,053 1,126 1,232
Notes, debentures and other interest bearing obligations...................... 17,233 8,988 3,209
---------- ---------- ----------
116,160 84,060 62,598
---------- ---------- ----------
Net interest income before provision for loan losses.......................... 77,734 53,215 68,860
Provision for loan losses....................................................... 22,450 1,121 --
---------- ---------- ----------
Net interest income after provision for loan losses........................... 55,284 52,094 68,860
---------- ---------- ----------
Non-interest income:
Servicing fees and other charges.............................................. 4,682 2,870 4,786
Gains on sales of interest earning assets, net................................ 21,682 6,955 5,727
Gains from sale of branch offices............................................. -- 5,430 62,600
Income on real estate owned, net.............................................. 3,827 9,540 5,995
Gain on sale of real estate held for investment............................... -- 4,658 --
Other income.................................................................. 7,084 1,727 2,467
---------- ---------- ----------
37,275 31,180 81,575
---------- ---------- ----------
Non-interest expense:
Compensation and employee benefits............................................ 38,357 23,787 42,395
Occupancy and equipment....................................................... 8,921 8,360 11,537
Amortization of excess cost over net assets acquired.......................... -- -- 1,346
Hotel operations (income) expense, net........................................ (453) 337 (723)
Savings Association Insurance Fund recapitalization assessment................ 7,140 -- --
Other operating expenses...................................................... 15,613 13,089 14,303
---------- ---------- ----------
69,578 45,573 68,858
---------- ---------- ----------
Equity in earnings of investment in joint venture............................... 38,320 -- --
---------- ---------- ----------
Income from continuing operations before income taxes......................... 61,301 37,701 81,577
Income tax expense.............................................................. 11,159 4,562 29,724
---------- ---------- ----------
Income from continuing operations............................................. 50,142 33,139 51,853
Discontinued operations:
Loss from operations of discontinued divisions to September 30, 1995 net of
tax benefits of $2,321 and $2,227 for 1995 and 1994, respectively........... -- (4,468) (4,514)
Loss on disposal of divisions, net of tax benefit of $1,776................... -- (3,204) --
---------- ---------- ----------
Net income................................................................ $ 50,142 $ 25,467 $ 47,339
---------- ---------- ----------
---------- ---------- ----------
Earnings per share:
Income from continuing operations............................................. $ 1.88 $ 1.19 $ 1.52
Discontinued operations, net of tax benefit................................... -- (0.28) (0.13)
---------- ---------- ----------
Net income................................................................ $ 1.88 $ 0.91 $ 1.39
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding...................................... 26,689,441 27,769,080 34,084,160
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
UNREALIZED NOTES
GAIN (LOSS) RECEIVABLE
ON SECURITIES ON EXERCISE
COMMON STOCK ADDITIONAL AVAILABLE OF COMMON
------------------- PAID-IN RETAINED FOR SALE, STOCK
SHARES AMOUNT CAPITAL EARNINGS NET OF TAXES OPTIONS TOTAL
----------- ------ ---------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1993............. 32,195,040 $322 $13,726 $94,891 $ 2,892 $-- $111,831
Net income......... -- -- -- 47,339 -- -- 47,339
Repurchase of
common stock
options.......... -- -- (73) -- -- -- (73)
Repurchase of
common stock..... (330) -- (1) -- -- -- (1)
Change in
unrealized gain
(loss) on
securities
available for
sale, net of tax
benefit.......... -- -- -- -- (5,713) -- (5,713)
----------- ------ ---------- -------- ------------- ------------ --------
Balances at
December 31,
1994............. 32,194,710 322 13,652 142,230 (2,821) -- 153,383
Net income......... -- -- -- 25,467 -- -- 25,467
Repurchase of
common stock
options.......... -- -- (132) -- -- -- (132)
Exercise of common
stock options.... 432,620 4 1,416 -- -- -- 1,420
Repurchase of
common stock..... (8,815,060) (88) (4,487) (37,422 ) -- -- (41,997)
Change in
unrealized gain
(loss) on
securities
available for
sale, net of
taxes............ -- -- -- -- 1,406 -- 1,406
----------- ------ ---------- -------- ------------- ------------ --------
Balances at
December 31,
1995............. 23,812,270 238 10,449 130,275 (1,415) -- 139,547
Net income......... -- -- -- 50,142 -- -- 50,142
Repurchase of
common stock
options.......... -- -- (177) -- -- -- (177)
Exercise of common
stock options.... 2,928,830 29 12,963 -- -- -- 12,992
Directors
compensation
payable in common
stock............ 3,070 -- 23 -- -- -- 23
Notes receivable on
exercise of
common stock
options.......... -- -- -- -- -- (3,832) (3,832)
Change in
unrealized gain
(loss) on
securities
available for
sale, net of
taxes............ -- -- -- -- 4,901 -- 4,901
----------- ------ ---------- -------- ------------- ------------ --------
Balances at
December 31,
1996............. 26,744,170 $267 $23,258 $180,417 $ 3,486 $(3,832) $203,596
----------- ------ ---------- -------- ------------- ------------ --------
----------- ------ ---------- -------- ------------- ------------ --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Cash flows from operating activities:
Net income...................................................................... $ 50,142 $ 25,467 $ 47,339
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Net cash (used) provided from trading activities.............................. (60,881) 2,949 4,118
Proceeds from sales of loans available for sale............................... 397,606 100,104 383,673
Purchases of loans available for sale......................................... (295,054) (271,210) (510,362)
Origination of loans available for sale....................................... (9,447) (2,829) (39,546)
Principal payments received on loans available for sale....................... 26,689 10,103 36,966
Amortization of excess of costs over net assets acquired...................... -- -- 1,346
Premium amortization (discount accretion), net................................ 11,640 (2,401) (8,268)
Depreciation and amortization................................................. 7,646 3,755 4,877
Provision for loan losses..................................................... 22,450 1,121 --
Loss on sales of premises and equipment....................................... 97 3,002 --
Gains on sales of interest earning assets, net................................ (21,682) (6,955) (5,727)
Gain on sale of low income housing tax credit interests....................... (4,861) -- --
Gain on sale of real estate owned, net........................................ (2,464) (8,496) (12,234)
Gain on sales of branch offices............................................... -- (5,430) (62,600)
Gain on sale of hotel......................................................... -- (4,658) --
(Increase) decrease in principal, interest and dividends receivable........... (2,277) (6,484) 5,710
(Increase) decrease in income taxes receivable................................ (14,110) (11,030) 16,473
(Increase) decrease in deferred tax asset..................................... 16,403 (1,568) (799)
(Increase) decrease in other assets........................................... (20,303) (13,189) 8,841
(Decrease) increase in accrued expenses, payables and other liabilities....... (226) (1,677) 21,386
---------- ---------- ----------
Net cash provided (used) in operating activities................................ 101,368 (189,426) (108,807)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale.......................... 175,857 836,247 877,911
Purchases of securities available for sale.................................... (233,858) (934,179) (511,694)
Maturities of and principal payments received on securities available for
sale........................................................................ 28,756 21,639 115,357
Purchase of securities held for investment.................................... (276) -- (4,804)
Maturities of and principal payments received on securities held for
investments................................................................. 10,006 17,545 44,133
Proceeds from sale of low income housing tax credit interests................. 24,667 -- --
Proceeds from sale of hotel................................................... -- 25,193 --
Purchases of low income housing tax credit interests.......................... (34,240) (29,280) (31,821)
Proceeds from sales of discounted loans and loans held for investment......... 205,499 38,942 35,161
Purchase of discounted loans.................................................. (925,850) (547,987) (543,982)
Purchase of loans held for investment......................................... (305) (35,073) --
Originations of loans held for investment..................................... (237,220) (235,527) (29,013)
Investment in joint venture................................................... (67,909) -- --
Principal payments received on discounted loans and loans held for
investment.................................................................. 364,128 251,485 188,850
Purchase of and capital improvements to real estate held for investment....... (29,946) -- --
</TABLE>
F-6
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds from sales of real estate owned...................................... 169,084 148,225 129,671
Purchases of real estate owned in connection with discounted loan purchases... (1,628) (24,617) (38,071)
Additions to premises and equipment........................................... (5,243) (12,207) (7,438)
Other, net.................................................................... 227 5,067 10,262
---------- ---------- ----------
Net cash (used) provided by investing activities................................ (558,251) (474,527) 234,522
---------- ---------- ----------
Cash flows from financing activities:
Increase in deposits.......................................................... 414,728 585,335 1,065,300
Proceeds from issuance of notes and debentures................................ 125,000 107,615 --
Payment of debt issuance costs................................................ (5,252) (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...................................... 76,000 170,000 17,000
Payments on advances from the Federal Home Loan Bank.......................... (146,000) (105,000) (69,000)
Increase (decrease) in securities sold under agreements to repurchase......... (10,215) 84,761 (276,095)
Payments and repurchase of notes and mortgages payable........................ (8,798) (10,672) (22,270)
Loans to executive officers, net.............................................. (3,832) -- --
Exercise of common stock options.............................................. 12,993 1,420 --
Repurchase of common stock options and common stock........................... (177) (42,129) (74)
Other......................................................................... 23 -- --
---------- ---------- ----------
Net cash provided (used) by financing activities................................ 454,470 681,835 (127,859)
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents............................ (2,413) 17,882 (2,144)
Cash and cash equivalents at beginning of year.................................. 54,632 36,750 38,894
---------- ---------- ----------
Cash and cash equivalents at end of year........................................ $ 52,219 $ 54,632 $ 36,750
---------- ---------- ----------
---------- ---------- ----------
Reconciliation of cash and cash equivalents at end of year:
Cash and amounts due from depository institutions............................. $ 6,878 $ 4,200 $ 32,954
Interest bearing deposits..................................................... 13,341 50,432 3,796
Federal funds sold and repurchase agreements.................................. 32,000 -- --
---------- ---------- ----------
$ 52,219 $ 54,632 $ 36,750
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest...................................................................... $ 115,015 $ 72,626 $ 58,174
---------- ---------- ----------
---------- ---------- ----------
Income taxes.................................................................. $ 4,725 $ 12,858 $ 11,170
---------- ---------- ----------
---------- ---------- ----------
Supplemental schedule of non-cash investing and financing activities:
Exchange of discount loans and loans available for sale for securities........ $ 357,628 $ 83,875 $ 346,588
---------- ---------- ----------
---------- ---------- ----------
Real estate owned acquired through foreclosure................................ $ 102,140 $ 185,001 $ 136,764
---------- ---------- ----------
---------- ---------- ----------
Transfer of mortgage-related securities from held for investment to available
for sale.................................................................... $ -- $ 73,706 $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(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 primarily in the acquisition, servicing and resolution of
non-performing and underperforming mortgage loans ("Discounted Loans"),
multi-family residential and commercial real estate lending activities, single-
family residential lending activities involving non-conforming borrowers and
various investment activities including mortgage related securities, low income
housing tax credit interests and hotels. The Company owns directly and
indirectly all of the outstanding common and preferred stock of its primary
subsidiaries, Ocwen Federal Bank FSB, formerly Berkeley Federal Bank & Trust FSB
(the "Bank") and Investors Mortgage Insurance Holding Company ("IMI"), which are
included in the Company's consolidated financial statements. 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.
RECLASSIFICATION
Certain amounts included in the 1995 and 1994 consolidated financial
statements have been reclassified in order to conform to the 1996 presentation.
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.
TRADING ACTIVITIES
From time to time the Company purchases investment and mortgage-backed and
related securities into its trading account. In addition, securities acquired
and sold shortly thereafter resulting from the securitization of loans available
for sale are accounted for as the sale of loans and the purchase and sale of
trading securities. Securities held for trading purposes are carried at market
value with the unrealized gains or losses included in gains on sales of interest
earning assets, net.
SECURITIES AVAILABLE FOR SALE
Certain U.S. Treasury securities, mortgage-backed securities and
mortgage-related securities are designated as assets available for sale because
the Company does not intend to hold them to maturity. Securities available for
sale are carried at market value with the net unrealized gains or losses
reported as a separate component of stockholders' equity. Unrealized losses on
securities that reflect a decline in value which is other than temporary, if
any, are charged to earnings. At disposition the realized net gain or loss is
included in earnings on a specific identification basis. The amortization of
premiums and accretion of
F-8
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
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.
During December 1995, in conjunction with a transition provision provided by
the Financial Accounting Standards Board pertaining to the classification of
securities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company transferred all of its mortgage-related securities held
for investment, with a book value of $75,194 and a market value of $73,706 to
securities available for sale.
INVESTMENTS AND MORTGAGE-RELATED SECURITIES HELD FOR INVESTMENT
Investments and mortgage-related securities held for investment are stated
at cost, adjusted for amortization of premiums and accretion of discounts,
because the Company has the ability and the intent to hold them to maturity.
Unrealized losses on securities that reflect a decline in value which is other
than temporary, if any, are charged to earnings. The amortization of premiums
and accretion of discounts are computed using the interest method after
considering actual and estimated prepayment rates, if applicable. Actual
prepayment experience is periodically reviewed and effective yields are
recalculated when differences arise between prepayments originally anticipated
and amounts actually received plus anticipated future prepayments.
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 89 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.
F-9
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Specific valuation allowances are established for impaired loans in the amount
by which the carrying value, before allowance for estimated losses, exceeds the
fair value of collateral less costs to dispose on an individual loan basis,
except for single family residential mortgage loans and consumer loans which are
generally evaluated for impairment as homogeneous pools of loans. The Company
considers a loan to be impaired when, based upon current information and events,
it believes that it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement on a timely
basis. The Company measures these impaired loans at the fair value of the loans'
underlying collateral less estimated disposal costs. Impaired loans may be left
on accrual status during the period the Company is pursuing repayment of the
loan. These loans are placed on non-accrual status at such time that the loans
either: (i) become 90 days delinquent; or (ii) the Company determines the
borrower is incapable of, or has ceased efforts toward, curing the cause of the
impairment. Impairment losses are recognized through an increase in the
allowance for loan losses and a corresponding charge to the provision for loan
losses. When an impaired loan is either sold, transferred to REO or charged off,
any related valuation allowance is credited to the allowance for loan losses.
Charge-offs occur when loans, or a portion thereof, are considered uncollectible
and of such little value that their continuance as bankable assets is not
warranted. General valuation allowances are also established for the inherent
risks in the loan portfolio which have occurred but have yet to be specifically
identified. Management's periodic evaluation of the allowance for estimated loan
losses is based upon an analysis of the portfolio, historical loss experience,
economic conditions and trends, collateral values and other relevant factors.
Future adjustments to the allowance may be necessary if economic conditions and
trends, collateral values and other relevant factors differ substantially from
the assumptions used in making the evaluation.
DISCOUNTED LOAN PORTFOLIO
Certain mortgage loans, for which the borrower is not current as to
principal and interest payments or which there is a reason to believe the
borrower will be unable to continue to make its scheduled 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. 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
F-10
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
buyer and, in cases where the Company finances the sale, receipt of sufficient
down payment. Rental income related to properties is reported as income as
earned. Holding and maintenance costs related to properties are reported as
period costs as incurred. No depreciation expense related to properties has been
recorded. Decreases in market value of foreclosed real estate subsequent to
foreclosure are recognized as a valuation allowance on a property specific
basis. Subsequent increases in market value of the foreclosed real estate are
reflected as reductions in the valuation allowance, but not below zero. Such
changes in the valuation allowance are charged or credited to income.
VALUATION ALLOWANCES ON DISCOUNTED LOANS AND REAL ESTATE OWNED
Beginning in the first quarter of 1996 the Company, as requested by the OTS,
began recording general valuation allowances on discounted loans and real estate
owned to reflect the inherent losses which may have occurred but have yet to be
specifically identified. Management has established the valuation allowances
based upon historical loss experience, economic conditions and trends,
collateral values and other relevant factors. Also beginning in 1996, the
Company began recording losses and charge-offs on discounted loans against the
allowance for loan losses. Previously these amounts were deducted from interest
income.
INVESTMENT IN REAL ESTATE
In conjunction with its multi-family and commercial lending business
activity, the Company has made certain acquisition, development and construction
loans in which the Company participates in the residual profits of the
underlying real estate and the borrower has not made an equity contribution
substantial to the overall project. As such, the Company accounts for these
loans under the equity method of accounting as though it has made an investment
in a real estate limited partnership.
The Company also has invested indirectly, through its IMI subsidiaries, in
certain hotel properties. Net operating income from the hotel properties
including depreciation expense is recorded as part of non-interest income.
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 income tax credits
and other tax benefits on a level yield basis over the 15-year obligation period
and reports the tax credits and tax benefits net of amortization of its
investment in the limited partnership as a reduction of income tax expense. Low
income housing tax credit partnerships in which the Company has invested as a
limited partner, and through a subsidiary, acts as the general partner are
presented on a consolidated basis. For all investments in low income housing tax
credit partnerships made after May 18, 1995, the Company capitalizes interest
expense and certain direct costs incurred during the pre-operating period.
F-11
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
EXCESS OF COST OVER NET ASSETS ACQUIRED
On February 17, 1988, the Company acquired 100% of the common stock of First
Federal Savings Bank (of Delaware). Through 1994 the excess of cost over net
assets acquired was being amortized over the estimated periods benefited. As of
December 31, 1994, the remaining depository branches acquired in 1988, along
with certain other branches subsequently acquired, were sold, and the
unamortized excess of cost over net assets acquired of $9,135 was retired and
charged against the gain recorded on the sale of branch offices.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost and, except for land, are
depreciated over their estimated useful lives on the straight-line method. The
estimated useful lives of the related assets range from 3 to 10 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 derivative
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. 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.
The Company accounts for income taxes using the asset and liability method
which 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, deferred
taxes are adjusted for subsequent tax rate changes.
F-12
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
INVESTMENT IN JOINT VENTURE
In March 1996, the Company and BlackRock Capital Finance L.P. ("BlackRock")
formed BCBF, L.L.C. (the "LLC"), a limited liability corporation, to acquire
loans from the U.S. Department of Housing and Urban Development ("HUD"). The
Company and BlackRock each own 50% of the LLC.
The Company's investment in the LLC is accounted for under the equity method
of accounting. Under the equity method of accounting, an investment in the
shares or other interests of an investee is initially recorded at the cost of
the shares or interests acquired and thereafter is periodically increased
(decreased) by the investor's proportionate share of the earnings (losses) of
the investee and decreased by all dividends received by the investor from the
investee.
The Company services all loans on behalf of the LLC for a fee, and all
intercompany transactions between the Company and the LLC are eliminated for
financial reporting purposes to the extent of the Company's ownership in the
LLC.
INVESTMENT MANAGEMENT AND TRUST ACTIVITIES
At December 31, 1996 and 1995 Ocwen Asset Management Inc. ("OAM"), a
subsidiary of the Bank, had under management $1,629 and $48,229, 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, 1996 and 1995 the Bank held $0 and $2,002, respectively, in
investments in trust accounts for customers. Such amounts are not included in
the Company's consolidated statements of financial condition.
RISKS AND UNCERTAINTIES
In the normal course of business, the Company encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or different bases, than its
interest earning assets. Credit risk is the risk of default on the Company's
loan portfolio that results from a borrowers' inability or unwillingness to make
contractually required payments. Market risk reflects changes in the value of
loans held for sale, securities available for sale and purchased mortgage
servicing rights due to changes in interest rates or other market factors
including the rate of prepayments of principal and the value of the collateral
underlying loans and the valuation of real estate held by the Company.
The Bank is subject to the regulations of various government agencies. These
regulations can and do change significantly from period to period. The Bank also
undergoes periodic examinations by the regulatory agencies, which may subject it
to further changes with respect to asset valuations, amounts of required loss
allowances and operating restrictions resulting from the regulators' judgments
based on information available to them at the time of their examination.
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
F-13
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
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 and discounted loans.
RECENT ACCOUNTING STANDARDS
On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires that long-lived assets to be held and used by an entity and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Additionally, SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell, except for certain assets. The
adoption of SFAS No. 121 did not have a material effect on the Company's
financial condition or results of operations in 1996.
On January 1, 1996 the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights", which requires that an institution engaged in
mortgage banking activities recognize as a separate asset rights to service
mortgage loans for others, regardless of the manner in which those servicing
rights are acquired. Upon sale or securitization of loans with servicing rights
retained, the Company is required to capitalize the cost associated with the
mortgage servicing rights based on their relative fair values. SFAS No. 122 also
requires that an institution assess its capitalized mortgage servicing rights
for impairment based on the fair value of those rights. Impairment is recognized
through a valuation allowance. See Note 13 for disclosures regarding capitalized
mortgage servicing rights as required by SFAS No. 122.
On January 1, 1996, the Company also adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which requires that the fair value of employee
stock-based compensation plans be recorded as a component of compensation
expense in the statement of operations as of the date of grant of awards related
to such plans or that the impact of such fair value on net income and earnings
per share be disclosed on a pro forma basis in a footnote to financial
statements for awards granted after December 15, 1994, if the accounting for
such awards continues to be in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The Company
will continue such accounting under the provisions of APB 25 and has disclosed
the pro forma information as required in Note 23.
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", was issued. SFAS No. 125
(i) sets forth the criteria for (a) determining when to recognize financial and
servicing assets and liabilities; and (b) accounting for transfers of financial
assets as sales or borrowings; and (ii) requires (a) liabilities and derivatives
related to a transfer of financial assets to be recorded at fair value; (b)
servicing assets and retained interests in transferred assets carrying amounts
be determined by allocating carrying amounts based on fair value; (c)
amortization of servicing assets and liabilities be in proportion to net
servicing income; (d) impairment measurement based on fair value; and (e)
pledged financial assets to be classified as collateral.
SFAS No. 125 provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitizations, transfers of sales-type and
direct financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls", "wash sales", loan syndications and
participations, risk participations in banker's
F-14
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
acceptances, factoring arrangements, transfers of receivables with recourse and
extinguishments of liabilities. In December 1996, the FASB issued SFAS No 127,
"Deferral of the Effective Date of FASB Statement No. 125", which delayed
implementation of certain provisions of SFAS 125. SFAS Nos. 125 and 127 are
effective for fiscal years ending after December 15, 1996. The Company does not
anticipate these Statements to have any material impact on the results of
operations, financial position or cash flows as a result of implementing these
Statements.
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.
NOTE 2 ACQUISITION AND DISPOSITION TRANSACTIONS
The LLC is a limited liability company formed in March 1996 between the
Company and BlackRock Capital Finance L.P. On March 22, 1996, the LLC was
notified by HUD that it was the successful bidder to purchase 16,196
single-family residential loans offered by HUD ("HUD Loans"). On April 10, 1996
the LLC consummated the acquisition of the HUD Loans.
At December 31, 1996, the Company's investment in the LLC amounted to
$67,909 and is net of valuations allowances of $5,114. Because the LLC is a
pass-through entity for federal income tax purposes, provisions for income taxes
are established by each of the Company and its co-investor and not the LLC.
F-15
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Set forth below is the statement of financial condition of the LLC at
December 31, 1996 and a statement of operations for the period from the date of
formation of the LLC through December 31, 1996.
BCBF, L.L.C.
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1996
<TABLE>
<S> <C>
Assets:
Cash............................................................ $ 10
Loans held for sale, at lower of cost or market value........... 110,702
Real estate owned, net of a valuation allowance of $511......... 25,595
Other assets.................................................... 10,526
---------
$ 146,833
---------
---------
Liabilities and Owners' Equity
Liabilities:
Accrued expenses, payables and other liabilities................ $ 787
---------
Total liabilities............................................. 787
---------
Owners' Equity:
Ocwen Federal Bank FSB.......................................... 73,023
BlackRock Capital Finance L.P................................... 73,023
---------
Total owners' equity.......................................... 146,046
---------
$ 146,833
---------
---------
</TABLE>
F-16
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
BCBF, L.L.C.
STATEMENT OF OPERATIONS
FOR PERIOD MARCH 13, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
Interest income.................................................... $ 38,647
Interest expense................................................... 18,503
---------
Net interest income.............................................. 20,144
---------
Non-interest income:
Gain on sale of discounted loans................................. 71,156
Gain on sale of loan servicing rights............................ 1,048
Loss on real estate owned........................................ (130)
Loan fees........................................................ 50
---------
72,124
---------
Operating expenses:
Loan servicing fees.............................................. 5,743
Other loan expenses.............................................. 273
---------
$ 6,016
---------
Net income....................................................... $ 86,252
---------
---------
</TABLE>
In October, 1996, the LLC securitized 9,825 loans with an unpaid principal
balance of $419,382 and past due interest of $86,131 and a net book value of
$394,234. Proceeds from sales of loans by the LLC amounted to $466,806 for the
period ending December 31, 1996. The Company continues to service such loans and
is paid a servicing fee.
The Company's equity in earnings of the LLC of $38,320 includes 50% of the
net income of the LLC before deduction of the Company's 50% share of loan
servicing fees which are paid 100% to the Company, 50% of the gain on sale of
loan servicing rights which the Company acquired from the LLC, $7,614 in
provision for losses on the equity investment in the joint venture and $460 from
gain on sale of future contracts used to hedge the loans securitized. The
Company has recognized 50% of the loan servicing fees not eliminated in
consolidation in servicing fees and other charges.
F-17
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
DISPOSITIONS
The Company 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 branch offices....................................... $ 5,430 $ 62,600
--------- ---------
--------- ---------
</TABLE>
Additionally, on October 4, 1995 the Company sold a hotel which it owned and
operated for a gain of $4,658.
NOTE 3 DISCONTINUED OPERATIONS
In September 1995, the Company announced its decisions to dispose of its
automated banking division and related activities. As a result of these
decisions, a loss of $3,204, net of a tax benefit of $1,776 was recorded
consisting of a net loss of $1,954 on the sale of assets and a loss of $1,250,
incurred from related operations until the sales and dispositions, both of which
were substantially complete at December 31, 1995. The Company's consolidated
statements of operations have been restated for all periods presented to reflect
the discontinuance of these operations. Losses from operations of the
discontinued division, net of tax, amounted to $4,468 and $4,514 for the nine
months ended September 30, 1995 and the year ended December 31, 1994,
respectively. Gross revenues from the automated banking division and related
activities for the years ended December 31, 1995 and 1994 amounted to $1,822 and
$1,768, respectively.
NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's assets, liabilities and off-balance sheet
instruments and commitments are considered financial instruments. For the
majority of the Company's financial instruments, principally loans and deposits,
fair values are not readily available since there are no available trading
markets as characterized by current exchanges between willing parties.
Accordingly, fair values can only be derived or estimated using various
valuation techniques, such as computing the present value of estimated future
cash flows using discount rates commensurate with the risks involved. However,
the determination of estimated future cash flows is inherently subjective and
imprecise. In addition, for those financial instruments with option-related
features, prepayment assumptions are incorporated into the valuation techniques.
It should be noted that minor changes in assumptions or estimation methodologies
can have a material effect on these derived or estimated fair values.
The fair values reflected below are indicative of the interest rate
environments as of December 31, 1996 and 1995 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
F-18
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
financial instruments and non-accrual assets. In addition, the fair values
presented do not attempt to estimate the value of the Company's fee generating
businesses and anticipated future business activities. In other words, they do
not represent the Company's value as a going concern. Furthermore, the
differences between the carrying amounts and the fair values presented may not
be realized because, except as indicated, the Company generally intends to hold
these financial instruments to maturity and realize their recorded values.
Reasonable comparability of fair values among financial institutions is
difficult due to the wide range of permitted valuation techniques and numerous
estimates that must be made in the absence of secondary market prices. This lack
of objective pricing standards introduces a degree of subjectivity to these
derived or estimated fair values. Therefore, while disclosure of estimated fair
values of financial instruments is required, readers are cautioned in using this
data for purposes of evaluating the financial condition of the Company.
The methodologies used and key assumptions made to estimate fair value, the
estimated fair values determined and recorded carrying values follow:
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 performing 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.
F-19
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
BORROWINGS
The fair value of the Company's notes and debentures is based upon quoted
market prices. The fair value of the Company's other borrowings is estimated
based upon the discounted value of the future cash flows expected to be paid on
such borrowings using estimated market discount rates that reflect the
borrowings of others with similar terms and maturities.
RISK MANAGEMENT INSTRUMENTS
The fair value of interest rate swap agreements is the estimated amount that
the Company would receive or pay to terminate the swap agreements at the
reporting date taking into account interest rates and the credit worthiness of
the swap counterparties on or about the respective financial statement dates.
Market quotes are used to estimate the fair value of interest rate futures
contracts.
LOAN COMMITMENTS
The fair value of loan commitments is estimated considering the difference
between interest rates on or about the respective financial statement dates and
the committed rates.
REAL ESTATE OWNED
Real estate, although not a financial instrument, is an integral part of the
Company's business. The fair value of real estate 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 (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(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, 1996 DECEMBER 31, 1995
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............ $ 52,219 $ 52,219 $ 54,632 $ 54,632
Securities held for trading.......... 75,606 75,606 -- --
Securities available for sale........ 354,005 354,005 337,480 337,480
Loans available for sale............. 126,366 128,784 251,790 253,854
Investment securities................ 8,901 8,901 18,665 18,657
Loan portfolio, net.................. 402,582 410,934 295,605 300,075
Discounted loan portfolio, net....... 1,060,953 1,140,686 669,771 682,241
Investments in low income housing tax
credit interest.................... 93,309 113,850 81,362 94,238
Real estate owned, net............... 103,704 130,221 166,556 187,877
Financial liabilities:
Deposits............................. 1,919,742 1,934,717 1,501,646 1,488,668
Advances from the Federal Home Loan
Bank............................... 399 399 70,399 70,530
Securities sold under agreements to
repurchase......................... 74,546 74,546 84,761 84,761
Notes, debentures and other interest
bearing obligations................ 225,573 246,511 117,054 120,398
Other:
Loan commitments..................... 194,128 194,128 54,405 54,405
</TABLE>
NOTE 5 SECURITIES HELD FOR TRADING
The book and market values and gross unrealized gains and losses for the
Company's securities held for trading at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
BOOK UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations............ $ 75,526 $ -- $ (140) $ 75,386
Futures contracts.............................. -- 220 -- 220
--------- ----- ----- ---------
$ 75,526 $ 220 $ (140) $ 75,606
--------- ----- ----- ---------
--------- ----- ----- ---------
</TABLE>
The Company traded assets totaling $373,723, $93,942 and $621,991 in
aggregate sales proceeds during the years ended December 31, 1996, 1995 and
1994, respectively, resulting in realized net gains of $14,645, $2,949 and
$4,118 for the years ended December 31, 1996, 1995 and 1994, respectively.
Unrealized gains on securities held for trading and included in gains on sales
of interest earning assets amounted to $80, $0 and $0, respectively, in 1996,
1995 and 1994.
F-21
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 6 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, 1996: COST GAINS LOSSES VALUE
- --------------------------------------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Mortgage-related securities:
Single family residential:
AAA-rated collateralized mortgage
obligations................................ $ 74,224 $ 227 $ (516) $ 73,935
FHLMC interest only.......................... 46,735 963 (127) 47,571
FNMA interest only........................... 48,573 1,315 (508) 49,380
AAA-rated interest only...................... 1,166 27 (20) 1,173
Subordinates................................. 15,550 3,614 -- 19,164
REMIC residuals.............................. 19,211 1,349 -- 20,560
Futures contracts............................ -- 19 (1,940) (1,921)
---------- ----------- ----------- ----------
205,459 7,514 (3,111) 209,862
---------- ----------- ----------- ----------
Multi-family and commercial:
AAA-rated interest only...................... 82,996 1,353 (759) 83,590
Non-investment grade interest only........... 3,620 205 (26) 3,799
Subordinates................................. 56,500 1,856 (822) 57,534
Futures contracts............................ -- -- (780) (780)
---------- ----------- ----------- ----------
143,116 3,414 (2,387) 144,143
---------- ----------- ----------- ----------
$ 348,575 $ 10,928 $ (5,498) $ 354,005
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Loans:
Single family residential.................... $ 111,980 2,949 (970) $ 113,959
Multi-family................................. 13,657 305 -- 13,962
Consumer..................................... 729 142 (8) 863
---------- ----------- ----------- ----------
$ 126,366 $ 3,396 $ (978) $ 128,784
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
F-22
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<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
Planned amortization class (PAC) residuals... 759 -- (185) 574
REMIC residuals.............................. 616 -- (144) 472
Futures contracts............................ -- 168 (1,766) (1,598)
---------- ----------- ----------- ----------
189,490 291 (4,200) 185,581
---------- ----------- ----------- ----------
Multi-family and commercial:
AAA-rated interest only...................... 101,110 2,840 (18) 103,932
FNMA interest only........................... 5,520 16 (275) 5,261
Subordinates................................. 43,605 845 (1,496) 42,954
Futures contracts............................ -- -- (248) (248)
---------- ----------- ----------- ----------
150,235 3,701 (2,037) 151,899
---------- ----------- ----------- ----------
$ 339,725 $ 3,992 $ (6,237) $ 337,480
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Loans:
Single family residential.................... $ 221,927 $ 1,736 $ -- $ 223,663
Multi-family................................. 28,694 314 -- 29,008
Consumer..................................... 1,169 14 -- 1,183
---------- ----------- ----------- ----------
$ 251,790 $ 2,064 $ -- $ 253,854
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
F-23
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
A profile of the maturities of securities available for sale at December 31,
1996 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............................................... $ 17,601 $ 17,735
Due after 1 through 5 years....................................... 211,955 209,887
Due after 5 through 10 years...................................... 92,023 95,103
Due after 10 years................................................ 26,996 31,280
-------------- ----------
$ 348,575 $ 354,005
-------------- ----------
-------------- ----------
</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>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Securities:
Gross realized gains..................................... $ 4,323 $ 1,266 $ 10,654
Gross realized losses.................................... (3,757) (2,079) (7,999)
---------- ---------- ----------
Net realized gains (losses).............................. $ 566 $ (813) $ 2,655
---------- ---------- ----------
---------- ---------- ----------
Proceeds on sales........................................ $ 175,857 $ 836,247 $ 877,911
---------- ---------- ----------
---------- ---------- ----------
Premiums amortized against interest income............... $ 23,508 $ 5,188 $ 2,782
Discounts accreted to interest income.................... (3,261) (3,135) (553)
---------- ---------- ----------
Net premium amortization................................. $ 20,247 $ 2,053 $ 2,229
---------- ---------- ----------
---------- ---------- ----------
Loans:
Gross realized gains..................................... $ 2,150 $ 1,817 $ 3,399
Gross realized losses.................................... (3,152) -- (806)
---------- ---------- ----------
---------- ---------- ----------
Net realized gains (losses).............................. $ (1,002) $ 1,817 $ 2,593
---------- ---------- ----------
---------- ---------- ----------
Proceeds on sales........................................ $ 397,606 $ 100,104 $ 383,673
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
One security in the available for sale portfolio, with a market value of
$6,570, 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 18).
F-24
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 7 INVESTMENT SECURITIES
The book and fair values and gross unrealized gains and losses on the
Company's investment securities are as follows at December 31:
<TABLE>
<CAPTION>
GROSS GROSS
BOOK UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
1996:
Federal Home Loan Bank stock................... $ 8,798 -- -- $ 8,798
Limited partnership interests.................. 103 -- -- 103
--
--------- ----- ---------
8,901 -- -- 8,901
--
--
--------- ----- ---------
--------- ----- ---------
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
--
--
--------- ----- ---------
--------- ----- ---------
</TABLE>
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>
1996 1995 1994
----- --------- ---------
<S> <C> <C> <C>
Premiums amortized against interest income............................. $ 36 $ 289 $ 324
Discounts accreted to interest income.................................. -- -- (12)
--- --------- ---------
Net premium amortization............................................... $ 36 $ 289 $ 312
--- --------- ---------
--- --------- ---------
</TABLE>
Included in interest income on investment securities and other for the
periods ended December 31, 1996, 1995 and 1994 are $1,767, $1,388 and $5,654,
respectively, of deferred fees accreted on tax residuals (see Note 21).
As a member of the FHLB system, the Bank is required to maintain an
investment in the capital stock of the FHLB in an amount at least equal to the
greater of 1% of residential mortgage assets, 5% of outstanding borrowings
(advances) from the FHLB, or 0.3% of total assets. FHLB capital stock is
generally pledged to secure FHLB advances.
NOTE 8 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).
F-25
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Premiums amortized against and discounts accreted to interest income on
mortgage-related securities were as follows for the periods ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Premiums amortized against interest income........................... $ -- $ 652 $ 1,043
Discounts accreted to interest income................................ -- (36) (277)
--------- --------- ---------
Net premium amortization............................................. $ -- $ 616 $ 766
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 9 LOAN PORTFOLIO
The Company's loan portfolio consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Carrying value:
Single family residential............................................. $ 73,186 $ 75,928
---------- ----------
Multi-family residential:
Permanent............................................................. 31,252 41,306
Construction.......................................................... 36,590 7,741
---------- ----------
Total multi-family residential........................................ 67,842 49,047
---------- ----------
Commercial real estate:
Hotel:
Permanent............................................................. 173,947 125,791
Construction.......................................................... 26,364 --
Office................................................................ 128,782 61,262
Land.................................................................. 2,332 24,904
Other................................................................. 25,623 2,494
---------- ----------
Total commercial real estate.......................................... 357,048 214,451
---------- ----------
Commercial non-mortgage............................................... 2,614 --
---------- ----------
Consumer.............................................................. 424 3,223
---------- ----------
Total loans........................................................... 501,114 342,649
Undisbursed loan funds................................................ (89,840) (39,721)
Unaccreted discount................................................... (5,169) (5,376)
Allowance for loan losses............................................. (3,523) (1,947)
---------- ----------
Loans, net............................................................ $ 402,582 $ 295,605
---------- ----------
---------- ----------
</TABLE>
At December 31, 1996 the Company had $6,407 of single family residential
loans, $2,310 of land loans and $3,733 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-26
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
Included in the loan portfolio at December 31, 1996 and 1995 are $315,871
and $180,223 of loans in which the Company participates in the residual profits
of the underlying real estate of which $233,749 and $142,139, respectively, have
been funded. The Company records any residual profits as part of interest income
when received.
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>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Non-performing loans:
Single family residential........................................ $ 2,123 $ 2,923 $ 2,478
Multi-family..................................................... 106 731 152
Consumer......................................................... 55 202 29
--------- --------- ---------
$ 2,284 $ 3,856 $ 2,659
--------- --------- ---------
--------- --------- ---------
Allowance for loan losses:
Balance, beginning of year....................................... $ 1,947 $ 1,071 $ 884
Provision for loan losses........................................ 1,872 1,121 --
Charge-offs...................................................... (296) (263) (472)
Recoveries....................................................... -- 18 659
--------- --------- ---------
Balance, end of year............................................. $ 3,523 $ 1,947 $ 1,071
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Significant ratios:
Non-performing loans as a percentage of:
Loans............................................. 0.56% 1.27% 4.35%
Total assets...................................... 0.09% 0.20% 0.21%
Allowance for loan losses as a percentage of:
Loans............................................. 0.87% 0.65% 1.84%
Non-performing loans.............................. 154.24% 50.49% 40.28%
Net charge-offs (recoveries) as a percentage of
average loans..................................... 0.09% 0.19% (0.28)%
</TABLE>
If non-accrual loans had been current in accordance with their original
terms, interest income for the years ended December 31, 1996, 1995 and 1994
would have been approximately $214, $322 and $207 higher, respectively. No
interest has been accrued on loans greater than 89 days past due.
At December 31, 1996, the Company had no investment in impaired loans as
defined in accordance with SFAS No. 114, and as amended by SFAS No. 118.
F-27
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The loan portfolio is geographically located throughout the United States.
The following table sets forth the five states in which the largest amount of
properties securing the Company's loans were located at December 31, 1996.
<TABLE>
<CAPTION>
SINGLE MULTI-
FAMILY FAMILY COMMERCIAL COMMERCIAL
RESIDENTIAL RESIDENTIAL REAL ESTATE NON-MORTGAGE CONSUMER TOTAL
----------- ----------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
New York..................................... $ 7,644 $ 34,115 $ 76,326 $ -- $ -- $ 118,085
Illinois..................................... 56 -- 81,280 -- -- 81,336
California................................... 18,551 15,733 39,710 2,614 -- 76,608
New Jersey................................... 32,996 -- 14,267 -- 22 47,285
Georgia...................................... -- -- 30,114 -- -- 30,114
Other........................................ 13,939 17,994 115,351 -- 402 147,686
----------- ----------- ----------- ------ ----- ----------
Total........................................ $ 73,186 $ 67,842 $ 357,048 $ 2,614 $ 424 $ 501,114
----------- ----------- ----------- ------ ----- ----------
----------- ----------- ----------- ------ ----- ----------
</TABLE>
NOTE 10 DISCOUNTED LOAN PORTFOLIO
The Company has acquired through private sales and auctions mortgage loans
at a discount because 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 nonperforming loans are carried at the
lower of amortized cost or net realizable value of the underlying collateral and
the remaining unaccreted discount is 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
------------------------
<S> <C> <C>
1996 1995
------------ ----------
Loan type:
Single family residential........................................... $ 504,049 $ 376,501
Multi-family residential............................................ 341,796 176,259
Commercial real estate.............................................. 465,801 388,566
Other............................................................... 2,753 2,203
------------ ----------
Total discounted loans.............................................. 1,314,399 943,529
Unaccreted discount................................................. (241,908) (273,758)
Allowance for loan losses........................................... (11,538) --
------------ ----------
Discounted loans, net............................................... $ 1,060,953 $ 669,771
------------ ----------
------------ ----------
</TABLE>
F-28
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1996 1995
------------ ----------
Loan status:
Past due less than 31 days.......................................... $ 579,597 $ 351,630
Past due 31 to 89 days.............................................. 22,161 86,838
Past due 90 days or more............................................ 563,077 385,112
Acquired and servicing not yet transferred.......................... 149,564 119,949
------------ ----------
$ 1,314,399 $ 943,529
------------ ----------
------------ ----------
</TABLE>
A summary of income on discounted loans is as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Interest income:
Realized.................................................... $ 97,174 $ 70,807 $ 48,734
Accreted and unrealized..................................... 5,991 5,191 3,826
---------- --------- ---------
$ 103,165 $ 75,998 $ 52,560
---------- --------- ---------
---------- --------- ---------
Gains on sales:
Realized gains on sales..................................... $ 7,393 $ 6,008 $ 890
---------- --------- ---------
---------- --------- ---------
Proceeds on sales........................................... $ 190,616 $ 38,942 $ 32,684
---------- --------- ---------
---------- --------- ---------
</TABLE>
The following table sets forth the activity in the Company's gross
discounted loan portfolio during the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
Principal balance, beginning of year................... $ 943,529 $ 785,434 $ 433,516
Acquisitions........................................... 1,110,887 791,195 826,391
Resolutions and repayments............................. (371,228) (300,161) (265,292)
Loans transferred to real estate owned................. (138,543) (281,344) (171,300)
Sales.................................................. (230,246) (51,595) (37,881)
------------ ---------- ----------
Principal balance, end of year......................... $ 1,314,399 $ 943,529 $ 785,434
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
F-29
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The discounted loan portfolio is geographically located throughout the
United States. The following table sets forth the five states in which the
largest amount of properties securing the Company's discounted loans were
located at December 31, 1996:
<TABLE>
<CAPTION>
SINGLE COMMERCIAL
FAMILY MULTI-FAMILY REAL ESTATE
RESIDENTIAL RESIDENTIAL AND OTHER TOTAL
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
California.............................. $ 175,916 $ 80,326 $ 114,279 $ 370,521
New Jersey.............................. 50,551 4,794 78,698 134,043
New York................................ 76,290 12,688 40,176 129,154
Pennsylvania............................ 8,856 97,062 4,430 110,348
Connecticut............................. 39,591 62,953 2,284 104,828
Other................................... 152,845 83,973 228,687 465,505
----------- ------------ ----------- ------------
Total................................... $ 504,049 $ 341,796 $ 468,554 $ 1,314,399
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
The following schedule presents a summary of the Company's allowance for
loan losses and significant ratios for its discounted loans as of and for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Allowance for loan losses:
Balance, beginning of year......................................... $ -- $ -- $ --
Provision for loan losses.......................................... 20,578 -- --
Charge-offs........................................................ (9,216) -- --
Recoveries......................................................... 176 -- --
--------- --------- ---------
Balance, end of year............................................... $ 11,538 $ -- $ --
--------- --------- ---------
--------- --------- ---------
Significant ratios:
Allowances for loan losses as a percentage of discounted loan
portfolio, net................................................... 1.09% -% -%
Net charge-offs (recoveries) as a percentage of average discounted
loans............................................................ 1.34% -% -%
</TABLE>
F-30
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 11 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>
1996 1995
---------- ----------
<S> <C> <C>
Discounted loan portfolio:
Single family residential............................................. $ 49,728 $ 75,144
Multi-family residential.............................................. 14,046 59,932
Commercial real estate................................................ 36,264 31,218
---------- ----------
Total discounted loan portfolio....................................... 100,038 166,294
Loan portfolio........................................................ 592 262
Loans available for sale.............................................. 3,074 --
---------- ----------
$ 103,704 $ 166,556
---------- ----------
---------- ----------
</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>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year..................................... $ 4,606 $ 3,937 $ 2,455
Provision for losses........................................... 18,360 10,510 9,074
Charge-offs and sales.......................................... (11,473) (9,841) (7,592)
--------- --------- ---------
Balance, end of year........................................... $ 11,493 $ 4,606 $ 3,937
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the 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>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Gains on sales............................................... $ 22,835 $ 19,006 $ 21,308
Provision for losses......................................... (18,360) (10,510) (9,074)
Rental income (carrying costs), net.......................... (648) 1,044 (6,239)
--------- --------- ---------
$ 3,827 $ 9,540 $ 5,995
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-31
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 12 INVESTMENT IN REAL ESTATE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Loans accounted for as investments in real estate:
Multi-family residential................................................ $ 24,946 $ --
Hotels:
Land.................................................................... 613 613
Building and leasehold improvements..................................... 14,874 11,402
Office and computer equipment........................................... 2,248 720
Less accumulated depreciation and amortization.......................... (1,648) (778)
--------- ---------
16,087 11,957
--------- ---------
$ 41,033 $ 11,957
--------- ---------
--------- ---------
</TABLE>
During 1995, the Company sold one of the two hotels it owned and operated (see
Note 2).
NOTE 13 MORTGAGE SERVICING RIGHTS
The Company services for other investors mortgage loans which it does not
own. The total amount of such loans serviced for others was $1,918,098 and
$361,608 at December 31, 1996 and 1995, respectively. Servicing fee income on
such loans amounted to $2,414, $493 and $231 for the years ended December 31,
1996, 1995 and 1994, respectively.
The unamortized balance of mortgage servicing rights, which are included in
other assets, is as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Unamortized balance........................................................ $ 4,048 $ 3,433
Valuation allowance........................................................ (1,630) --
--------- ---------
$ 2,418 $ 3,433
--------- ---------
--------- ---------
</TABLE>
Periodically, the Company evaluates the recoverability of mortgage servicing
rights based on the projected value of future net servicing income. Future
prepayment rates are estimated based on current interest rates and various
portfolio characteristics, including loan type, interest rate, and market
prepayment estimates. If the estimated recovery is lower than the current amount
of mortgage servicing rights, a reduction to mortgage servicing rights is
recorded through an increase in the valuation allowance. Valuation allowances
were established through charges to servicing fees and other charges during 1996
primarily as a result of higher than projected prepayment rates.
F-32
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 14 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>
1996 1995
--------- ---------
<S> <C> <C>
Investments solely as a limited partner made prior to
May 18, 1995.......................................................... $ 55,595 $ 58,911
Investments solely as a limited partner made on or after
May 18, 1995.......................................................... 12,887 4,223
Investments as both a limited and, through subsidiaries, general
partner............................................................... 24,827 18,228
--------- ---------
$ 93,309 $ 81,362
--------- ---------
--------- ---------
</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, 1996, the Company's
largest single investment was $15,402 which is in a project located in Fort
Lauderdale, Florida.
Income on the Company's limited partnership investments made prior to May
18, 1995 is recorded under the level yield method as a reduction of income tax
expense, and amounted to $9,330, $7,709 and $5,410 for the years ended December
31, 1996, 1995 and 1994, respectively. Had these investments been accounted for
under the equity method, net income would have been reduced by $2,223, $2,798
and $2,742 for the years ended December 31, 1996, 1995 and 1994, respectively.
For limited partnership investments made after May 18, 1995, and for investments
as a limited and, through subsidiaries, general partner, the Company recorded a
loss of $636 from operations of the underlying real estate after depreciation,
for the year ended December 31, 1996, and no income or expense for the years
ended December 31, 1995 and 1994.
Other liabilities include $9,105 and $9,794 at December 31, 1996 and 1995,
respectively, representing contractual obligations to fund certain limited
partnerships which invest in low income housing tax credit interests.
Included in other income for the year ended December 31 1996 is a gain of
$4,861 on the sale of certain investments in low income housing tax credit
interests which had a carrying value of $19,806 at time of sale.
F-33
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 15 PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Land.................................................................... $ 485 $ 485
Leasehold improvements.................................................. 5,999 5,672
Office and computer equipment........................................... 15,950 12,726
Other................................................................... -- 347
Less accumulated depreciation and amortization.......................... (7,815) (5,828)
--------- ---------
$ 14,619 $ 13,402
--------- ---------
--------- ---------
</TABLE>
NOTE 16 DEPOSITS
The Company's deposits consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
<S> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE BOOK AVERAGE BOOK
RATE VALUE RATE VALUE
----------- ------------ ----------- ------------
Non-interest bearing deposits.................................. -- % $ 96,563 -- % $ 48,482
NOW and money market checking accounts......................... 2.99 22,208 3.37 17,147
Savings accounts............................................... 2.30 2,761 2.30 3,471
------------ --- ------------
121,532 69,100
------------ --- ------------
Certificates of deposit........................................ 5.80 1,809,098 1,440,240
Unamortized deferred fees...................................... 5.47 (10,888) (7,694)
------------ --- ------------
1,798,210 5.68 1,432,546
------------ --- ------------
$ 1,919,742 5.46 $ 1,501,646
------------ --- ------------
------------ --- ------------
</TABLE>
At December 31, 1996 and 1995 certificates of deposit include $1,572,081 and
$1,123,196 respectively, of deposits originated through national, regional and
local investment banking firms which solicit deposits from their customers, all
of which are non-cancelable. Additionally, at December 31, 1996 and 1995,
$147,488 and $80,045, respectively, of certificates of deposit were issued on an
uninsured basis. Non-interest bearing deposits include $82,885 and $37,686 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, 1996 and 1995, respectively.
F-34
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The contractual maturity of the Company's certificates of deposit at
December 31, 1996 follows:
<TABLE>
<S> <C>
Contractual Remaining Maturity:
Within one year............................................... $ 916,056
Within two years.............................................. 375,286
Within three years............................................ 222,477
Within four years............................................. 144,978
Within five years............................................. 138,744
Thereafter.................................................... 669
---------
$1,798,210
---------
---------
</TABLE>
The amortization of the deferred fees of $5,384, $4,729 and $1,606 for the
years ended December 31, 1996, 1995 and 1994, respectively, and the accretion of
the purchase accounting discount of $0, $0 and $(2,991) for the years ended
December 31, 1996, 1995 and 1994, 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>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
NOW accounts and money market checking....................... $ 620 $ 1,031 $ 1,395
Savings...................................................... 78 451 2,602
Certificates of deposit...................................... 93,075 70,371 40,964
--------- --------- ---------
$ 93,773 $ 71,853 $ 44,961
--------- --------- ---------
--------- --------- ---------
</TABLE>
Accrued interest payable on deposits in the amount of $18,249 and $18,994 as
of December 31, 1996 and 1995, respectively, is included in accrued expenses,
payables and other liabilities.
NOTE 17 ADVANCES FROM THE FEDERAL HOME LOAN BANK ("FHLB")
Advances from the FHLB mature as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
DECEMBER 31, 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
INTEREST BOOK INTEREST BOOK
DUE DATE RATE VALUE RATE VALUE
- ------------------------------------------------------------------ ----------- --------- ----------- ---------
1996.............................................................. -- % $ -- 5.83% $ 70,000
1997.............................................................. 7.02% $ 399 7.02% $ 399
--------- ---------
$ 399 $ 70,399
--------- ---------
--------- ---------
</TABLE>
Accrued interest payable on FHLB advances amounted to $2 and $297 as of
December 31, 1996 and 1995, 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. At December
31, 1995 the Company's FHLB stock was pledged as additional collateral for these
advances.
F-35
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 18 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company periodically enters into sales of securities under agreements to
repurchase the same securities (reverse repurchase agreements). Fixed coupon
reverse repurchase agreements with maturities of three months or less 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, 1996, 1995 and 1994, 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 $0, $261 and $296, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ----------
Other information concerning securities sold under agreements to repurchase:
Balance, end of year.......................................................... $ 74,546 $ 84,761 $ --
Accrued interest payable, end of year......................................... $ 12 $ 153 $ --
Weighted average interest rate, end of year................................... 5.46% 5.70% --%
Average balance during the year............................................... $ 19,581 $ 16,754 $ 254,457
Weighted average interest rate during the year................................ 5.62% 5.68% 4.09%
Maximum month-end balance..................................................... $ 84,321 $ 84,761 $ 537,629
</TABLE>
Mortgage-related securities at amortized cost of $75,526 and a market value
of $75,386 were posted as collateral for securities sold under agreements to
repurchase at December 31, 1996.
NOTE 19 NOTES, DEBENTURES AND OTHER INTEREST BEARING OBLIGATIONS
Notes, debentures and other interest bearing obligations mature as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
1996
12% subordinated notes due January 2.................................. $ -- $ 1,012
10.5% subordinated notes due May 1.................................... -- 7,615
---------- ----------
-- 8,627
2003:
12% mortgage loan due September 1................................... -- 7,817
11.875% notes due October 1......................................... 125,000 --
2005:
12% subordinated debentures due June 15............................. 100,000 100,000
2014:
0-8.5% mortgage loan due December 1................................. 573 610
---------- ----------
$ 225,573 $ 117,054
---------- ----------
---------- ----------
</TABLE>
F-36
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The notes which matured in 1996 were payable to current or former
shareholders and executive officers.
On June 12, 1995 the Bank issued $100,000 of 12% Subordinated Debentures due
2005 (the "Debentures") with interest payable semiannually on June 15 and
December 15. The Debentures are unsecured general obligations of the Bank and
are subordinated in right of payment to all existing and future senior debt.
The Debentures may not be redeemed prior to June 15, 2000, except as
described below. On or after such date, the Debentures may be redeemed at any
time at the option of the Bank, in whole or in part, 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 $2,745 and $3,170, at December 31, 1996 and 1995,
respectively, and is included in other assets. Accrued interest payable on the
Debentures amounted to $500 at December 31, 1996 and 1995 and is included in
accrued expenses, payables and other liabilities.
On September 25, 1996 the Company completed the public offering of $125,000
aggregate principal of 11.875% Notes due October 1, 2003 ("the Notes") with
interest payable semi-annually on April 1 and October 1. The Notes are unsecured
general obligations of the Company and are subordinated in right of payment to
the claims of creditors of the Company and the Company's subsidiaries.
The Notes may not be redeemed prior to October 1, 2001 except as described
below. On or after such date, the Notes may be redeemed at any time at the
option of the Company, in whole or in part, at the following redemption prices
(expressed as a percentage of the principal amount) plus accrued and unpaid
interest, if redeemed during the twelve-month period beginning October 1 of the
years indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2001........................................................................ 105.938%
2002........................................................................ 102.969%
</TABLE>
F-37
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
In addition, the Company may redeem, at its option, up to 35% of the
original aggregate principal amount of the Notes at any time and from time to
time until October 1, 1999 with the net cash proceeds received by the Company
from one or more public or private equity offerings at a redemption price of
111.875% of the principal amount thereof, plus accrued and unpaid interest.
The indenture governing the Notes requires the Company to maintain, at all
times when the Notes are not rated in an investment grade category by one or
more nationally recognized statistical rating organization unencumbered liquid
assets with a value equal to 100% of the required interest payments due on the
Notes on the next two succeeding semi-annual interest payment dates. The Company
maintains a $15,000 investment in repurchase agreements at December 31, 1996
that is restricted for purposes of meeting this liquidity requirement. The
indenture further provides that the Company shall not sell, transfer or
otherwise dispose of shares of common stock of the Bank or permit the Bank to
issue, sell or otherwise dispose of shares of its common stock unless in either
case the Bank remains a wholly-owned subsidiary of the Company.
Proceeds from the offering of the Notes amounted to approximately $120,156
(net of underwriting discount). On September 30, 1996, the Company contributed
$50,000 of such proceeds to the Bank to support future growth. The remainder of
the proceeds retained by the Company are available for general corporate
purposes, with the exception of the liquidity maintenance requirement described
above.
In connection with the issuance of the Notes, the Company incurred certain
costs which have been capitalized and are being amortized on a straight-line
basis over the life of the Notes. The unamortized balance of these issuance
costs amounted to $5,252 at December 31, 1996 and is included in other assets.
Accrued interest payable on the Notes amounted to $3,752 at December 31, 1996
and is included in accrued expenses, payables and other liabilities.
In November 1996, the Company acquired the 12% first mortgage note due
September 1, 2003 from an unaffiliated third party. The principal balance and
related interest have been eliminated in consolidation at December 31, 1996.
NOTE 20 INTEREST RATE RISK MANAGEMENT INSTRUMENTS
In managing its interest rate risk, the Company on occasion enters into
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 notional amount of the swap outstanding at December 31, 1996 is
amortized (i.e., reduced) monthly based on estimated prepayment rates. The
Company had no outstanding swaps at December 31, 1995. The terms of the
outstanding swap at December 31, 1996 follows:
<TABLE>
<CAPTION>
NOTIONAL LIBOR FLOATING RATE
MATURITY AMOUNT INDEX FIXED RATE AT END OF YEAR FAIR VALUE
- ------------------------------- --------- ---------- ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
1998........................... $ 45,720 1-Month 6.18% 5.67% $ (103)
</TABLE>
F-38
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The 1-month LIBOR was 5.50% on December 31, 1996. The interest expense or
benefit of the swaps had the effect of increasing (decreasing) net interest
income by ($58), $358 and ($754) for the years ended December 31, 1996, 1995 and
1994, respectively.
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 maturity risk of
certain 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 mortgage loans and certain fixed rate mortgage-backed and related
securities available for sale in a rising interest rate environment.
Terms and other information on interest rate futures contracts sold short
are as follows:
<TABLE>
<CAPTION>
NOTIONAL
MATURITY PRINCIPAL FAIR VALUE
----------- ----------------- -----------
<S> <C> <C> <C>
December 31, 1996:
Eurodollar futures................................. 1997 $ 365,000 $ (558)
1998 40,000 (87)
U.S. Treasury futures.............................. 1997 165,100 498
December 31, 1995:
Eurodollar futures................................. 1996 $ 386,000 $ (1,598)
1997 26,000 (168)
U.S. Treasury futures.............................. 1996 11,100 (80)
</TABLE>
The following table summarizes the Company's use of interest rate risk
management instruments.
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
--------------------------------------
<S> <C> <C> <C>
SHORT SHORT
EURODOLLAR U.S. TREASURY
SWAPS FUTURES FUTURES
---------- ----------- -------------
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
Purchases........................................... 47,350 564,000 3,362,400
Maturities.......................................... (1,630) -- --
Terminations........................................ -- (571,000) (3,208,400)
---------- ----------- -------------
Balance, December 31, 1996............................ $ 45,720 $ 405,000 $ 165,100
---------- ----------- -------------
---------- ----------- -------------
</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
F-39
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
loss in the event of nonperformance by the counterparty to the swap and controls
this risk through credit monitoring procedures. The notional principal amount
does not represent the Company's exposure to credit loss.
U.S. Treasury Bills with a carrying value of $3,138 and $1,134 and a fair
value of $3,138 and $1,134 were pledged by the Company as security for the
obligations under these swaps and interest rate futures contracts at December
31, 1996 and 1995, respectively.
NOTE 21 INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Income from continuing operations............................. $ 11,159 $ 4,562 $ 29,724
Discontinued operations....................................... -- (4,097) (2,227)
Benefit of tax deduction in excess of amounts recognized for
financial reporting purposes related to employee stock
options reflected in stockholders' equity................... -- (375) (39)
--------- --------- ---------
$ 11,159 $ 90 $ 27,458
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of income tax expense (benefit) attributable to income from
continuing operations were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Current: Federal................................... $ (6,844) $ 1,673 $ 26,267
State..................................... (576) 5,011 2,261
--------- --------- ---------
(7,420) 6,684 28,528
--------- --------- ---------
Deferred: Federal................................... 16,616 1,762 1,022
State..................................... 1,963 (3,884) 174
--------- --------- ---------
18,579 (2,122) 1,196
--------- --------- ---------
Total.................................................. $ 11,159 $ 4,562 $ 29,724
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-40
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(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,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Expected income tax expense at statutory rate................ $ 21,455 $ 13,196 $ 28,552
Differences between expected and actual tax:
Excess of cost over net assets acquired adjustments.......... (76) (76) 3,592
Tax effect of (utilization) non-utilization of net operating
loss....................................................... (1,782) (1,380) 23
State tax (after Federal tax benefit)........................ 901 733 2,054
Low income housing tax credits............................... (9,330) (7,709) (5,410)
Other........................................................ (9) (202) 913
--------- --------- ---------
Actual income tax expense.................................. $ 11,159 $ 4,562 $ 29,724
--------- --------- ---------
--------- --------- ---------
</TABLE>
For taxable years beginning prior to January 1, 1996, a savings institution
that met certain definitional tests relating to the composition of its assets
and the sources of its income (a "qualifying savings institution") was permitted
to establish reserves for bad debts and make annual additions thereto under the
experience method. Alternatively, a qualifying savings institution could elect,
on an annual basis, to use the percentage of taxable income method to compute
its allowable addition to its bad debt reserve on qualifying real property loans
(generally loans secured by an interest in improved real estate). The applicable
percentage was 8% for tax periods after 1987. The Bank utilized the percentage
of taxable income method for these years.
On August 20, 1996, President Clinton signed the Small Business Job
Protection Act (the "Act") into law. One provision of the Act repeals the
reserve method of accounting for bad debts for savings institutions effective
for taxable years beginning after 1995. The Bank, therefore, will be required to
use the specific charge-off method on its 1996 and subsequent federal income tax
returns. The Bank will be required to recapture its "applicable excess
reserves", which are its federal tax bad debt reserves in excess of the base
year reserve amount described in the following paragraph. The Bank will include
one-sixth of its applicable excess reserves in taxable income in each year from
1996 through 2001. As of December 31, 1995, the Bank had approximately $42.4
million of applicable excess reserves. As of December 31, 1996, the Bank had
fully provided for the tax related to this recapture. The base year reserves
will continue to be subject to recapture and the Bank could be required to
recognize a tax liability if: (1) the Bank fails to qualify as a "bank" for
federal income tax purposes, (2) certain distributions are made with respect to
the stock of the Bank, (3) the bad debt reserves are used for any purpose other
than to absorb bad debt losses, or (4) there is a change in federal tax law. The
enactment of this legislation is expected to have no material impact on the
Bank's or the Company's operations or financial position.
In accordance with SFAS No. 109 "Accounting for Income Taxes," a deferred
tax liability has not been recognized for the tax bad debt base year reserves of
the Bank. The base year reserves are generally the balance of reserves as of
December 31, 1987 reduced proportionately for reductions in the Bank's loan
portfolio between that date and December 31, 1995. At December 31, 1996 and
1995, the amount of those reserves was approximately $5.7 million. This reserve
could be recognized in the future under the conditions described in the
preceding paragraph.
F-41
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
The net deferred tax liability was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1996 1995
--------- ---------
Deferred Tax Assets:
Tax residuals and deferred income on tax residuals..................... $ 3,712 $ 27,648
State taxes............................................................ 552 2,563
Application of purchase accounting..................................... 1,503 1,031
Accrued profit sharing................................................. 1,422 2,940
Accrued other liabilities.............................................. 420 739
Deferred interest expense on discounted loan portfolio................. 3,989 2,130
Mark to market and reserves on REO properties.......................... 3,513 1,059
Other.................................................................. -- 105
--------- ---------
15,111 38,215
--------- ---------
Deferred Tax Liabilities:
Bad debt reserves...................................................... 810 12,356
Deferred interest income on discounted loan portfolio.................. 4,632 4,276
Partnership losses..................................................... 1,205 --
Other.................................................................. 500 553
--------- ---------
7,147 17,185
--------- ---------
7,964 21,030
Mark to market on certain mortgage-backed and related securities
available for sale................................................... (2,104) 1,233
--------- ---------
5,860 22,263
--------- ---------
Deferred tax asset valuation allowance................................. -- --
Net deferred tax assets................................................ $ 5,860 $ 22,263
--------- ---------
--------- ---------
</TABLE>
Deferred tax assets, net of deferred fees, include tax residuals which
result from the ownership of Real Estate Mortgage Investment Conduits ("REMIC").
While a tax residual is anticipated to have little or no future cash flows from
the REMIC from which it has been issued, the tax residual does bear the income
tax liability and benefit resulting from the annual differences between the
interest paid on the debt instruments issued by the REMIC and the interest
received on the mortgage loans held by the REMIC. Typically this difference
generates taxable income to the Company in the first several years of the REMIC
and equal amounts of tax losses thereafter, thus resulting in the deferred tax
asset. As a result of the manner in which REMIC residual interests are treated
for tax purposes, at December 31, 1996, 1995 and 1994, the Company had
approximately $10,228, $55,000 and $12,400, respectively, of net operating loss
carryforwards for tax purposes. The net operating loss carryforward of $10,228
will expire, if unused, in the year 2010.
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, 1996. In evaluating the expectation of sufficient
future taxable
F-42
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
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, 1996 and 1995 as
it was the Company's assessment that, based on available information, it is more
likely than not that all of the deferred tax asset will be realized. A valuation
allowance will be established in the future to the extent of a change in the
Company's assessment of the amount of the net deferred tax asset that is
expected to be realized.
NOTE 22 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 Berkeley Federal Savings Bank in June
1993, 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 was frozen for the plan year
ended December 31, 1993 and has been fully funded.
The Company's combined contributions to 401(k) plan in the years ended
December 31, 1996, 1995, and 1994 were $258, $248 and $163, respectively.
NOTE 23 STOCKHOLDERS' EQUITY
On July 12, 1996 stockholders of the Company approved an amendment to the
Company's articles of incorporation to increase the authorized number of common
shares from 20,000,000 to 200,000,000 shares, to increase the authorized number
of preferred shares from 250,000 to 20,000,000 shares and to decrease the par
value of the authorized preferred shares from $1.00 to $0.01 per share. On July
30, 1996, the Company's Board of Directors declared a 10 for 1 stock split for
each share of common stock then outstanding in the form of a stock dividend
which was paid to holders of record on July 31, 1996. All references in the
interim consolidated financial statements to the number of shares and per share
amounts have been adjusted retroactively for the recapitalization and stock
split.
During September 1996, 2,928,830 shares of common stock were issued in
connection with the exercise of vested stock options by certain of the Company's
and the Bank's current and former officers and directors. The Company loaned
$6,654 to certain of such officers to fund their exercise of the stock options.
Such notes, which are presented as a reduction of shareholders' equity, have an
unpaid principal balance of $3,832 at December 31, 1996, bear interest at 10.5%
per annum, are payable in two equal installments on March 1, 1998 and March 1,
1999 and are secured by the related shares of common stock.
On September 25, 1996, certain stockholders of Ocwen completed an initial
public offering of 2,300,000 shares of Ocwen common stock. Prior to this
offering, there had been no public trading market for the common stock. The
common stock is quoted on The NASDAQ Stock Market under the symbol "OCWN". The
Company did not receive any of the proceeds from the common stock offering.
During 1995, the Company repurchased from stockholders and retired 8,815,060
shares of common stock for the aggregate price of $41,997.
F-43
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
In December 1991, as part of its annual incentive compensation plan, the
Company adopted a Non-Qualified Stock Option Plan (the "Stock Plan"). The Stock
Plan provides for the issuance of stock options to key employees to purchase
shares of common stock at prices less than the fair market value of the stock at
the date of grant.
<TABLE>
<CAPTION>
OPTIONS
OPTIONS EXERCISE OPTIONS FORFEITED OR OPTIONS
GRANTED PRICE EXERCISED REPURCHASED VESTED
---------- ----------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
1994:............................ 1,149,320 .79 1,059,440 89,880 --
1995:............................ 297,380 5.76 -- 44,400 252,980
1995:............................ 7,110 .94 -- -- 7,110
1996:............................ 573,686 22.00 -- -- --
</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 $2,725, $65, and $4,571 for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company has adopted SFAS No. 123 during 1996. In accordance with the
provisions of SFAS No. 123, the Company has retained its current accounting
metod for its stock-based employee compensation plans under the provisions of
APB 25, "Accounting for Stock Issued to employee" ("APB 25"). However, entities
continuing to apply APB 25 are required to disclose pro forma net income and
earnings per share as if the fair value method of accounting for stock-based
employee compensation plans as prescribed by SFAS No. 123 had been utilized. The
following is a summary of the Company's for forma information:
<TABLE>
<S> <C>
Net income (as reported)........................................... $ 50,142
Pro forma net income............................................... $ 47,777
Earnings per share(as reported).................................... $ 1.88
Pro forma earnings per share....................................... $ 1.79
</TABLE>
The fair value of the option grants were estimated using the Black-Scholes
option-pricing model with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield............................................ 0.00%
Expected stock price volatility.................................... 21.00%
Risk-free interest rate............................................ 6.20%
Expected life of options........................................... 5 years
</TABLE>
NOTE 24 REGULATORY REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989,
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institution subject to OTS
supervision. The Bank must follow specific capital guidelines stipulated by the
OTS which involve quantitative measures of the Bank's assets, liabilities and
certain off-balance sheet items. An institution that fails to comply with its
regulatory capital requirements must obtain OTS approval of a capital plan and
can be subject to a capital directive and certain restrictions on its
operations. At December 31, 1996, the minimum regulatory capital requirements
were:
F-44
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
-- Tangible and core capital of 1.5 percent and 3 percent of total adjusted
assets, respectively, consisting principally of stockholders' equity, but
excluding most intangible assets, such as goodwill and any net unrealized
holding gains or losses on debt securities available for sale.
-- Risk-based capital consisting of core capital plus certain subordinated
debt and other capital instruments and, subject to certain limitations,
general valuation allowances on loans receivable, equal to 8 percent of
the value of risk-weighted assets.
-- At December 31, 1996, the Bank was "well capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
To be categorized as "well capitalized", the Bank must maintain minimum
core capital, Tier 1 risk-based capital and risk-based capital ratio as
set forth in the table below. The Bank's capital amounts and
classification are subject to review by federal regulators about
components, risk-weightings and other factors. There are no conditions or
events since December 31, 1996 that management believes have changed the
institution's category.
The following tables summarizes the Bank's actual and required regulatory
capital at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------------
TO BE WELL
CAPITALIZED
MINIMUM FOR CAPITAL FOR PROMPT
CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------- ----------------------- ---------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
--------- ------------ ----- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity, and ratio to total
assets........................................ 9.49% $ 228,153
Net unrealized (gain) on certain available for
sale securities............................... (3,526)
Excess mortgage servicing rights................ (242)
------------
Tangible capital, and ratio to adjusted total
assets........................................ 9.33% $ 224,385 1.50% $ 36,057
------------ ----------
------------ ----------
Tier 1 (core) capital, and ratio to adjusted
total assets.................................. 9.33% $ 224,385 3.00% $ 72,114 5.00% $ 120,190
------------ ---------- ----------
------------ ---------- ----------
Tier 1 capital, and ratio to risk-weighted
assets........................................ 8.47% $ 224,385 6.00% $ 159,011
------------ ----------
------------ ----------
Allowance for loan and lease losses............. 16,057
Subordinated debentures......................... 100,000
------------
Tier 2 Capital.................................. 116,057
------------
Total risk-based capital, and ratio to risk-
weighted assets............................... 12.85% $ 340,442 8.00% $ 212,014 10.00% $ 265,018
------------ ---------- ----------
------------ ---------- ----------
Total regulatory assets......................... $ 2,405,188
------------
------------
Adjusted total assets........................... $ 2,403,790
------------
------------
Risk-weighted assets............................ $ 2,650,175
------------
------------
</TABLE>
(CONTINUED ON NEXT PAGE)
F-45
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------------------
TO BE WELL
CAPITALIZED
MINIMUM FOR CAPITAL FOR PROMPT
CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------------- ----------------------- ---------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
--------- ------------ ----- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity, and ratio to total
assets........................................ 6.47% $ 124,725
Net unrealized loss on certain available for
sale securities............................... 1,416
Excess mortgage servicing rights................ (344)
------------
Tangible capital, and ratio to adjusted total
assets........................................ 6.52% $ 125,797 1.50% $ 28,952
------------ ----------
------------ ----------
Tier 1 (core) capital, and ratio to adjusted
total assets.................................. 6.52% $ 125,797 3.00% $ 57,904 5.00% $ 96,506
------------ ---------- ----------
------------ ---------- ----------
Tier 1 capital, and ratio to risk-weighted
assets........................................ 6.52% $ 125,797 6.00% $ 115,743
------------ ----------
------------ ----------
Allowance for loan and lease losses............. 1,757
Subordinated debentures......................... 100,000
------------
Tier 2 Capital.................................. 101,757
------------
Total risk-based capital, and ratio to risk-
weighted assets............................... 11.80% $ 227,554 8.00% $ 154,324 10.00% $ 192,906
------------ ---------- ----------
------------ ---------- ----------
Total regulatory assets......................... $ 1,929,054
------------
------------
Adjusted total assets........................... $ 1,930,126
------------
------------
Risk-weighted assets............................ $ 1,929,056
------------
------------
</TABLE>
F-46
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
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, 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, the Bank must
submit written notice to the OTS 30 days in advance of making the distribution.
In addition to these OTS regulations governing capital distributions (see
Note 19) the indenture governing the Bank's debentures limits the declaration or
payment of dividends and the purchase or redemption of common or preferred stock
in the aggregate to the sum of 50% of consolidated net income and 100% of all
capital contributions and proceeds from the issuance or sale (other than to a
subsidiary) of common stock, since the date the Debentures were issued.
Subsequent to December 31, 1996, in connection with a recent examination of
the Bank, the staff of the OTS expressed concern about many of the Bank's
non-traditional operations, which generally are deemed by the OTS to involve
higher risk, and the adequacy of the Bank's capital in light of the Bank's
lending and investment strategies, notwithstanding that it is a
"well-capitalized institution" under OTS regulations. The activities which are
of concern to the OTS include the Bank's single-family residential lending
activities to non-conforming borrowers, the Bank's origination of acquisition,
development and construction loans with terms which provide for shared
participation in the results of the underlying real estate, the Bank's
discounted loan activities, which involve significantly higher investment in
non-performing and classified assets than the majority of the savings industry,
and the Bank's investment in subordinated classes of mortgage-related securities
issued in connection with the Bank's asset securitization activities and
otherwise.
In connection with the examination, the OTS instructed the Bank, commencing
on June 30, 1997, to maintain a ratio of Tier 1 capital to assets of at least
12% and a total risk-based capital ratio of no less than 18%, which amounts may
be decreased in the event that the Bank reduces its risk profile in a manner
which is satisfactory to the OTS. Although the Bank strongly disagrees with the
level of risk perceived by the OTS in its businesses, the Bank has taken the
following actions in response to the OTS concerns: (i) sold to Ocwen
subordinated, participating interests in a total of eleven acquisition,
development and construction loans, which interests had an aggregate principal
balance of $16,949, (ii) modified certain of its accounting practices,
including, among other things, ceasing to accrue unaccreted discount on non-
performing single-family residential loans commencing as of January 1, 1997,
(iii) ceased originating acquisition, development and construction loans with
profit participation features in the underlying real estate, with the exception
of existing commitments, and (iv) established as of December 31, 1996 requested
write downs of cost basis, which amounted to $7.2 million, against loans and
securities resulting from its investment in loans acquired from HUD.
The Bank intends to meet with the OTS staff to present recommendations by
the Bank to transfer some of its non-traditional assets to Ocwen, one or more
affiliates of Ocwen and/or one or more affiliates of the Bank in order to
decrease the specified capital ratios the Bank has been instructed to maintain.
Based on discussions with the OTS, the Bank does not believe at this time that
any requirement to maintain higher levels of capital will be pursuant to a
written agreement, order or directive which would
F-47
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
cause it to cease to be a "well-capitalized institution" under OTS regulations,
assuming compliance with any new capital requirements.
NOTE 25 OTHER EXPENSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Other operating expenses:
Professional fees.......................................... $ 2,979 $ 2,786 $ 2,928
Loan related expenses...................................... 4,111 2,433 1,332
FDIC insurance............................................. 3,098 2,212 2,220
Marketing.................................................. 701 968 1,305
Travel and lodging......................................... 1,291 925 1,566
Corporate insurance........................................ 1,209 637 501
Investment and treasury services........................... 438 387 681
Deposit related expenses................................... 91 303 513
OTS assessment............................................. 293 257 393
Other.................................................... 1,402 2,181 2,864
--------- --------- ---------
$ 15,613 $ 13,089 $ 14,303
--------- --------- ---------
--------- --------- ---------
</TABLE>
Included in the 1996 results of operations is a non-recurring expense of
$7,140 related to the Federal Deposit Corporation's ("FDIC") assessment to
recapitalized the Savings Association Insurance Fund ("SAIF") as a result of
federal legislation passed into law on September 30, 1996.
NOTE 26 BUSINESS LINE REPORTING
The Company considers itself to be involved in the single business segment
of providing financial services and conducts a variety of business activities
within this segment. Such activities are as follows:
<TABLE>
<CAPTION>
INCOME FROM
CONTINUING
INTEREST OPERATIONS
INCOME BEFORE TAXES ASSETS
---------- ------------ ------------
<S> <C> <C> <C>
December 31, 1996:
Asset acquisition, servicing and resolution........ $ 111,209 $ 51,711 $ 1,454,320
Residential finance................................ 22,609 8,600 204,880
Commercial finance................................. 26,433 1,038 373,316
Investment management.............................. 27,590 3,344 342,801
Retail banking..................................... 6,006 (5,983) 34,873
Hotel operations................................... -- 453 16,087
Other.............................................. 47 2,138 57,408
---------- ------------ ------------
$ 193,894 $ 61,301 $ 2,483,685
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
(CONTINUED ON NEXT PAGE)
F-48
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<S> <C> <C> <C>
December 31, 1995:
Asset acquisition and resolution......... $ 77,143 $ 28,184 $ 910,680
Residential finance...................... 13,323 1,338 321,350
Commercial finance....................... 23,708 (1,686) 356,690
Investment management.................... 21,855 3,641 328,263
Retail banking........................... 44 4,053 3,449
Hotel operations......................... -- 2,593 19,451
Other.................................... 1,202 (422) 33,707
--------- ----------- ---------
$ 137,275 $ 37,701 $1,973,590
--------- ----------- ---------
--------- ----------- ---------
December 31, 1994:
Asset acquisition and resolution......... $ 53,357 $ 18,008 $ 656,125
Residential finance...................... 4,573 (303) 59,513
Commercial finance....................... 21,566 4,550 175,958
Investment management.................... 47,906 7,504 308,530
Retail banking........................... 121 53,214 27,282
Hotel operations......................... -- (1,808) 26,149
Other.................................... 3,935 412 12,846
--------- ----------- ---------
$ 131,458 $ 81,577 $1,266,403
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
The asset acquisition, servicing and resolution activity 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 multi-family and commercial real estate loans held for investment, the
origination and purchase of multi-family residential loans available for sale,
and investments in low income housing tax credit partnerships. Low income
housing tax credits and benefits of $9,330, $7,709 and $5,410 were earned as
part of the commercial finance activity for the years ended December 31, 1996,
1995 and 1994, respectively, and are not reflected in the above table as they
are included as credits against income tax expense. Investment management
includes the results of the securities portfolio, whether available for sale,
trading or investment, other than REMIC residuals and subordinate interests
related to the Company's securitization activities which have been included in
the related business activity. Retail banking activities include the results of
the Company's retail branch network which consists of one branch at December 31,
1996 and 1995. Included in retail banking income from continuing operations
before taxes for 1996 is the SAIF recapitalization assessment of $7,140. In
addition, retail banking income from continuing operations before taxes for the
years ended December 31, 1995 and 1994 include gains on sales of branches, net
of profit sharing expense, of $4,344 and $50,080, 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 treasury 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.
F-49
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 27 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>
1997............................................................... $ 1,118
1998............................................................... 1,137
1999............................................................... 1,194
2000............................................................... 1,210
2001............................................................... 1,302
2002-2005.......................................................... 4,083
---------
Minimum lease payments............................................. $ 10,044
---------
---------
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$1,563, $1,601 and $2,402, respectively, which are net of sublease rentals of
$0, $68, and $339, respectively.
At December 31, 1996 the Company was committed to land up to $5,744 under
outstanding unused lines of credit. The Company also had commitments to (i)
originate $105,490 of loans secured by multi-family residential buildings, (ii)
originate $19,849 of mortgage loans secured by office buildings and (iii)
originate $55,949 of loans secured by hotel properties and (iv) originate
$12,840 of loans secured by land. In connection with its 1993 acquisition of
Berkeley Federal Savings Bank, the Company has a recourse obligation of $3,486
on single family residential loans sold to the Federal Home Loan Mortgage
Corporation ("FHLMC"). The Company, through its investment in subordinated
securities and REMIC residuals, which had a carrying value of $76,699 at
December 31, 1996, supports senior classes of securities having an outstanding
principal balance of $1,453,575.
At December 31, 1995 the Company was committed to lend up to $9,884 under
outstanding unused lines of credit. The Company also had commitments to (i)
originate multi-family construction loans with aggregate principal balances of
$8,907, (ii) purchase $4,800 of residential discounted loans, (iii) originate
$5,390 of loans secured by office buildings, and (iv) originate $25,424 of
mortgage loans secured by hotel properties. In connection with its acquisition
of Berkeley Federal Savings Bank, the Company had 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 carrying value of $70,264 at December 31, 1995, supports senior
classes of securities having an outstanding principal balance of $868,835.
On October 29, 1996, Ocwen Financial Services, Inc., a wholly-owned
subsidiary of Ocwen, entered into an asset purchase agreement ("Asset Purchase
Agreement") to acquire Admiral Home Loan ("Admiral"), a California corporation
engaged in the origination of loans to credit-impaired borrowers secured by
first mortgage liens on single-family residential real property, both through
the wholesale acquisition of such loans originated by mortgage brokers and
through its retail offices, and selling of such originated loans, servicing
released, to third parties. Under the Asset Purchase Agreement, as amended,
Ocwen has agreed to pay $6,750 to acquire an 80% interest in the assets of
Admiral. Closing of the acquisition is expected to occur during the second
quarter of 1997.
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-50
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 28 PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
ASSETS
Cash and cash equivalents............................................................... $ 32,348 $ 1,028
Securities available for sale, at market value.......................................... 13,062 --
Investment in bank subsidiary........................................................... 221,094 117,300
Investments in non-bank subsidiaries.................................................... 31,907 35,660
Loan portfolio, net..................................................................... 12,365 520
Investment in real estate............................................................... 9,680 --
Income taxes receivable................................................................. 10,003 --
Prepaid expenses and other assets....................................................... 5,424 4,240
---------- ----------
$ 335,883 $ 158,748
---------- ----------
---------- ----------
LIABILITIES
Notes payable........................................................................... $ 125,000 $ 8,627
Other liabilities....................................................................... 7,287 10,574
---------- ----------
Total liabilities..................................................................... 132,287 19,201
---------- ----------
STOCKHOLDERS' EQUITY
Total stockholders' equity.............................................................. 203,596 139,547
---------- ----------
$ 335,883 $ 158,748
---------- ----------
---------- ----------
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Interest income.................................................................. $ 1,400 $ 401 $ 42
Non-interest income.............................................................. 511 8 67
--------- --------- ---------
1,911 409 109
Interest expense................................................................. (4,406) (654) (678)
Non-interest expense............................................................. (1,131) (277) (401)
--------- --------- ---------
Loss before income taxes....................................................... (3,626) (522) (970)
Income tax benefit............................................................... 2,925 1,533 1,197
--------- --------- ---------
Income (loss) before equity in net income of subsidiaries........................ (701) 1,011 227
Equity in net income of bank subsidiary.......................................... 49,186 24,773 51,650
Equity in net income (loss) of non-bank subsidiaries............................. 1,657 (317) (4,538)
--------- --------- ---------
Net income................................................................... $ 50,142 $ 25,467 $ 47,339
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-51
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
CONDENSED STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Cash flows from operating activities:
Net income.................................................................. $ 50,142 $ 25,467 $ 47,339
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Equity in income of bank subsidiary....................................... (49,186) (24,773) (51,650)
Equity in (income) loss of non-bank subsidiaries.......................... (1,657) 317 4,538
Increase in other assets.................................................. 4,067 (2,254) (1,351)
Increase in income taxes receivable....................................... (10,003) -- (596)
Increase (decrease) in accrued expenses, payables and other liabilities... (3,286) 5,209 2,023
---------- ---------- ----------
Net cash provided (used) by operating activities............................ (9,923) 3,966 303
---------- ---------- ----------
Cash flows from investing activities:
Purchase of securities available for sale................................... (13,125) -- --
Maturities of and principal payments received on securities available for
sale...................................................................... 63 -- --
Net distributions from (investments in) bank subsidiary..................... (49,707) 39,216 802
Net distributions from (investments in) non-bank subsidiaries............... 5,410 (10,450) 11,491
Purchase of real estate held for investment................................. (9,680) -- --
Purchase of loans held for investment....................................... (11,845) (520) --
---------- ---------- ----------
Net cash provided (used) by investing activities.......................... (78,884) 28,246 12,293
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes and debentures.............................. 125,000 7,615 --
Payment of debt issuance costs.............................................. (5,252) -- --
Repayment of notes payable.................................................. (8,628) -- (13,566)
Loans to executive officers, net............................................ (3,832) -- --
Exercise of common stock options............................................ 12,993 1,420 --
Repurchase of common stock options and common stock......................... (177) (42,129) (74)
Other....................................................................... 23 -- --
---------- ---------- ----------
Net cash provided (used) by financing activities.......................... 120,127 (33,094) (13,640)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents........................ 31,320 (882) (1,044)
Cash and cash equivalents at beginning of year.............................. 1,028 1,910 2,954
---------- ---------- ----------
Cash and cash equivalents at end of year.................................... $ 32,348 $ 1,028 $ 1,910
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-52
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
NOTE 29 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1996
------------ ------------- ---------- ----------
Interest income............................................. $ 50,292 $ 44,145 $ 51,501 $ 47,956
Interest expense............................................ (33,907) (27,217) (27,131) (27,905)
Provision for loan losses................................... (3,611) (4,469) (4,979) (9,391)
------------ ------------- ---------- ----------
Net interest income after provision for loan losses......... 12,774 12,459 19,391 10,660
Non-interest income......................................... 10,815 15,104 8,378 2,978
Non-interest expense........................................ (22,540) (21,489) (14,164) (11,385)
Equity in earnings of investment in joint venture........... 33,103 4,139 1,078 --
------------ ------------- ---------- ----------
Income before income taxes.................................. 34,152 10,213 14,683 2,253
Income taxes (expense) benefit.............................. (9,092) (157) (2,686) 776
------------ ------------- ---------- ----------
Net income.................................................. $ 25,060 $ 10,056 $ 11,997 $ 3,029
------------ ------------- ---------- ----------
------------ ------------- ---------- ----------
Earnings per share.......................................... $ 0.93 $ 0.37 $ 0.45 $ 0.11
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------ ------------- ---------- ----------
Interest income............................................. $ 44,916 $ 32,489 $ 33,840 $ 26,030
Interest expense............................................ (26,692) (22,688) (18,110) (16,570)
Provision for loan losses................................... (1,121) -- -- --
------------ ------------- ---------- ----------
Net interest income after provision for loan losses......... 17,103 9,801 15,730 9,460
Gain on sale of branches.................................... 5,430 -- -- --
Gain on sale of hotel....................................... 4,658 -- -- --
Non-interest income......................................... 8,081 4,084 6,380 2,547
Non-interest expense........................................ (13,407) (10,274) (13,130) (8,762)
------------ ------------- ---------- ----------
Income before income taxes and discontinued operations...... 21,865 3,611 8,980 3,245
Income taxes (expense) benefit.............................. (4,660) 858 (1,172) 412
Discontinued operations, net................................ -- (4,536) (1,586) (1,550)
------------ ------------- ---------- ----------
Net income (loss)........................................... $ 17,205 $ (67) $ 6,222 $ 2,107
------------ ------------- ---------- ----------
------------ ------------- ---------- ----------
Earnings per share:
Earnings before discontinued operations................... $ 0.67 $ 0.17 $ 0.30 $ 0.11
Earnings (loss) after discontinued operations............. $ 0.67 $ -- $ 0.24 $ 0.06
</TABLE>
F-53
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions.................................... $ 8,966 $ 6,878
Interest bearing deposits............................................................ 8,802 13,341
Federal funds sold and repurchase agreements......................................... 99,000 32,000
Securities held for trading.......................................................... -- 75,606
Securities available for sale, at market value....................................... 348,066 354,005
Loans available for sale, at lower of cost or market................................. 88,511 126,366
Investment securities, net........................................................... 11,201 8,901
Loan portfolio, net.................................................................. 422,232 402,582
Discount loan portfolio, net......................................................... 1,280,972 1,060,953
Principal, interest and dividends receivable......................................... 13,566 16,821
Investments in low income housing tax credit interests............................... 99,924 93,309
Investment in joint ventures......................................................... 33,367 67,909
Real estate owned, net............................................................... 98,466 103,704
Investment in real estate............................................................ 46,132 41,033
Premises and equipment, net.......................................................... 15,518 14,619
Income taxes receivable.............................................................. 14,625 15,115
Deferred tax asset................................................................... 3,253 5,860
Other assets......................................................................... 56,870 44,683
------------ ------------
$ 2,649,471 $2,483,685
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits........................................................................... $ 2,106,829 $1,919,742
Advances from the Federal Home Loan Bank........................................... 399 399
Securities sold under agreements to repurchase..................................... 39,224 74,546
Notes, debentures and other interest bearing obligations........................... 225,573 225,573
Accrued expenses, payables and other liabilities................................... 52,290 59,829
------------ ------------
Total liabilities................................................................ 2,424,315 2,280,089
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized; 0 shares issued and
outstanding...................................................................... -- --
Common stock, $.01 par value; 200,000,000 shares authorized; 26,799,511 and
26,744,170 shares issued and outstanding at March 31, 1997 and December 31, 1996,
respectively..................................................................... 268 267
Additional paid-in capital......................................................... 23,109 23,258
Retained earnings.................................................................. 197,458 180,417
Unrealized gain on securities available for sale, net of taxes..................... 6,648 3,486
Notes receivable on exercise of common stock options............................... (2,327) (3,832)
------------ ------------
Total stockholders' equity....................................................... 225,156 203,596
------------ ------------
$ 2,649,471 $2,483,685
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-54
<PAGE>
OCWEN FINANCIAL OPERATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
Interest income:
Federal funds sold and repurchase agreements..................................... $ 1,658 $ 769
Securities available for sale.................................................... 8,173 7,781
Securities held for trading...................................................... 248 --
Loans available for sale......................................................... 2,851 6,597
Loans............................................................................ 10,692 10,010
Discount loans................................................................... 30,224 22,155
Investment securities and other.................................................. 681 644
------------- -------------
54,527 47,956
------------- -------------
Interest expense:
Deposits......................................................................... 29,894 23,001
Securities sold under agreements to repurchase................................... 272 653
Advances from the Federal Home Loan Bank......................................... 283 1,039
Notes, debentures and other interest bearing obligations......................... 6,715 3,439
------------- -------------
37,164 28,132
------------- -------------
Net interest income before provision for loan losses........................... 17,363 19,824
Provision for loan losses.......................................................... 9,742 9,407
------------- -------------
Net interest income after provision for loan losses............................ 7,621 10,417
------------- -------------
Non-interest income:
Servicing fees and other charges................................................. 5,236 (681)
Gains on sales of interest earning assets, net................................... 16,778 5,017
Loss on real estate owned, net................................................... (794) (1,916)
Other income..................................................................... 131 872
------------- -------------
21,351 3,292
------------- -------------
Non-interest expense:
Compensation and employee benefits............................................... 14,923 6,170
Occupancy and equipment.......................................................... 2,829 2,045
Net operating losses on investments in real estate and certain low-income housing
tax credit interests........................................................... 1,093 461
Other operating expenses......................................................... 3,852 3,007
------------- -------------
22,697 11,683
------------- -------------
Equity in earnings of investment in joint venture.................................. 14,372 --
Income before income taxes..................................................... 20,647 2,026
Income tax expense (benefit)....................................................... 3,606 (1,003)
------------- -------------
Net income..................................................................... $ 17,041 $ 3,029
------------- -------------
------------- -------------
Earnings per share:
Net income....................................................................... $ 0.63 $ 0.11
------------- -------------
------------- -------------
Weighted average common shares outstanding......................................... 27,073,362 26,445,370
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-55
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) NOTES
ON RECEIVABLE
SECURITIES ON EXERCISE
COMMON STOCK ADDITIONAL AVAILABLE OF COMMON
------------------------- PAID-IN RETAINED FOR SALE, STOCK
SHARES AMOUNT CAPITAL EARNINGS NET OF TAXES OPTIONS TOTAL
------------ ----------- ----------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995........ 23,812,270 $ 238 $ 10,449 $ 130,275 $ (1,415) $ -- $ 139,547
Net income........................... -- -- -- 50,142 -- -- 50,142
Repurchase of common stock options... -- -- (177) -- -- -- (177)
Exercise of common stock options..... 2,928,830 29 12,963 -- -- -- 12,992
Directors compensation payable in
common stock....................... 3,070 -- 23 -- -- -- 23
Notes receivable on exercise of
common stock options............... -- -- -- -- -- (3,832) (3,832)
Change in unrealized gain on
securities available for sale, net
of taxes........................... -- -- -- -- 4,901 -- 4,901
------------ ----- ----------- ---------- ------------ ----------- ----------
Balances at December 31, 1996........ 26,744,170 267 23,258 180,417 3,486 (3,832) 203,596
------------ ----- ----------- ---------- ------------ ----------- ----------
Net income (unaudited)............... -- -- -- 17,041 -- -- 17,041
Repurchase of common stock options
(unaudited)........................ -- -- (1,870) -- -- -- (1,870)
Exercise of common stock options
(unaudited)........................ 55,341 1 1,721 -- -- -- 1,722
Notes receivable on exercise of
common stock options (unaudited)... -- -- -- -- -- 1,505 1,505
Change in unrealized gain (loss) on
securities available for sale, net
of taxes (unaudited)............... -- -- -- -- 3,162 -- 3,162
------------ ----- ----------- ---------- ------------ ----------- ----------
Balances at March 31, 1997
(unaudited)........................ 26,799,511 $ 268 $ 23,109 $ 197,458 $ 6,648 $ (2,327) $ 225,156
------------ ----- ----------- ---------- ------------ ----------- ----------
------------ ----- ----------- ---------- ------------ ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-56
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income............................................................................. $ 17,041 $ 3,029
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Net cash provided from trading activities............................................ 85,167 --
Proceeds from sales of loans available for sale...................................... 88,184 62,939
Purchases of loans available for sale................................................ (37,667) (80,648)
Originations of loans available for sale............................................. (28,164) --
Principal payments received on loans available for sale.............................. 3,010 16,481
Premium amortization (discount accretion), net....................................... 11,029 (917)
Depreciation and amortization........................................................ 4,579 914
Provision for loan losses............................................................ 9,742 9,407
Gains on sales of interest earning assets, net....................................... (16,778) (5,017)
Gain on sale of real estate owned, net............................................... (3,702) (3,900)
Provision for real estate losses..................................................... 2,336 6,378
Decrease in principal, interest and dividends receivable............................. 1,080 280
Decrease (increase) in income taxes receivable....................................... 918 (744)
Decrease in deferred tax asset....................................................... 2,181 --
Increase in other assets............................................................. (5,360) (5,180)
(Decrease) increase in accrued expenses, payables and other liabilities.............. (9,400) 5,247
----------- ----------
Net cash provided by operating activities................................................ 124,196 8,269
----------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale................................... 14,631 37,309
Purchases of securities available for sale............................................. (21,679) (5,740)
Maturities of and principal payments received on securities available for sale......... 3,831 12,445
Purchase of securities held for investment............................................. (2,306) --
Maturities of and principal payments received on securities held for investments....... -- 10,025
Purchase of low income housing tax credit interests.................................... (9,966) (6,409)
Proceeds from sales of discount loans and loans held for investment.................... 87,253 22,095
Purchase and originations of discount loans and loans held for investment.............. (432,494) (58,832)
Decrease (increase) in investment in joint ventures.................................... 34,542 (32,000)
Principal payments received on discount loans and loans held for investment............ 67,420 100,633
Proceeds from sales of real estate owned............................................... 48,768 29,144
Other, net............................................................................. (2,826) (4,179)
----------- ----------
Net cash (used) provided by investing activities......................................... (212,826) 104,491
----------- ----------
</TABLE>
(CONTINUED ON NEXT PAGE)
The accompanying notes are an integral part of these
consolidated financial statements
F-57
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
(UNAUDITED)
Cash flows from financing activities:
Increase (decrease) in deposits.......................................................... 187,180 (4,047)
Decrease in securities sold under agreements to repurchase............................... (35,322) (84,761)
Payments and repurchase of notes and mortgages payable................................... -- (1,055)
Repayment of notes by executive officers................................................. 1,505 --
Exercise of common stock options......................................................... 1,722 --
Repurchase of common stock options....................................................... (1,870) --
Other, net............................................................................... (36) 238
---------- ---------
Net cash provided (used) by financing activities........................................... 153,179 (89,625)
---------- ---------
Net increase in cash and cash equivalents.................................................. 64,549 23,135
Cash and cash equivalents at beginning of period........................................... 52,219 54,632
---------- ---------
Cash and cash equivalents at end of period................................................. $ 116,768 $ 77,767
---------- ---------
---------- ---------
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions........................................ $ 8,966 $ 6,322
Interest bearing deposits................................................................ 8,802 26,445
Federal funds sold and repurchase agreements............................................. 99,000 45,000
---------- ---------
$ 116,768 $ 77,767
---------- ---------
---------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................................................... $ 36,206 $ 23,606
---------- ---------
---------- ---------
Income taxes........................................................................... $ 509 $ 1,869
---------- ---------
---------- ---------
Supplemental schedule of non-cash investing and financing activities:
Exchange of discount loans and loans available for sale for securities................... $ 38,062 $ --
---------- ---------
---------- ---------
Real estate owned acquired through foreclosure........................................... $ 42,095 $ 15,125
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-58
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements 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. The
consolidated financial statements include the accounts of Ocwen Financial
Corporation ("Ocwen" or the "Company") and its subsidiaries. Ocwen owns directly
and indirectly all of the outstanding common and preferred stock of its primary
subsidiaries, Ocwen Federal Bank FSB (the "Bank") and Investors Mortgage
Insurance Holding Company ("IMI").
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 financial condition at March 31, 1997 and December
31, 1996, the results of its operations for the three months ended March 31,
1997 and 1996, its cash flows for the three months ended March 31, 1997 and
1996, and the changes in stockholders' equity for the year ended December 31,
1996 and the three months ended March 31, 1997. The results of operations and
other data for the three month period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for any other interim periods or
the entire year ending December 31, 1997. The unaudited consolidated financial
statements presented herein should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in the
Company's Form 10-K for the year ended December 31, 1996. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the March 31, 1997 presentation.
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 statements of financial condition and revenues
and expenses for the periods covered. Actual results could differ from those
estimates and assumptions.
NOTE 2 ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". SFAS No. 125 (i) sets forth the
criteria for (a) determining when to recognize financial and servicing assets
and liabilities, and (b) accounting for transfers of financial assets as sales
or borrowings; and (ii) requires (a) liabilities and derivatives related to a
transfer of financial assets to be recorded at fair value, (b) servicing assets
and retained interests in transferred assets carrying amounts be determined by
allocating carrying amounts based on fair value, (c) amortization of servicing
assets and liabilities be in proportion to net servicing income, (d) impairment
measurement based on fair value, and (e) pledged financial assets to be
classified as collateral.
SFAS No. 125 provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitizations, transfers of sales-type and
direct financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls", "wash sales", loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse and extinguishments of
liabilities. In December 1996, SFAS No. 127, "Deferral of the Effective Date of
FASB Statement No. 125", was
F-59
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
issued and delayed implementation for one year certain provisions of SFAS 125.
The adoption of SFAS No. 125 did not have any material impact on the results of
operations, financial position or cash flows as a result of implementing these
Statements.
In February 1997, SFAS No. 128, "Earnings per Share", and SFAS No. 129,
"Disclosure of Information about Capital Structure were issued. SFAS No. 128
established standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
SFAS No. 128 simplifies the standards previously found in Accounting Principles
Board Opinion No. 15. SFAS No. 128 is effective for financial statements for
periods ending after December 15, 1997, including interim periods. Early
adoption is not permitted. SFAS No. 129 is effective for financial statements
for periods ending after December 15, 1997. The Company does not anticipate a
material impact on its earnings per share calculation as a result of
implementing these statements.
NOTE 3 INVESTMENT IN JOINT VENTURES
The Company's investment in joint ventures include investments in BCFL,
L.L.C ("BCFL"), a limited liability company formed in January, 1997 between the
Company and BlackRock Capital Finance L.P. ("BlackRock"), and BCBF, L.L.C, (the
"LLC"), a limited liability company formed in March 1996 between the Company and
BlackRock. The Company owns a 10% interest in BCFL and a 50% interest in the
LLC. BCFL was formed to acquire multifamily loans. At March 31, 1997, the
Company's 10% investment, which is accounted for under the cost method, amounted
to $1,056.
The Company's 50% investment in the LLC, which was formed to acquire
single-family residential loans offered by the Department of Housing and Urban
Development ("HUD"), amounted to $32,311 and $67,909 at March 31, 1997 and
December 31, 1996, respectively, and is net of valuation allowances of $2,473
and $5,114, respectively. Because the LLC is a pass-through entity for federal
income tax purposes, provisions for income taxes are established by each of the
Company and its co-investor and not the LLC.
The Company's equity in earnings of the LLC of $14,372 includes 50% of the
net income of the LLC before deduction of the Bank's 50% share of loan servicing
fees which are paid 100% to the Company, and the recapture of $2,641 of
valuation allowances established in 1996 by the Company on its equity investment
in the joint venture as a result of the resolution and securitization of loans
during the first quarter of 1997. The Company has recognized 50% of the loan
servicing fees not eliminated in consolidation in servicing fees and other
charges.
Set forth below is the statement of financial condition of the LLC at the
dates indicated and a statement of operations for the three months ended March
31, 1997.
F-60
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
BCBF, L.L.C.
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
<S> <C> <C>
ASSETS:
Cash................................................................................ $ 10 $ 10
Loans held for sale, at lower of cost or market value............................... 48,586 110,702
Real estate owned, net of valuation allowance of $150 and $511 at March 31, 1997 and
December 31, 1996, respectively................................................... 12,120 25,595
Other assets........................................................................ 9,487 10,526
----------- ------------
$ 70,203 $ 146,833
----------- ------------
----------- ------------
LIABILITIES AND OWNERS' EQUITY
LIABILITIES:
Accrued expenses, payables and other liabilities.................................. $ 635 $ 787
----------- ------------
Total liabilities............................................................... 635 787
----------- ------------
OWNERS' EQUITY:
Ocwen Federal Bank FSB.............................................................. 34,784 73,023
BlackRock Capital Finance L.P....................................................... 34,784 73,023
----------- ------------
Total owners' equity.............................................................. 69,568 146,046
----------- ------------
$ 70,203 $ 146,833
----------- ------------
----------- ------------
</TABLE>
BCBF, L.L.C.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<S> <C>
Interest income.................................................................... $ 3,485
---------
Non-interest income:
Gain on sale of loans held for sale.............................................. 18,412
Gain on real estate owned, net................................................... 1,543
Loan fees........................................................................ 22
---------
19,977
---------
Operating expenses:
Loan servicing fees.............................................................. 676
---------
Net income......................................................................... $ 22,786
---------
---------
</TABLE>
In March, 1997, as part of a larger transaction involving the Company and an
affiliate of BlackRock, the LLC securitized 1,196 loans with an unpaid principal
balance of $51,714 and past due interest of $14,209, and a net book value of
$40,454. Proceeds from sales of such securities by the LLC amounted to $58,866.
The Company continues to service such loans and is paid a servicing fee. For
further discussion
F-61
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
regarding this transaction, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Summary."
NOTE 4 INTEREST RATE RISK MANAGEMENT INSTRUMENTS
In managing its interest rate risk, the Company on occasion enters into
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 upon 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 notional amount of the outstanding swap is amortized (i.e.
reduced) monthly based upon estimated prepayment rates of the mortgages
underlying the securities being hedged. The terms of the outstanding swap at
March 31, 1997 and December 31, 1996 follows:
<TABLE>
<CAPTION>
NOTIONAL LIBOR FLOATING RATE
MATURITY AMOUNT INDEX FIXED RATE AT END OF PERIOD FAIR VALUE
----------- --------- ---------- ------------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1997............................. 1998 $ 44,070 1-Month 6.18% 5.38% $ (135)
December 31, 1996.......................... 1998 $ 45,720 1-Month 6.18% 5.67% $ (103)
</TABLE>
The 1-month LIBOR was 5.69% and 5.50% on March 31, 1997 and December 31,
1996, respectively.
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. U.S. Treasury
futures have been sold by the Company to hedge the risk of a reduction in the
market value of fixed-rate mortgage loans and certain fixed-rate mortgage-backed
and related securities available for sale in a rising interest rate environment.
Terms and other information on interest rate futures contracts sold short
are as follows:
<TABLE>
<CAPTION>
NOTIONAL
MATURITY PRINCIPAL FAIR VALUE
----------- ----------------- -----------
<S> <C> <C> <C>
March 31, 1997
U.S. Treasury futures.................................................... 1997 $ 264,300 $ 2,976
December 31, 1996:
Eurodollar futures....................................................... 1997 $ 365,000 $ (558)
1998 40,000 (87)
U.S. Treasury futures.................................................... 1997 165,100 498
</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.
NOTE 5 REGULATORY REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings
F-62
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
institutions subject to Office of Thrift Supervision ("OTS") supervision. The
Bank must follow specific capital guidelines stipulated by the OTS which involve
quantitative measures of the Bank's assets, liabilities and certain off-balance
sheet items. An institution that fails to comply with its regulatory capital
requirements must obtain OTS approval of a capital plan and can be subject to a
capital directive and certain restrictions on its operations. At March 31, 1997,
the minimum regulatory capital requirements were:
-- Tangible and core capital of 1.5 percent and 3 percent of total adjusted
assets, respectively, consisting principally of stockholders' equity, but
excluding most intangible assets, such as goodwill and any net unrealized
holding gains or losses on debt securities available for sale.
-- Risk-based capital consisting of core capital plus certain subordinated
debt and other capital instruments and, subject to certain limitations,
general valuation allowances on loans receivable, equal to 8 percent of
the value of risk-weighted assets.
At March 31, 1997, the Bank was "well-capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To be
categorized as "well capitalized", the Bank must maintain minimum core capital,
Tier 1 risk-based capital and risk-based capital ratios as set forth in the
table below. The Bank's capital amounts and classification are subject to review
by federal regulators about components, risk-weightings and other factors. There
are no conditions or events since March 31, 1997 that management believes have
changed the institution's category.
F-63
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The following tables summarize the Bank's actual and required regulatory
capital at March 31, 1997
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
MINIMUM FOR CAPITAL FOR PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
--------- ------------- --------- ----------- --------- -----------
Stockholders' equity, and ratio to total assets.......... 9.73% $ 249,860
Net unrealized gain on certain available for sale
securities............................................. (6,786)
Excess mortgage servicing rights......................... (222)
-------------
Tangible capital, and ratio to adjusted total assets..... 9.48% $ 242,852 1.50% $ 38,411
------------- -----------
------------- -----------
Tier 1 (core) capital, and ratio to adjusted total
assets................................................. 9.48% $ 242,852 3.00% $ 76,822 5.00% $ 128,037
------------- ----------- -----------
------------- ----------- -----------
Tier 1 capital, and ratio to risk-weighted assets........ 8.80% $ 242,852 6.00% $ 165,574
------------- -----------
------------- -----------
Allowance for loan and lease losses...................... $ 21,850
Subordinated debentures.................................. 100,000
-------------
Tier 2 Capital........................................... 121,850
-------------
Total risk-based capital, and ratio to risk-weighted
assets................................................. 13.22% $ 364,702 8.00% $ 220,765 10.00% $ 275,956
------------- ----------- -----------
------------- ----------- -----------
Total regulatory assets.................................. $ 2,567,743
-------------
-------------
Adjusted total assets.................................... $ 2,560,735
-------------
-------------
Risk-weighted assets..................................... $ 2,759,563
-------------
-------------
</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 March 31, 1997. 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.
In addition to these OTS regulations governing capital distributions, the
indenture governing the $100,000 of 12% subordinated debentures (the
"Debentures") due 2005 and issued by the Bank on June 12, 1995 limits the
declaration or payment of dividends and the purchase or redemption of common or
preferred stock in the aggregate to the sum of 50% of consolidated net income
and 100% of all capital contributions and proceeds from the issuance or sale
(other than to a subsidiary) of common stock, since the date the Debentures were
issued.
Based upon recent discussions with the OTS, the Bank has determined to
maintain a core capital ratio of at least 9% and a total risk-based capital
ratio of no less than 13%. The Bank also determined to
F-64
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
transfer its single-family residential lending activities to non-conforming
borrowers to a non-bank subsidiary of Ocwen. The Bank believes at this time that
it will continue to be a "well-capitalized institution" under OTS regulations.
NOTE 6 COMMITMENTS AND CONTINGENCIES
At March 31, 1997 the Company had commitments to fund (i) $65,413 of loans
secured by multi-family residential buildings, (ii) $62,948 of loans secured by
office buildings and (iii) $44,303 of loans secured by hotel properties.
Additionally, the Company had commitments of $1,292 to purchase residential
discount loans. The Company, through its investment in subordinated securities
and REMIC residuals which had a book value of $78,116 at March 31, 1997,
supports senior classes of mortgage-related securities having an outstanding
balance of $1,317,804.
On October 29, 1996, Ocwen Financial Services, Inc., a wholly-owned
subsidiary of Ocwen, entered into an asset purchase agreement ("Asset Purchase
Agreement") to acquire Admiral Home Loan ("Admiral"), a California corporation
engaged in the origination of loans to credit-impaired borrowers secured by
first mortgage liens on single-family residential real property, both through
the wholesale acquisition of such loans originated by mortgage brokers and
through its retail offices, and selling of such originated loans, servicing
released, to third parties. Under the Asset Purchase Agreement, as amended,
Ocwen has agreed to pay $6,750 to acquire an 80% interest in the assets of
Admiral. Closing of the acquisition occurred on May 1, 1997.
The Company is subject to various pending legal proceedings. Management,
after reviewing these claims with legal counsel, is of the opinion that the
resolution of these claims will not have a material effect on the Company's
financial position, results of operations, cash flows or liquidity.
F-65
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of
BCBF, L.L.C.
In our opinion, the accompanying statement of financial condition and the
related statements of operations, of changes in owners' equity and of cash flows
present fairly, in all material respects, the financial position of BCBF. L.L.C.
(the "Company") at December 31, 1996, and the results of its operations and its
cash flows for the period from March 13, 1996 through December 31, 1996, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
<TABLE>
<S> <C>
/s/ Price Waterhouse LLP
- ---------------------------------------------
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
January 24, 1997
</TABLE>
F-66
<PAGE>
BCBF, L.L.C.
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash.............................................................................. $ 10
Loans held for sale, at lower of cost or market value............................. 110,702
Real estate owned, net of a valuation allowance of $511........................... 25,595
Other assets...................................................................... 10,526
---------
$ 146,833
---------
---------
LIABILITIES AND OWNERS' EQUITY
Liabilities:
Accrued expenses, payables and other liabilities................................ $ 787
---------
Total liabilities............................................................. 787
---------
Owners' Equity:
Ocwen Federal Bank FSB.......................................................... 73,023
BlackRock Capital Finance L.P................................................... 73,023
---------
Total owners' equity.......................................................... 146,046
---------
$ 146,833
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
BCBF, L.L.C.
STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 13, 1996 THROUGH DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Interest income.................................................................... $ 38,647
Interest expense................................................................... 18,503
---------
Net interest income.............................................................. 20,144
---------
Non-interest income:
Gain on sale of loans held for sale.............................................. 71,156
Gain on sale of loan servicing rights............................................ 1,048
Loss on real estate owned, net................................................... (130)
Loan fees........................................................................ 50
---------
72,124
---------
Non-interest expense:
Loan servicing fees.............................................................. 5,743
Other loan expenses.............................................................. 273
---------
6,016
---------
Net income..................................................................... $ 86,252
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
BCBF, L.L.C
STATEMENT OF CHANGES IN OWNERS' EQUITY
FOR THE PERIOD MARCH 13, 1996 THROUGH DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OCWEN FEDERAL BLACKROCK CAPITAL
BANK FSB FINANCE L.P. TOTAL
------------- ----------------- ----------
<S> <C> <C> <C>
Contributions of capital........................................... $ 66,204 $ 66,204 $ 132,408
Net income......................................................... 43,126 43,126 86,252
Distributions of cash.............................................. (16,534) (16,534) (33,068)
Distributions of securities........................................ (19,773) (19,773) (39,546)
------------- -------- ----------
Balances at December 31, 1996...................................... $ 73,023 $ 73,023 $ 146,046
------------- -------- ----------
------------- -------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
BCBF, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE PERIOD MARCH 13, 1996 THROUGH DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income........................................................................ $ 86,252
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Provision for losses on real estate owned....................................... 636
Gain on sale of loans held for sale............................................. (71,156)
Gain on sale of real estate owned............................................... (775)
Gain on sale of loan servicing rights........................................... (1,048)
Purchase of loans held for sale................................................. (626,400)
Proceeds from sale of loans held for sale....................................... 466,806
Principal repayments on loans held for sale..................................... 42,210
Proceeds from sale of real estate owned......................................... 4,364
Proceeds from sale of loan servicing rights..................................... 1,048
Increase in other assets........................................................ (2,054)
Increase in accrued expenses, payables and other liabilities.................... 787
---------
Net cash used in operating activities........................................... (99,330)
---------
Cash flows from financing activities:
Proceeds from note payable...................................................... 473,042
Repayment of note payable....................................................... (473,042)
Proceeds from capital contributions............................................. 132,408
Distributions of capital........................................................ (33,068)
---------
Net cash provided by financing activities......................................... 99,340
---------
Net increase in cash and cash equivalents......................................... 10
Cash and cash equivalents at beginning of period.................................. --
---------
Cash and cash equivalents at end of period........................................ $ 10
---------
---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest...................................................................... $ (18,503)
---------
---------
Supplemental schedule of non-cash investing and financing activities:
Exchange of loans for mortgage-backed securities................................ $ 394,234
---------
---------
Real estate owned acquired through foreclosure.................................. $ 29,820
---------
---------
Distribution of securities to Partners.......................................... $ (39,546)
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
BCBF, L.L.C. (the "LLC") is a limited liability company formed on March 13,
1996 between Ocwen Federal Bank FSB ("Ocwen"), formerly known as Berkeley
Federal Bank and Trust FSB, and BlackRock Capital Finance L.P. ("BlackRock"), or
collectively, the "Partners". The Partners each have a 50% interest in the LLC
and share equally in net income or loss.
On March 22, 1996, the LLC was notified by the Department of Housing and
Urban Development ("HUD") that it was the successful bidder to purchase 16,196
single-family residential loans offered by HUD at an auction (the "HUD Loans").
On April 10, 1996 the LLC consummated the acquisition of the HUD Loans, which
had an aggregate unpaid principal balance of $741,176 for a purchase price of
$626,400. The purchase was financed by $117,647 in equity contributions, $35,711
of proceeds from the LLC's concurrent sale of 1,631 HUD Loans and the proceeds
from a $473,042 note payable from an unaffiliated party. No significant activity
occurred prior to April 10, 1996.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, interest and non-interest bearing deposits and all highly liquid debt
instruments purchased with an original maturity of three months or less.
LOANS HELD FOR SALE
The HUD Loans purchased by the LLC have been designated as held for sale
because it is the LLC's intent to securitize and sell the majority of these
loans. Loans held for sale are carried at the lower of aggregate cost or market
value. Market value is determined based upon current market yields at which
recent pools of similar mortgages have been traded. There was no allowance for
market value losses on loans held for sale at December 31, 1996.
All of the HUD Loans are secured by first mortgage liens on single-family
residences. The HUD Loans were acquired by HUD pursuant to various assignment
programs of the Federal Housing Authority ("FHA"). Under programs of the FHA, a
lending institution may assign an 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 payments on the loan. FHA-insured loans are
also 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.
The HUD Loans were purchased by the LLC at a substantial discount to the
unpaid principal balance of the loans as many of the loans were not performing
in accordance with the original terms of the loans or an applicable forbearance
agreement. The cost of acquiring the pool of loans was allocated to each
individual loan within the pool based on the LLCs' pricing methodology. Loans
are considered performing if they are less than 90 days past due based on the
original terms of the mortgage loan. Interest income on performing loans is
recognized on the accrual method. Interest income on all other loans is
recognized on
F-71
<PAGE>
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
a cash basis due to the uncertainty of collection. Gains and losses on the
repayment and the discharging of loans are also reported as part of 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.
REAL ESTATE OWNED
Properties acquired through foreclosure or deed-in-lieu of foreclosure are
valued at the lower of the adjusted 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. All
of the LLC's real estate owned is held for sale. Gains and losses on the sale of
REO are recognized with the passage of title and all risks of ownership to the
buyer. 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 foreclosed real estate held for
sale is 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. Additional
valuation allowances are also established for the inherent risks in the real
estate owned portfolio which have yet to be specifically identified.
INCOME TAXES
Because the LLC is a pass-through entity for federal income tax purposes,
provisions for income taxes are established by each of the Partners and not the
LLC.
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 the
reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 2--ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 122, "Accounting for Mortgage Servicing Rights", requires an
institution engaged in mortgage banking activities to recognize as a separate
asset rights to service mortgage loans for others, regardless of the manner in
which those servicing rights are acquired. Upon sale or securitization of loans
with servicing rights retained, an entity is 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 recognized through a valuation allowance. Provisions of
SFAS No. 122 are effective for fiscal years beginning after December 15, 1995.
No assets related to mortgage servicing rights were recognized by the LLC at
December 31, 1996.
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", was issued. SFAS No. 125
(i) sets forth the criteria for (a) determining when to recognize financial and
servicing assets and liabilities; and (b) accounting for transfers of financial
assets as sales or borrowings; and (ii) requires (a) liabilities and derivatives
related to a transfer of financial
F-72
<PAGE>
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
assets to be recorded at fair value; (b) servicing assets and retained interests
in transferred assets carrying amounts be determined by allocating carrying
amounts based on fair value; (c) amortization of servicing assets and
liabilities be in proportion to net servicing income; (d) impairment measurement
based on fair value; and (e) pledged financial assets to be classified as
collateral.
SFAS No. 125 provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitizations, transfers of sales-type and
direct financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls", "wash sales", loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse and extinguishments of
liabilities. SFAS No. 125 is effective for transfers of servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Management does not believe the adoption of SFAS
No. 125 will have a material impact on the statement of financial condition or
results of operations of the LLC.
NOTE 3--FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the LLC's assets are considered financial instruments.
For discounted loans, 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 the estimated cash
flows using discount rates commensurate with the risks involved. However, the
determination of estimated future cash flows is inherently subjective and
imprecise.
The fair values reflected below are indicative of the interest rate
environments as of December 31, 1996 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 LLC's future business
activities. In other words, they do not represent the LLC's value as a going
concern. Furthermore, the differences between the carrying amounts and the fair
values presented may not be realized.
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 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 LLC.
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.
F-73
<PAGE>
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
LOANS HELD FOR SALE
The HUD Loans, which are designated held for sale, have been valued at their
carrying amount which approximates fair value given that the assumptions used to
value such loans at their date of purchase have remained relatively constant.
REAL ESTATE OWNED
Real estate owned, although not a financial instrument, is an integral part
of the LLC'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.
The carrying amounts and the estimated fair values of the LLC's financial
instruments and real estate owned at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
---------------- ----------
<S> <C> <C>
Financial Assets:
Cash and cash equivalents................................... $ 10 $ 10
Loans held for sale......................................... 110,702 110,702
Real estate owned, net...................................... 25,595 31,738
</TABLE>
NOTE 4 HUD LOAN PORTFOLIO
The LLC acquired the HUD Loans through an auction at a discount with the
intent of securitizing and selling the majority of the loans. Because many of
the mortgage loan borrowers are either not current as to principal and interest
payments or there is doubt as to their ability to pay in full the contractual
principal and interest, the LLC estimated the amounts expected to be realized
through foreclosure, collection efforts or other resolution of each HUD loan and
the length of time required to complete the collection process in determining
the amount it bid to acquire the HUD Loans.
The LLC's HUD Loan portfolio, which has been designated held for sale,
consists of the following at December 31, 1996 :
<TABLE>
<S> <C>
Unpaid principal balance.......................................... $ 159,405
Discount.......................................................... (48,703)
---------
$ 110,702
---------
---------
</TABLE>
F-74
<PAGE>
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
The following table sets forth information relating to the payment status of
the HUD Loans at December 31, 1996:
<TABLE>
<CAPTION>
% OF HUD
AMOUNT LOANS
---------- -----------
<S> <C> <C>
Loans without Forbearance Agreements:
Past due less than 31 days.......................................... $ 6,709 4.21%
Past due 31 to 90 days.............................................. 3,011 1.89
Past due 90 days or more............................................ 84,509 53.02
----------
94,229 59.12
----------
Loans with Forbearance Agreements:
Past due less than 31 days.......................................... 4,867 3.05
Past due 31 to 90 days.............................................. 5,168 3.24
Past due 90 days or more............................................ 55,141 34.59
----------
65,176 40.88
----------
Total................................................................. $ 159,405 100.00%
----------
----------
</TABLE>
Forbearance agreements are agreements entered into by HUD or the LLC with
the borrower for the repayment of delinquent payments over a period and for
forbearance from foreclosure during the term for such agreement. HUD forbearance
agreements are generally twelve months in duration and the borrower may be
granted up to a maximum of three consecutive twelve month plans. Under the terms
of the contract governing the sale of the HUD Loans, the LLC and Ocwen, as the
servicer of the loans, are obligated to comply with the terms of the HUD
forbearance agreements, which may be written or oral in nature, until the term
of the forbearance agreement expires or there is a default under the forbearance
agreement.
The HUD loans are geographically located throughout the United Sates and
Puerto Rico. The following table sets forth the five states in which the largest
amount of properties securing the LLC's discounted loans were located at
December 31, 1996:
<TABLE>
<S> <C>
Texas............................................................. $ 30,382
California........................................................ 26,596
Connecticut....................................................... 11,729
Maryland.......................................................... 9,487
Colorado.......................................................... 9,018
Other............................................................. 72,193
---------
Total............................................................. $ 159,405
---------
---------
</TABLE>
NOTE 5 MORTGAGE LOAN SALES AND SECURITIZATION OF MORTGAGE LOANS
In April 1996, the LLC sold 1,631 loans with an unpaid principal balance of
$61,885 and a net book value of $34,388 for $35,711 resulting in a gain on sale
of loans of $1,323.
In October 1996, the LLC securitized 9,825 loans with a unpaid principal
balance of $419,382 and a net book value of $394,234. Certain of the mortgage
related securities created from the securitization were
F-75
<PAGE>
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
sold in October 1996 for $431,095, resulting in a gain of $69,833 which includes
a gain of $12,863 on the sale of $79,411 of securities directly to Ocwen.
Certain other mortgage related securities created from the securitization were
distributed to the Partners at their allocated book values which amounted to
$39,546.
NOTE 6 REAL ESTATE OWNED
Real estate owned, net of valuation allowances, is held for sale. The LLC's
real estate owned portfolio, acquired through foreclosure or deed-in-lieu of
foreclosure, consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Single-family residential.......................................... $ 26,106
Valuation allowance................................................ (511)
---------
Real estate owned, net............................................. $ 25,595
---------
---------
</TABLE>
The following schedule presents the activity in the valuation allowance on
real estate owned for the period from March 13, 1996 to December 31, 1996:
<TABLE>
<S> <C>
Balance, beginning of period......................................... $ --
Provision for losses................................................. 636
Charge-offs and sales................................................ (125)
---------
Balance, end of period............................................... $ 511
---------
---------
</TABLE>
Real estate owned is geographically located throughout the United Sates and
Puerto Rico. The following table sets forth the five states with the largest
amount of properties owned by the LLC at December 31, 1996:
<TABLE>
<S> <C>
Texas.............................................................. $ 7,782
California......................................................... 6,992
Maryland........................................................... 2,692
Virginia........................................................... 1,318
Georgia............................................................ 1,274
Other.............................................................. 5,537
---------
Total.............................................................. $ 25,595
---------
---------
</TABLE>
The following table sets forth the results of the LLC's investment in real
estate owned during the period from March 13, 1996 to December 31, 1996:
<TABLE>
<S> <C>
Description:
Gains on sales....................................................... $ 775
Provision for losses................................................. (636)
Carrying costs, net of rental income................................. (269)
---------
Loss on real estate owned, net....................................... $ (130)
---------
---------
</TABLE>
F-76
<PAGE>
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
NOTE 7 NOTE PAYABLE
In April 1996, the LLC financed the acquisition of the HUD Loans with the
proceeds from a $473,042 note payable from an unaffiliated party. Interest on
the note payable was payable monthly and accrued at a rate equal to LIBOR plus
2.25%. The note payable, which was scheduled to mature in January 1997, was
secured by a first position lien on the HUD Loans purchased. Proceeds from the
sale of securities resulting from the securitization of 9,825 HUD Loans in
October, 1996 and additional capital contributions by the Partners were used to
fully repay the note payable in 1996.
NOTE 8 RELATED PARTY TRANSACTIONS
In connection with the LLC's acquisition of the HUD Loans, Ocwen 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, Ocwen receives specified fees which are payable on a monthly basis.
For the period from March 13, 1996 to December 31, 1996, Ocwen earned $5,743 in
such servicing fees.
As the servicer for the HUD Loans, Ocwen is responsible for the collection
of the payments due from borrowers and the payment of certain costs incurred in
connection with the operation and maintenance of real estate owned properties. A
cash settlement is made monthly between Ocwen and the LLC for the net of such
collections and payments. At December 31, 1996, $5,447 was due from Ocwen and is
included in other assets. Such amount was paid by Ocwen to the LLC in January,
1997.
In connection with the securitization transaction (see Note 5), the LLC sold
$79,411 of securities to Ocwen for a gain of $12,863. Additionally, the LLC sold
certain rights to service the securitized loans to Ocwen for $1,048.
F-77
<PAGE>
BCBF, L.L.C.
STATEMENT OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
<S> <C> <C>
Assets:
Cash................................................................................ $ 10 $ 10
Loans held for sale, at lower of cost or market value............................... 48,586 110,702
Real estate owned, net of valuation allowance of $150 and $511 at March 31, 1997 and
December 31, 1996, respectively................................................... 12,120 25,595
Other assets........................................................................ 9,487 10,526
----------- ------------
$ 70,203 $ 146,833
----------- ------------
----------- ------------
Liabilities and Owners' Equity
Liabilities:
Accrued expenses, payables and other liabilities.................................. $ 635 $ 787
----------- ------------
Total liabilities............................................................... 635 787
----------- ------------
Owners' Equity:
Ocwen Federal Bank FSB.............................................................. 34,784 73,023
BlackRock Capital Finance L.P..................................................... 34,784 73,023
----------- ------------
Total owners' equity............................................................ 69,568 146,046
----------- ------------
$ 70,203 $ 146,833
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE>
BCBF, L.L.C.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
Interest income.................................................................... $ 3,485
---------
Non-interest income:
Gain on sale of loans held for sale.............................................. 18,412
Gain on real estate owned, net................................................... 1,543
Loan fees........................................................................ 22
---------
19,977
---------
Operating expenses:
Loan servicing fees.............................................................. 676
---------
Net income......................................................................... $ 22,786
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE>
BCBF, L.L.C.
STATEMENT OF CHANGES IN OWNERS' EQUITY
FOR THE PERIOD MARCH 13, 1996 THROUGH DECEMBER 31, 1996 AND
FOR THREE MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BLACKROCK
OCWEN FEDERAL CAPITAL
BANK FSB FINANCE L.P. TOTAL
------------- ---------------- ----------
<S> <C> <C> <C>
Contributions of capital........................................... $ 66,204 $ 66,204 $ 132,408
Net income......................................................... 43,126 43,126 86,252
Distributions of cash.............................................. (16,534) (16,534) (33,068)
Distributions of securities........................................ (19,773) (19,773) (39,546)
------------- ------- ----------
Balances at December 31, 1996...................................... 73,023 73,023 146,046
Net income (unaudited)............................................. 11,393 11,393 22,786
Distributions of cash (unaudited).................................. (48,293) (48,293) (96,586)
Distributions of securities (unaudited)............................ (1,339) (1,339) (2,678)
------------- ------- ----------
Balances at March 31, 1997 (unaudited)............................. $ 34,784 $ 34,784 $ 69,568
------------- ------- ----------
------------- ------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE>
BCBF, L.L.C.
STATEMENT OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income....................................................................... $ 22,786
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Provision for losses on real estate owned.................................... 484
Gain on sale of loans held for sale.......................................... (18,412)
Gain on sale of real estate owned............................................ (4,277)
Proceeds from sale of loans held for sale.................................... 58,866
Principal repayments on loans held for sale.................................. 608
Proceeds from sale of real estate owned...................................... 38,271
Decrease in other assets..................................................... 1,090
Decrease in accrued expenses, payables and other liabilities................. (152)
---------
Net cash used in operating activities.............................................. 99,264
---------
Cash flows from financing activities:
Proceeds from capital contributions.............................................. (96,586)
Distributions of capital......................................................... (2,678)
---------
Net cash provided by financing activities.......................................... (99,264)
---------
Net increase in cash and cash equivalents.......................................... --
Cash and cash equivalents at beginning of period................................... 10
---------
Cash and cash equivalents at end of period......................................... $ 10
---------
---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest....................................................................... $ --
---------
---------
Supplemental schedule of non-cash investing and financing activities:
Real estate owned acquired through foreclosure................................. $ 21,004
---------
---------
Distributions of securities to Partners........................................ $ 2,678
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE>
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited financial statements include the accounts of
BCBF, L.L.C. (the "LLC"), a limited liability company formed on March 13, 1996
between Ocwen Financial Corporation ("Ocwen") and BlackRock Capital Finance L.P.
("BlackRock") each having a 50% interest. The financial statements 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 LLC's results for the interim periods. The result of
operations and other data for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the entire year.
The unaudited financial statements presented herein should be read in
conjunction with the audited financial statements and related notes thereto
included elsewhere in this Offering Circular.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the statement of financial condition and the
revenues and expenses for the period covered. Actual results could differ
significantly from those estimates and assumptions.
NOTE 2 ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1997, the LLC adopted Statement of Financial Accounting
Standard ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". SFAS No. 125 (i) sets forth the
criteria for (a) determining when to recognize financial and servicing assets
and liabilities, and (b) accounting for transfers of financial assets as sales
or borrowings; and (ii) requires (a) liabilities and derivatives related to a
transfer of financial assets to be recorded at fair value, (b) servicing assets
and retained interests in transferred assets carrying amounts be determined by
allocating carrying amounts based on fair value, (c) amortization of servicing
assets and liabilities be in proportion to net servicing income, (d) impairment
measurement based on fair value, and (e) pledged financial assets to be
classified as collateral.
SFAS No. 125 provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitizations, transfers of sales-type and
direct financing lease receivables, securities lending transactions, repurchase
agreements including "dollar rolls", "wash sales", loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse and extinguishments of
liabilities. In December 1996, SFAS No. 127, "Deferral of the Effective Date of
FASB Statement No. 125", was issued and delayed implementation for one year
certain provisions of SFAS 125. The adoption of SFAS No. 125 did not have any
material impact on the results of operations, financial position or cash flows
as a result of implementing these Statements.
F-82
<PAGE>
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
NOTE 3 SECURITIZATION OF MORTGAGE LOANS
In March, 1997, as part of a larger transaction involving Ocwen and an
affiliate of BlackRock, the LLC securitized 1,196 loans with an unpaid principal
balance of $51,714 and past due interest of $14,209, and a net book value of
$40,454. Proceeds from sales of such securities by the LLC amounted to $58,866.
Ocwen continues to service such loans and is paid a servicing fee.
F-83
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
DESCRIBED IN THIS PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH
INFORMATION.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.......................... 4
Prospectus Summary............................. 5
Summary Selected Consolidated Financial and
Other Data................................... 11
Risk Factors................................... 13
The Company.................................... 24
The Trust...................................... 24
Use of Proceeds................................ 26
Ratio of Earnings to Fixed Charges............. 26
Accounting Treatment........................... 26
Capitalization................................. 27
Selected Consolidated Financial
and Other Data............................... 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 30
Business....................................... 55
Regulation..................................... 91
Taxation....................................... 98
Management..................................... 101
Beneficial Ownership of Common Stock........... 108
Desription of Capital Securities............... 110
Description of Junior Subordinated
Debentures................................... 120
Description of Guarantee....................... 136
Relationship Among the Capital Securities, the
Junior Subordinated Debentures and the
Guarantee.................................... 139
Certain United States Federal Income Tax
Consequences................................. 140
Underwriting................................... 145
Legal Matters.................................. 146
Experts........................................ 146
</TABLE>
$125,000,000
[LOGO]
OCWEN CAPITAL TRUST I
% CAPITAL SECURITIES
(LIQUIDATION AMOUNT $1,000 PER
CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED
TO THE EXTENT SET FORTH HEREIN BY
OCWEN FINANCIAL CORPORATION
-----------------
PROSPECTUS
, 1997
-------------------
LEHMAN BROTHERS
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
MORGAN STANLEY DEAN WITTER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the expenses to be incurred in connection
with the offering of securities described herein.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 37,879
NASD fee.......................................................... 13,000
Legal fees and expenses........................................... 75,000
Accounting fees and expenses...................................... 50,000
Trustee fees and expenses......................................... 12,000
Printing, postage and delivery expenses........................... 50,000
Blue Sky fees and expenses........................................ 7,500
Miscellaneous expenses............................................ 14,621
---------
Total......................................................... $ 260,000
---------
---------
</TABLE>
- ------------------------
* To be included 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 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
II-1
<PAGE>
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.
(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
II-2
<PAGE>
or on behalf of such director or officer to repay such amount if he is
ultimately found not to be entitled to indemnification by the corporation
pursuant to this section. Expenses incurred by other employees and agents may be
paid in advance upon such terms or conditions that the board of directors deems
appropriate.
(7) The indemnification and advancement of expenses provided pursuant to
this section are not exclusive, and a corporation may make any other or further
indemnification or advancement of expenses of any of its directors, officers,
employees, or agents, under any bylaw, agreement, vote of shareholders or
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
However, indemnification or advancement of expenses shall not be made to or on
behalf of any director, officer, employee, or agent if a judgment or other final
adjudication establishes that his actions, or omissions to act, were material to
the cause of action so adjudicated and constitute:
(a) A violation of the criminal law, unless the director, officer,
employee, or agent had reasonable cause to believe his conduct was lawful or
had no reasonable cause to believe his conduct was unlawful;
(b) A transaction from which the director, officer, employee, or agent
derived an improper personal benefit;
(c) In the case of a director, a circumstance under which the liability
provisions of s.607.0834 are applicable; or
(d) Willful misconduct or a conscious disregard for the best interests
of the corporation in a proceeding by or in the right of the corporation to
procure a judgment in its favor or in a proceeding by or in the right of a
shareholder.
(8) Indemnification and advancement of expenses as provided in this section
shall continue as, unless otherwise provided when authorized or ratified, to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such a
person, unless otherwise provided when authorized or ratified.
(9) Unless the corporation's articles of incorporation provide otherwise,
notwithstanding the failure of a corporation to provide indemnification, and
despite any contrary determination of the board or of the shareholders in the
specific case, a director, officer, employee, or agent of the corporation who is
or was a party to a proceeding may apply for indemnification or advancement of
expenses, or both, to the court conducting the proceeding, to the circuit court,
or to another court of competent jurisdiction. On receipt of an application, the
court, after giving notice that it considers necessary, may order
indemnification and advancement of expenses, including expenses incurred in
seeking court- ordered indemnification or advancement of expenses, if it
determines that:
(a) The director, officer, employee, or agent is entitled to mandatory
indemnification under subsection (3), in which case the court shall also
order the corporation to pay the director reasonable expenses incurred in
obtaining court-ordered indemnification or advancement of expenses;
(b) The director, officer, employee or agent is entitled to
indemnification or advancement of expenses, or both, by virtue of the
exercise by the corporation of its power pursuant to subsection (7); or
(c) The director, officer, employee, or agent is fairly and reasonably
entitled to indemnification or advancement of expenses, or both, in view of
all the relevant circumstances, regardless of whether such person met the
standard of conduct set forth in subsection (1), subsection (2), or
subsection (7).
(10) For purposes of this section, the term "corporation" includes, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a
II-3
<PAGE>
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.
(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.
------------------------
Under the Declaration of Trust of Ocwen Capital Trust I, the Company will
agree to indemnify each of the Trustees of the Trust or any predecessor Trustee
for the Trust, and to hold each Trustee harmless against, any loss, damage,
claim, liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or administration of
the Declaration of Trust, including the costs and expenses of defending itself
against any claim or liability in connection with the exercise or performance of
any to its powers or duties under the Trust.
II-4
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the three months ended March 31, 1997 and the years ended December
31, 1996 and 1995, the Company issued 55,329 shares, 2,928,200 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. See
"Management--Stock Option Plan" and "--Certain Relationships and Related
Transactions." 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 October 1996 and July
1997, the Company issued 3,070 shares and 1,876 shares of Common Stock,
respectively, to directors of the Company as compensation pursuant to the
Directors Stock Plan. See "Management--Board of Directors Compensation." These
shares were issued in reliance on the private offering exemption from
registration set forth in Section 4(2) of the Securities Act. In addition to the
foregoing, the Company issued 12 shares of Common Stock as holiday gifts during
the first quarter of 1997.
During 1995, the Company issued $7.6 million of 10.5% notes due May 1, 1996
to 14 stockholders of the Company, and on May 1, 1996 the Company reissued $7.4
million of 10.5% notes due May 1, 1997 to 11 stockholders of the Company. These
notes were issued for cash and in reliance on the private offering exemption
from registration set forth in Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<S> <C> <C>
1.0 Form of Underwriting Agreement relating to the Capital Securities Offering*
3.1 Amended and Restated Articles of Incorporation of the Company(1)
3.2 Bylaws of the Company(1)
4.0 Form of certificate of Common Stock(1)
4.1 Form of Indenture relating to the 11.875% Notes due 2003(1)
4.2 Form of 11.875% Notes due 2003 (included in Exhibit 4.1)(1)
4.3 Certificate of Trust of the Trust**
4.4 Declaration of Trust of the Trust*
4.5 Form of Capital Security of the Trust (included as Exhibit A to Exhibit 4.4)
4.6 Form of Indenture relating to the Junior Subordinated Debentures*
4.7 Form of Junior Subordinated Debenture (included as Exhibit A to Exhibit 4.6)
4.8 Form of Guarantee of the Company relating to the Capital Securities*
4.9 Form of Indenture relating to the 12% Subordinated Debentures due 2005 of
Ocwen Federal Bank F.S.B.(3)
4.10 Form of 12% Subordinated Debenutres due 2005 of Ocwen Federal Bank F.S.B.(3)
5.0 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. as to legality of the Junior
Subordinated Debentures and the Guarantee to be issued by the Company*
5.1 Opinion of Richards, Layton & Finger as to legality of the Capital Securities
to be issued by the Trust*
8.0 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. as to certain federal income
tax matters*
10.1 Ocwen Financial Corporation 1991 Non-Qualified Stock Option Plan, as
amended(1)
10.2 Ocwen Financial Corporation Annual Incentive Plan(1)
10.3 Ocwen Financial Corporation 1996 Stock Plan for Directors, as amended(2)
12.0 Computation of ratio of earnings to fixed charges (including interest on
deposits)**
12.1 Computation of ratio of earnings to fixed charges (excluding interest on
deposits)**
21.0 Subsidiaries (see "Business--Subsidiaries" in the Prospectus)
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C>
23.1 Consent of Elias, Matz, Tiernan & Herrick L.L.P. (to be contained in the
opinions included as Exhibits 5.0 and 8.0)*
23.2 Consent of Richards, Layton & Finger (to be contained in the opinion included
as Exhibit 5.1)*
23.2 Consent of Price Waterhouse LLP
25.1 Form T-1 Statement of Eligibility of The Chase Manhattan Bank to act as
trustee under the Indenture*
25.2 Form T-1 Statement of Eligibility of Chase Manhattan Bank Delaware to act as
trustee under the Declaration of Trust of the Trust*
25.3 Form T-1 Statement of Eligibility of The Chase Manhattan Bank under the
Guarantee for the benefit of the holders of the Capital Securities*
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
(1) Incorporated by reference to the similarly described exhibit filed in
connection with the Company's Registration Statement on Form S-1, File No.
333-5153, declared effective by the Commission on September 25, 1996.
(2) Incorporated by reference to the similarly described exhibit included with
the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.
(3) To be provided to the Commission upon request.
The Company's management contracts or compensatory plans or arrangements
consist of Exhibits No. 10.1, 10.2 and 10.3.
(b) Financial Statements and Schedules:
The Financial Statements listed in the Index to 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
Each of the undersigned Registrants hereby undertakes 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 offering.
For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus 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.
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, each 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.
II-6
<PAGE>
In the event that a claim for indemnification against such liabilities (other
than the payment by each Registrant of expenses incurred or paid by a director,
officer or controlling person of each 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, each
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-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Ocwen Financial
Corporation 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 July 14, 1997.
OCWEN FINANCIAL CORPORATION
By: /s/ WILLIAM C. ERBEY
-----------------------------------------
William C. Erbey
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
(DULY AUTHORIZED REPRESENTATIVE)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------------ ------------
<C> <S> <C>
/s/ WILLIAM C. ERBEY Chairman, President and Chief July 14,
- ------------------------------
Executive Officer (principal 1997
William C. Erbey executive officer)
/s/ HON. THOMAS F. LEWIS Director July 14,
- ------------------------------ 1997
Hon. Thomas F. Lewis
/s/ W.C. MARTIN Director July 14,
- ------------------------------ 1997
W. C. Martin
Director
- ------------------------------
Howard H. Simon
/s/ BARRY N. WISH Director July 14,
- ------------------------------ 1997
Barry N. Wish
Senior Vice President and July 14,
/s/ MARK S. ZEIDMAN Chief Financial Officer 1997
- ------------------------------
(principal financial and
Mark S. Zeidman accounting officer)
</TABLE>
II-8
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, Ocwen Capital
Trust I 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 July 14, 1997.
OCWEN CAPITAL TRUST
By: OCWEN FINANCIAL CORPORATION,
as Sponsor
By: /s/ WILLIAM C. ERBEY
-----------------------------------
William C. Erbey
Chairman, President and Chief
Executive
Officer
By: /s/ CHRISTINE A. REICH
-----------------------------------
Christine A. Reich
Trustee
II-9
<PAGE>
EXHIBIT 23.3
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 (i) our report dated January 21, 1997
relating to the consolidated financial statements of Ocwen Financial Corporation
and (ii) our report dated January 24, 1997 relating to the financial statements
of BCBF, L.L.C., each of 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 9, 1997
