<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 5, 1997
REGISTRATION NO. 333-28889
REGISTRATION NO. 333-28889-01
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
<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.
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<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 5, 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 18 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 $260,000.
-------------------
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 August , 1997, against payment therefor in immediately available
funds.
-------------------
LEHMAN BROTHERS
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
MORGAN STANLEY DEAN WITTER
August , 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 dissolve the Trust and, after satisfaction of claims of creditors
of the Trust, if any, as provided by applicable law, 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
listed on the NYSE and, as a result, such reports, proxy statements and other
information also may be inspected at the offices of the NYSE, 20 Broad Street,
New York, New York 10005.
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 dissolve the Trust and,
after satisfaction of claims of creditors of the Trust, if any,
as required by applicable law, 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>
SUMMARY OF RECENT DEVELOPMENTS
(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 three and six months ended June
30, 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 and six months ended June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
OPERATIONS DATA:
Interest income............................................. $ 66,942 $ 51,502 $ 121,469 $ 99,457
Interest expense............................................ 38,868 26,904 76,032 55,036
--------- --------- --------- ---------
Net interest income....................................... 28,074 24,598 45,437 44,421
Provision for loan losses................................... 7,909 4,964 17,651 14,370
--------- --------- --------- ---------
Net interest income after
provision for loan losses................................. 20,165 19,634 27,786 30,051
--------- --------- --------- ---------
Gains on sales of interest-
earning assets, net....................................... 23,365 4,584 40,143 9,601
Income (loss) on real estate owned,
net....................................................... 4,629 887 3,835 (1,028)
Other non-interest income................................... 5,295 2,597 10,662 2,788
--------- --------- --------- ---------
Total non-interest income................................. 33,289 8,068 54,640 11,361
--------- --------- --------- ---------
Non-interest expenses....................................... 31,080 13,870 53,777 25,554
--------- --------- --------- ---------
Equity in earnings of investment in
joint ventures(1)......................................... 1,301 1,078 15,674 1,078
--------- --------- --------- ---------
Income before income taxes.................................. 23,675 14,910 44,323 16,936
Income tax expense.......................................... 5,126 2,911 8,733 1,910
Minority interest in net loss of
consolidated subsidiary................................... (243) -- (243) --
--------- --------- --------- ---------
Net income.................................................. $ 18,792 $ 11,999 $ 35,833 $ 15,026
--------- --------- --------- ---------
--------- --------- --------- ---------
Income per share(2)......................................... $ 0.69 $ 0.45 $ 1.32 $ 0.57
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets............................................................................ $2,786,879 $2,483,685
Securities available for sale........................................................... 263,412 354,005
Loans available for sale(3)............................................................. 103,627 126,366
Investment securities, net.............................................................. 38,821 8,901
Loan portfolio, net(3).................................................................. 433,663 402,582
Discounted loan portfolio(3)............................................................ 1,295,120 1,060,953
Investment in low-income housing tax credit interests................................... 101,204 93,309
Real estate owned, net(4)............................................................... 117,703 103,704
Investment in joint ventures, net(1).................................................... 27,588 67,909
Excess of cost over net assets acquired, net............................................ 11,040 --
Deposits................................................................................ 2,198,603 1,919,742
Borrowings and other interest-bearing obligations....................................... 286,972 300,518
Stockholders' equity.................................................................... 243,864 203,596
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
OTHER DATA(5):
Average assets(6).......................................... $2,732,315 $1,896,986 $2,671,306 $1,924,701
Average equity............................................. 232,758 148,599 222,386 145,399
Return on average assets(6)................................ 2.75% 2.27% 2.68% 1.48%
Return on average equity................................... 32.29 32.30 32.23 20.67
Average equity to average assets(6)........................ 8.52 7.83 8.32 7.55
Net interest spread(7)..................................... 4.84 7.05 4.18 6.13
Net interest margin........................................ 4.81 6.48 4.04 5.65
Efficiency ratio(8)........................................ 49.60 41.10 46.46 44.94
Non-performing loans to loans
at end of period(9)...................................... 2.06 0.77 2.06 0.77
Allowance for losses on loans
to loans at end of period................................ 1.13 0.91 1.13 0.91
Allowance for losses on discounted
loans to discounted loans at
end of period............................................ 1.51 1.57 1.51 1.57
Bank regulatory capital ratios
at end of period:
Tangible................................................. 9.40 6.74 9.40 6.74
Core(Leverage)........................................... 9.40 6.74 9.40 6.74
Risk-based............................................... 13.81 13.61 13.81 13.61
</TABLE>
- ------------------------
(1) Relates primarily to the Company's investment in LLC, a joint venture formed
to acquire loans from HUD. At June 30, 1997 and December 31, 1996, the net
discounted loans held by such joint venture amounted to $36.9 million and
$110.7 million, respectively. All of such loans are classified as available
for sale. See "Business--Investment in Joint Ventures."
(2) Based upon weighted average number of shares of Common Stock outstanding of
27,063,761 and 26,398,127 during the three months ended June 30, 1997 and
1996, respectively, and 27,068,563 and 26,397,920 during the six months
ended June 30, 1997 and 1996, respectively.
(3) 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.
(4) 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.
(5) Ratios are based on average daily balances during the periods and are
annualized where appropriate.
(6) Includes the Company's pro rata share of the average assets held by LLC.
(7) The Company ceased accretion of discount on non-performing discounted
single-family residential loans effective January 1, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations-- Net Interest Income" and "--Recent
Regulatory Developments." Discount accretion on non-performing discounted
single-family residential loans amounted to $2.0 million or 125 basis points
in yield during the three months ended March 31, 1996, $3.0 million or 203
basis points in yield during the three months ended June 30, 1996 and $5.0
million or 162 basis points in yield during the six months ended June 30,
1996.
(8) 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.
(9) Non-performing loans and total loans do not include loans in the Company's
discounted loan portfolio or loans available for sale.
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<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income before provision for loan losses
increased by $3.5 million or 14% during the second quarter of 1997 as compared
to the second quarter of 1996. The increase was due to a 54% increase in average
earning assets (primarily in the discounted loan portfolio), which offset a 221
basis point decrease in the net interest spread. Interest income of $66.9
million for the second quarter of 1997 increased by $15.4 million or 30% over
that of the second quarter of 1996 as a result of an $816.5 million or 54%
increase in the average balance of interest-earning assets, which was offset in
part by a 210 basis point decline in the weighted average yield earned. The
weighted average yield on interest-earning assets was 11.47% and 13.57% in the
second quarter of 1997 and 1996, respectively, and 10.79% and 12.65% in the
first six months of 1997 and 1996, respectively. The decline in yields for these
periods in 1997 was primarily attributable to increases in the average balance
of discounted single-family residential loans and the Company's decision to
cease accretion of discount on non-performing discounted single-family
residential loans effective January 1, 1997. As a result of the Company's
decision to cease accretion of discount, the Company now recognizes income on
such loans at the time cash is received or the loan is sold rather than over the
anticipated holding period. Discount accretion on non-performing discounted
single-family residential loans amounted to $3.0 million or 162 basis points in
yield during the second quarter of 1996.
Interest expense of $38.9 million for the second quarter of 1997 increased
by $12.0 million or 44% over the comparable period in the prior year as a result
of a $695.9 million or 42% increase in the average balance of interest-bearing
liabilities and an 11 basis point increase in the weighted average rate paid.
For the first six months of 1997, interest expense amounted to $76.0 million, a
$21.0 million or 38% increase over the same period in the prior year.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses amounted
to $7.9 million and $5.0 million for the second quarter of 1997 and 1996,
respectively, and $17.7 million and $14.4 million for the first six months of
1997 and 1996, respectively. At June 30, 1997, the Company had allowances for
losses of $19.9 million and $5.4 million on its discounted loan and loan
portfolios, respectively, which amounted to 1.5% and 1.1% of the respective
balances. The Company maintained reserves of 1.1% and 0.9% on its discounted
loan and loan portfolios, respectively, at December 31, 1996.
NON-INTEREST INCOME. Non-interest income of $33.3 million for the second
quarter of 1997 increased by $25.2 million from that of the second quarter of
1996 primarily due to an $18.8 million increase in gains on sales of
interest-earning assets and a $3.4 million increase in servicing fees and other
charges. Gains on sales of interest-earning assets for the second quarter of
1997 of $23.4 million were primarily comprised of a $16.8 million net gain
recognized in connection with the securitization of 1,783 discounted
single-family residential loans acquired from HUD with an aggregate unpaid
balance of $170.6 million, a $4.5 million gain recognized in connection with the
securitization of 896 sub-prime single-family residential loans with an
aggregate unpaid principal balance of $104.8 million and a $2.6 million gain on
the sale of mortgage-related securities to OAIC. Gains on sales of
interest-earning assets for the first six months of 1997 increased by $30.5
million from the same period in 1996 and included a $9.5 million gain earned
during the first quarter in connection with the securitization of discounted
single-family residential loans acquired from HUD.
Servicing fees and other charges increased $9.3 million during the first six
months of 1997, as compared to the same period in 1996, and included $1.1
million of fees earned during the first quarter in connection with the set up of
loans transferred to the Company for servicing. The increase in servicing fees
and other charges reflect an increase in loan servicing and related fees as a
result of an increase in loans serviced for others. The average unpaid principal
balance of loans serviced for others amounted to $2.50 billion and $561.8
million during the second quarter of 1997 and 1996, respectively, and $2.27
billion and $450.3 million during the first six months of 1997 and 1996,
respectively. The loans serviced by the
15
<PAGE>
Company for others include the loans which back the mortgage-related securities
which resulted from the Company's loan securitization transactions during the
second quarter of 1997, as discussed above.
OPERATING EXPENSES. Non-interest expense of $31.1 million for the second
quarter of 1997 increased by $17.2 million or 124% as compared to the same
period for 1996. Compensation and employee benefits accounted for $11.1 million
of this increase, as the average number of employees increased to 823 from 373
and the accrual for employee profit sharing expense increased by $3.3 million
over that of the second quarter of 1996. Occupancy and equipment expense
increased $1.8 million, primarily due to an increase in data processing costs
and general office equipment expenses. Other operating expenses increased $3.6
million, primarily due to $2.5 million of certain one-time charges and a
$766,000 increase in loan related expenses. Non-interest expense of $53.8
million for the first six months of 1997 increased $28.2 million or 110% over
the comparable period in the prior year, with compensation and employee benefits
accounting for $19.9 million of the increase.
EQUITY IN EARNINGS OF INVESTMENT IN JOINT VENTURES. During the second
quarter of 1997, the Company recorded $1.3 million of income related to its
investment in joint ventures, which consist primarily of LLC, as compared to
$1.1 million in the second quarter of 1996. The Company's pro rata share of the
income from joint ventures in the second quarter of 1997 consisted primarily of
net interest income. Equity in earnings of investment in joint ventures amounted
to $15.7 million for the first six months of 1997 and included $9.2 million of
net gains in the first quarter related to the securitization of discounted
single-family residential loans acquired from HUD. The Company acts as the
servicer for the loans previously securitized as well as the remaining loans
held by LLC.
INCOME TAX EXPENSE. The Company's effective tax rate amounted to 21.65% and
19.52% during the second quarter of 1997 and 1996, respectively and 19.70% and
11.28% during the first six months of 1997 and 1996, respectively. The Company's
income tax expense is reported net of tax credits of $2.9 million and $2.5
million for the second quarter of 1997 and 1996, respectively, and $6.5 million
and $4.9 million for the first six months of 1997 and 1996, respectively,
resulting from investments in low-income housing tax credit interests. Exclusive
of such amounts, the Company's effective tax rate amounted to 34.02% and 36.08%
during the second quarter of 1997 and 1996, respectively, and 34.35% and 40.30%
for the first six months of 1997 and 1996, respectively.
MINORITY INTEREST. Minority interest in net loss of consolidated subsidiary
represents the loss attributable to the 20% interest in OFS not owned by the
Company.
OTHER DEVELOPMENTS
In connection with the securitizations of discounted single-family
residential loans acquired from HUD and sub-prime single-family residential
loans during the second quarter of 1997, the Bank sold the senior classes of
securities from these transactions and retained the related subordinate and
residual securities, which had an aggregate book value of $12.9 million at June
30, 1997. In addition, at the same date the Bank held four additional
subordinate and residual securities which had an aggregate book value of $25.1
million. Pursuant to discussions with the OTS, the Bank generally has agreed to
dividend to the Company such subordinate and residual securities from time to
time pursuant to the OTS capital distribution regulation. At June 30, 1997, the
Bank could pay an aggregate of $11.5 million in dividends to the Company without
violating the regulatory capital requirements committed to maintained by the
Bank as of such date. As a result of the agreement with the OTS to dividend
subordinate and residual securities, however, the Bank currently may not be able
to pay any cash dividends to the Company without prior OTS approval. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Recent Regulatory Developments" and "Regulation--The
Bank--Restrictions on Capital Distributions."
During the second quarter of 1997, the Company consolidated its sub-prime
single-family residential lending operations within OFS in connection with its
acquisition of substantially all of the assets of
16
<PAGE>
Admiral. See "Business--Lending Activities -Single-family Residential Loans."
Goodwill related to this transaction amounted to $11.0 million at June 30, 1997
and is being amortized on a straight-line basis over a period of 15 years.
On July 17, 1997, the Company entered into a letter of intent to acquire a
small, privately-held firm which is engaged primarily in the development of
software for the financial services industry, including loan servicing software.
The aggregate purchase price would be $8.0 million, including $3.5 million which
would be contingent on the target meeting certain software development
performance criteria, and would be payable in cash and/or securities of the
Company, as to be agreed by the parties. This acquisition is subject to the
completion of due diligence by the Company to its satisfaction, the negotiation
and execution of definitive agreements and the satisfaction of other conditions
customary in these types of transactions, and, as a result, there can be no
assurance that it will be consummated in the near term or at all.
The Company is currently exploring obtaining an approximately $20 million
line of credit to the Company and an approximately $500 million line of credit
to the Bank. If obtained, these lines of credit will enhance the Company's
ability to manage its liquidity and sources of funds to utilize those which are
the most cost effective.
The Company has received notice that HUD intends to auction approximately
18,200 single-family residential loans with an aggregate unpaid principal amount
of approximately $1.15 billion in early September 1997. The Company currently
intends to submit a bid to acquire all or a substantial portion of these loans
with one or more co-investors. There can be no assurance that the Company
ultimately will submit a bid or as to the terms thereof, or that any bid by the
Company will be successful in whole or in part.
17
<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
18
<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
19
<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
20
<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
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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
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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
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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."
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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 subordinate 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 subordinate mortgage-related
securities
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resulting from securitization activities conducted by the Bank. As a result of
the foregoing, the Bank currently may not be able to pay any cash dividends to
the Company without prior OTS approval. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Recent Regulatory
Developments" and "Regulation--The Bank--Restrictions on Capital Distributions."
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
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Trust will be deferred during any such Extension Period but would continue to
accumulate at the rate of % per 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 continue 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 income
in gross income for United States federal income tax purposes in advance of the
receipt of cash attributable to such 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
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).
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 dissolve the Trust and, after satisfaction of creditors of the
Trust, if any, as required by applicable law, 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
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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."
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."
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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, as amended (the "Certificate of Trust"), with the Secretary of State
of the State of Delaware and the entering into of 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 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
29
<PAGE>
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.
30
<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.
31
<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."
32
<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>
33
<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.
34
<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 80%, 58%, 97%, 73% and 27%
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
35
<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.
36
<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>
37
<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.
38
<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>
39
<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
40
<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.
41
<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
42
<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
43
<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
44
<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
45
<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.
46
<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.
47
<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
48
<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."
49
<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
50
<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.
51
<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
52
<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
53
<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.
54
<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
55
<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
net proceeds from the Offerings initially will enhance the Company's liquidity.
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
56
<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
57
<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 book 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 subordinate securities with an aggregate book value of $19.5
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
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<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.
59
<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
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<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.
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<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
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<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
63
<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
64
<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."
65
<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.
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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.
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<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
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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
in 1996 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.
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<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
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(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.
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<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.
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<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
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<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
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<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.
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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
76
<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."
77
<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.
78
<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>
79
<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
80
<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.
81
<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.
82
<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>
83
<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.
84
<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
85
<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.
86
<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
87
<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
88
<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
89
<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.
90
<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>
91
<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.
92
<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.
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<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."
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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.
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REGULATION
Financial institutions and their holding companies are extensively regulated
under federal and state laws. As a result, the business, financial condition and
prospects of the Company 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
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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.
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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
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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
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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.
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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. 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. As a result of an
agreement by the Company with the OTS to dividend subordinate and residual
mortgage-related securities resulting from securitization activities conducted
by the Bank, which had an aggregate book value of $45.9 million at March 31,
1997, the Bank may not be able to pay any cash dividends to the Company without
prior OTS approval, however. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Regulatory Developments."
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.
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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
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 (i) was in compliance with the
foregoing limitation because it had no loan or groups of loans to one borrower
(including related entities) which exceeded $54.7 million and (ii) had $138.3
million, $104.5 million and $159.5 million of loans or groups 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,
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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, 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.
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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 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.
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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."
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth certain information about the directors and
executive officers of the Company. Directors are elected annually and hold
office until the earlier of the election and qualification of their successors
or their resignation or removal. Executive officers of the Company are elected
annually by the Board of Directors and generally serve at the discretion of the
Board. There are no arrangements or understandings between the Company and any
person pursuant to which such person was elected as a director or executive
officer of the Company. Other than William C. Erbey and John R. Erbey, who are
brothers, no director or executive officer is related to any other director or
executive officer of the Company or any of its subsidiaries by blood, marriage
or adoption.
DIRECTORS OF THE COMPANY
<TABLE>
<CAPTION>
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,
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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,
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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
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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 12,0$00 115,790 $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.
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(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 $26.75.
The Stock Option Plan currently is administered and interpreted by either
the Board of Directors of the Company or, to the extent authority is delegated,
the Nominating and Compensation Committee thereof.
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OPTION GRANTS FOR 1996
The following table provides information relating to option grants made
pursuant to the Stock Option Plan in January 1997 to the individuals named in
the Summary Compensation Table for services rendered in 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
RATES OF
STOCK
PERCENT PRICE
NUMBER OF OF SECURITIES MARKET VALUE PER APPRECIATION
SECURITIES UNDERLYING SHARE OF THE FOR OPTION
UNDERLYING TOTAL OPTIONS COMPANY TERM(3)
OPTIONS GRANTED TO EXERCISE COMMON STOCK AT EXPIRATION ---------
NAME GRANTED#)(1)(2) EMPLOYEES(2) PRICE ($/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.
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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.
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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.
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(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.
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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-
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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), except that if such next succeeding Business Day falls in the next
calendar year, then such payment shall 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 (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.
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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
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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
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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 dissolve 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
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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.
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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, (ii) to add to the covenants, restrictions or obligations of
the Company or (iii) 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
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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 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
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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.
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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 or as otherwise described under "--Liquidation Distribution Upon
Dissolution." 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
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the Property Trustee as the holder of the Junior Subordinated Debentures, (iii)
the 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
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certain terms and provisions of the Junior Subordinated Debentures and the
Indenture does not purport to 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),
except that if such next succeeding Business Day falls in the next calendar
year, then such payment shall be made on the immediately preceeding Business
Day, in each case 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."
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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 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 and agreements between the Bank and the OTS which
affect 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 violating the regulatory capital levels
committed to be maintained by the Bank as of June 30, 1997. As a result of an
agreement by the Company with the OTS to dividend subordinate and residual
mortgage-related securities resulting from securitization activities conducted
by the Bank, which had an aggregate book value of $45.9 million at March 31,
1997, the Bank may not be able to pay any cash dividends to the Company without
prior OTS approval, however. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Regulatory Developments"
and "Regulation--The Bank--Restrictions on Capital Distributions"). 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."
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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 of 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.
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"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 "Reference Treasury
Dealer"), the Company shall substitute therefor another Reference Treasury
Dealer; and (ii) any other Reference 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 Trust 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 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.
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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 Person (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;
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(c) make loans or advances to the Company or any Subsidiary or to guarantee
Indebtedness of the Company or any 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 limits 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
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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 which are 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 or any Junior Subordinated
Debentures distributed as a result of the liquidation of the Trust 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
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Dividends and Other Payment Restrictions Affecting Subsidiaries," "--Limitation
on Transactions with Affiliates," "--Limitation on Senior Subordinated
Indebtedness" and "--Offer to Purchase Upon a 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 20% or more of the Voting Stock of such specified
Person. Notwithstanding the foregoing, no Securitization Entity shall be deemed
an Affiliate of the Company.
"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" (as defined above)
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
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(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% 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 means
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.
"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.
"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 is 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 Security shall be deemed to be Disqualified Capital Stock.
"Existing Principal Stockholders" means, individually or collectively,
William C. Erbey, Barry N. Wish and Harold D. Price and their respective
estates, spouses, heirs, ancestors, lineal descendants and legatees and legal
representatives of any of the foregoing and the trustee of any bona fide trust
of which one or more of the foregoing are the trustees or the majority
beneficiaries, and any entity of which any of the foregoing, individually or
collectively, beneficially owns more than 50% of the Voting Stock thereof.
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"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.
"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 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
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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 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 subdivision
thereof, or any other entity of whatever nature.
"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.
"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.
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"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 the Company, whether recourse
is to all or a portion of the assets of the Company and whether or not
contingent, (i) every obligation of the Company for money borrowed; (ii) every
obligation of the Company evidenced by bonds, debentures, notes or other similar
instruments of the Company, including obligations incurred in connection with
the acquisition of property, assets or businesses; (iii) every reimbursement
obligation of the Company with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of the Company; (iv)
every obligation of the Company 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 the Company; (vi) every obligation of the Company 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,
the Company 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
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States Bankruptcy Code of 1978, as 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 (and premium, if any) 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
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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
execute supplemental indentures which modify the Indenture in a manner affecting
the rights of the holders of such Junior Subordinated Debentures; provided that
no such supplemental indenture 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
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reduce the principal amount thereof, or reduce 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
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register the transfer or exchange of Junior Subordinated Debentures, replace
stolen, lost or mutilated 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
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liquidation of the Trust (unless the Junior Subordinated Debentures are
distributed to holders of the 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
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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.
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.
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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
Securities and a holder of a Junior Subordinated Debentures is that a holder of
a Junior Subordinated
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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 DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
the Trust involving the liquidation of the Junior Subordinated Debentures, and
after satisfaction of creditors of the Trust, if any, as required by applicable
law, 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.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
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<PAGE>
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.
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
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<PAGE>
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. The Taxpayer Relief Act of 1997
generally reduces the United States federal income tax rates on capital gains
recognized by individuals upon the sale or other taxable disposition of capital
assets that such individuals have held for more than 18 months at the time of
such sale or disposition. Holders are advised to consult with their own tax
advisors regarding the application of these provisions of the Taxpayer Relief
Act of 1997 in their particular circumstances.
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
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<PAGE>
(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.
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
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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 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
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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 Lehman Brothers Inc., on behalf of the
Representatives.
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.
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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. Elias, Matz, Tiernan & Herrick
L.L.P. will rely on the opinion of Simpson Thacher & Bartlett as to matters of
New York law.
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.
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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
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)
interest rate environments, fair value results can differ significantly,
especially for certain fixed-rate financial instruments and non-accrual assets.
In addition, the fair values presented do not attempt to estimate the value of
the Company's fee generating businesses and anticipated future business
activities. In other words, they do not represent the Company's value as a going
concern. Furthermore, the differences between the carrying amounts and the fair
values presented may not be realized because, except as indicated, the Company
generally intends to hold these financial instruments to maturity and realize
their recorded values.
Reasonable comparability of fair values among financial institutions is
difficult due to the wide range of permitted valuation techniques and numerous
estimates that must be made in the absence of secondary market prices. This lack
of objective pricing standards introduces a degree of subjectivity to these
derived or estimated fair values. Therefore, while disclosure of estimated fair
values of financial instruments is required, readers are cautioned in using this
data for purposes of evaluating the financial condition of the Company.
The methodologies used and key assumptions made to estimate fair value, the
estimated fair values determined and recorded carrying values follow:
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 lend 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
Summary of Recent Developments................. 13
Risk Factors................................... 18
The Company.................................... 29
The Trust...................................... 29
Use of Proceeds................................ 31
Ratio of Earnings to Fixed Charges............. 31
Accounting Treatment........................... 31
Capitalization................................. 32
Selected Consolidated Financial
and Other Data............................... 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 35
Business....................................... 60
Regulation..................................... 96
Taxation....................................... 103
Management..................................... 106
Beneficial Ownership of Common Stock........... 113
Desription of Capital Securities............... 115
Description of Junior Subordinated
Debentures................................... 125
Description of Guarantee....................... 141
Relationship Among the Capital Securities, the
Junior Subordinated Debentures and the
Guarantee.................................... 144
Certain United States Federal Income Tax
Consequences................................. 145
Underwriting................................... 150
Legal Matters.................................. 151
Experts........................................ 151
Index to Financial Statements.................. F-1
</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
AUGUST , 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 (i) 12 shares of Common Stock as holiday gifts
during the first quarter of 1997 and (ii) 1,223 shares of Common Stock as gifts
to employees of the Company and their spouses on July 29, 1997 in order to
satisfy a minimum shareholder requirement in order for the Common Stock to be
listed on the NYSE.
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)**
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C>
21.0 Subsidiaries (see "Business--Subsidiaries" in the Prospectus)
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>
- ------------------------
* 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 30, 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 30,
- ------------------------------
Executive Officer (principal 1997
William C. Erbey executive officer)
/s/ HON. THOMAS F. LEWIS Director July 30,
- ------------------------------ 1997
Hon. Thomas F. Lewis
/s/ W.C. MARTIN Director July 25,
- ------------------------------ 1997
W. C. Martin
/s/ HOWARD H. SIMON Director July 30,
- ------------------------------ 1997
Howard H. Simon
/s/ BARRY N. WISH Director July 30,
- ------------------------------ 1997
Barry N. Wish
Senior Vice President and July 30,
/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 30, 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>
$125,000,000
OCWEN CAPITAL TRUST I
__% Capital Securities
UNDERWRITING AGREEMENT
August __, 1997
Lehman Brothers Inc.
Friedman, Billings, Ramsey & Co., Inc.
Morgan Stanley & Co. Incorporated
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Ocwen Capital Trust I (the "Trust"), a statutory business trust
created under the Business Trust Act (the "Delaware Act") of the State of
Delaware (Chapter 38, Title 12, of the Delaware Code, 12 Del. C. Section 3801
et seq.), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule 1 hereto (the
"Underwriters") ________ of its __% Capital Securities, liquidation amount
$1,000 per Capital Security (the "Capital Securities"). Because NASD
Regulation, Inc. (the "NASD") views the Capital Securities offered under the
Registration Statements (as defined herein) as interests in a direct
participation program, the 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 Capital Securities will be guaranteed by Ocwen Financial
Corporation (the "Company") with respect to distributions and amounts payable
upon liquidation or redemption (the "Guarantee"), to the extent set forth in
the Guarantee Agreement (the "Guarantee Agreement"), to be dated as of the
Closing Date (as defined below), executed and delivered by the Company and
The Chase Manhattan Bank, as trustee (the "Guarantee Trustee"), for the
benefit of the holders from time to time of the Capital Securities. The
proceeds from the sale of the Capital Securities to the Underwriters will be
aggregated with the entire proceeds from the sale by the Trust to the Company
of the common securities of the Trust (the "Common Securities") and will be
used by the Trust to purchase the ___% Junior Subordinated Debentures due
2027 (the "Debentures") issued by the Company. The Capital Securities and
the Common Securities will be issued pursuant to the Amended and Restated
Declaration of Trust of the Trust, to be dated as of the Closing Date (the
"Declaration"), among the Company, as Depositor, the trustees named therein
(the "Trustees") and the holders from time to time of the Capital
<PAGE>
Securities and the Common Securities, which represent undivided beneficial
interests in the assets of the Trust. The Debentures will be issued pursuant
to a Junior Subordinated Indenture, to be dated as of the Closing Date (the
"Indenture"), between the Company and The Chase Manhattan Bank, as trustee
(the "Debenture Trustee"). The Capital Securities, the Guarantee and the
Debentures are collectively referred to herein as the "Offered Securities".
This Agreement, the Indenture, the Declaration and the Guarantee Agreement
are referred to collectively as the "Operative Documents".
1. Representations, Warranties and Agreements of the Company. Each
of the Trust and the Company, jointly and severally, represents, warrants and
agrees that:
(a) A registration statement on Form S-1, and amendments
thereto, with respect to the Capital Securities has (i) been
prepared by the Trust and the Company in conformity with the
requirements of the United States Securities Act of 1933 (the
"Securities Act") and the rules and regulations (the "Rules and
Regulations") of the United States Securities and Exchange
Commission (the "Commission") thereunder, (ii) been filed with the
Commission under the Securities Act and (iii) become effective under
the Securities Act; and a second registration statement on Form S-1
with respect to the Capital Securities (i) may also be prepared by
the Trust and the Company in conformity with the requirements of the
Securities Act and the Rules and Regulations and (ii) if to be so
prepared, will be filed with the Commission under the Securities Act
pursuant to Rule 462(b) of the Rules and Regulations on the date
hereof. Copies of the first such registration statement and the
amendments to such registration statement, together with the form of
any such second registration statement, have been delivered by the
Trust and the Company to you as the representatives (the
"Representatives") of the Underwriters. As used in this Agreement,
"Effective Time" means (i) with respect to the first such
registration statement, the date and the time as of which such
registration statement, or the most recent post-effective amendment
thereto, if any, was declared effective by the Commission and (ii)
with respect to any second registration statement, the date and time
as of which such second registration statement is filed with the
Commission, and "Effective Times" is the collective reference to
both Effective Times; "Effective Date" means (i) with respect to the
first such registration statement, the date of the Effective Time of
such registration statement and (ii) with respect to any second
registration statement, the date of the Effective Time of such
second registration statement, and "Effective Dates" is the
collective reference to both Effective Dates; "Preliminary
Prospectus" means each prospectus included in any such registration
statement, or amendments thereof, before it became effective under
the Securities Act and any prospectus filed with the Commission by
the Trust and the Company with the consent of the Representatives
pursuant to Rule 424(a) of the Rules and Regulations; "Primary
Registration Statement" means the first registration statement
referred to in this Section 1(a), as amended, at its Effective Time,
"Rule 462(b) Registration Statement" means the second registration
statement, if any, referred to in this Section 1(a), as filed with
the Commission, and "Registration
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Statements" means both the Primary Registration Statement and any
Rule 462(b) Registration Statement, including in each case all
information contained in the final prospectus filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations in
accordance with Section 5(a) hereof and deemed to be a part of the
Registration Statements as of the Effective Time of the Primary
Registration Statement pursuant to paragraph (b) of Rule 430A of the
Rules and Regulations; and "Prospectus" means such final prospectus,
as first filed with the Commission pursuant to paragraph (1) or (4)
of Rule 424(b) of the Rules and Regulations. The Commission has not
issued any order preventing or suspending the use of any Preliminary
Prospectus.
(b) The Primary Registration Statement conforms (and the Rule
462(b) Registration Statement, if any, the Prospectus and any
further amendments or supplements to the Registration Statements or
the Prospectus, when they become effective or are filed with the
Commission, as the case may be, will conform) in all material
respects to the requirements of the Securities Act and the Rules and
Regulations and do not and will not, as of the applicable Effective
Date (as to the Registration Statements and any amendment thereto)
and as of the applicable filing date (as to the Prospectus and any
amendment or supplement thereto) contain any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading; provided that no representation or warranty is made as
to information contained in or omitted from the Registration
Statements or the Prospectus in reliance upon and in conformity with
written information furnished to the Trust and the Company through
the Representatives by or on behalf of any Underwriter specifically
for inclusion therein.
(c) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of
the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; and all of the issued shares of capital
stock of each subsidiary of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable and,
except for directors' qualifying shares and as set forth in the
Registration Statements and the Prospectus, are owned directly or
indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims; the Company is a savings and loan
holding company duly registered under the Home Owners' Loan Act, as
amended ("HOLA"), and duly organized and validly existing under the
laws of the state of Florida, with full power and authority to own
its properties and conduct its business as described in the
Registration Statements and the Prospectus, and to execute and
deliver this Agreement; the Company owns, directly or indirectly,
beneficially and of record 100% of the outstanding shares of capital
stock of Ocwen Federal Bank FSB (the "Bank"); the Bank is a federal
savings bank duly organized and validly existing under the laws of
the United States with full power and authority to own its
properties and conduct its business
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as described in the Registration Statements and the Prospectus; the
Bank is a member in good standing of the Federal Home Loan Bank
System; the savings accounts of depositors in the Bank are insured
by the Federal Deposit Insurance Corporation (the "FDIC") to the
fullest extent permitted by law and the rules and regulations of the
FDIC, and no proceedings for the termination of such insurance are
pending, or to the best of the Company's knowledge, threatened.
(d) Each of the Company's subsidiaries (as defined in Section
15) have been duly formed and are validly existing and in good
standing under the laws of their respective jurisdictions of
incorporation; the Company and each of its subsidiaries are duly
qualified to do business and are in good standing as foreign
corporations in each jurisdiction in which their respective
ownership or lease of property or the conduct of their respective
businesses requires such qualification and in which the failure
singularly or in the aggregate, to be so qualified could have a
material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or prospects
of the Company and its subsidiaries, and have all power and
authority necessary to own or hold their respective properties and
to conduct the businesses in which they are engaged; and none of the
subsidiaries (other than the Bank and BCBF, L.L.C. ("BCBF"), each a
"Significant Subsidiary" and together the "Significant
Subsidiaries") is a "significant subsidiary", as such term is
defined in Rule 405 of the Rules and Regulations.
(e) All of the outstanding beneficial interests of the Trust
have been duly authorized and validly issued and are fully paid and
nonassessable undivided beneficial interests in the assets of the
Trust except as provided in Section [9.1(b)] of the Declaration; the
holders of such beneficial interests of the Trust have no preemptive
or other rights to acquire Capital Securities or Common Securities;
there are no restrictions on transfers of the Capital Securities and
the Common Securities except as required under the Securities Act
and the Declaration; the holders of the Capital Securities will be
entitled to the same limitation of personal liability extended to
stockholders of private corporations for profit incorporated under
the General Corporation Law of the State of Delaware; and all of the
issued and outstanding Common Securities of the Trust will be
directly owned by the Company free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity.
(f) The Trust has been duly created and is validly existing in
good standing as a business trust under the Delaware Act with the
power and authority to own property and to conduct its business as
described in the Prospectus.
(g) The Declaration has been duly authorized; and when the
Capital Securities are delivered and paid for pursuant to this
Agreement on the Closing Date, the Declaration will have been duly
executed and delivered and will constitute a valid and legally
binding instrument enforceable in accordance with
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its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
(h) The Guarantee Agreement has been duly authorized; and when
the Capital Securities are delivered and paid for pursuant to this
Agreement on the Closing Date, the Guarantee Agreement will have
been duly executed and delivered, assuming due authorization,
execution and delivery by the Guarantee Trustee, and will constitute
a valid and legally binding instrument enforceable in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to
general equity principles.
(i) The Capital Securities and the Common Securities conform to
the descriptions thereof contained in the Prospectus.
(j) The Indenture has been duly authorized; and on the Closing
Date the Indenture will have been duly executed and delivered by the
Company and, assuming due authorization, execution and delivery by
the Debenture Trustee, will constitute a valid and legally binding
obligation of the Company, enforceable in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
(k) The Debentures have been duly authorized; and when the
Debentures are executed by the Company and delivered on the Closing
Date to the Debenture Trustee for authentication in accordance with
the Indenture and when authenticated in the manner provided for in
the Indenture and delivered against payment therefor, the Debentures
will conform to the descriptions thereof contained in the Prospectus
and will constitute valid and legally binding obligations of the
Company, enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
(l) The execution, delivery and performance of the Operative
Documents by the Trust and the Company and the consummation of the
transactions contemplated hereby and thereby will not conflict with
or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the
Trust, the Company or any of the Company's subsidiaries is a party
or by which the Trust, the Company or any of the Company's
subsidiaries is bound or to which any of the properties or assets of
the Trust, the Company or any of the Company's subsidiaries is
subject except for such breaches or violations which would not,
singularly or in the aggregate, have a material
5
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adverse effect on the general affairs, management, financial
position, stockholders' equity or results of operations of the
Trust, the Company and the Company's subsidiaries, nor will such
actions result in any violation of the provisions of the charter (or
other organizational document) or by-laws of the Company or any of
its subsidiaries, the Declaration or any statute or any order, rule
or regulation of any court or governmental agency or body having
jurisdiction over the Trust, the Company or any of the Company's
subsidiaries or any of their properties or assets; and except for
the registration of the Capital Securities under the Securities Act
and such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state or foreign securities laws in connection with the
purchase and distribution of the Capital Securities by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental agency
or body is required for the execution, delivery and performance of
the Operative Documents by the Trust or the Company and the
consummation of the transactions contemplated thereby.
(m) There are no contracts, agreements or understandings
between the Trust or the Company and any person granting such person
the right to require the Trust or the Company to file a registration
statement under the Securities Act with respect to any securities of
the Trust owned or to be owned by such person or to require the
Trust or the Company to include such securities in the securities
registered pursuant to the Registration Statements or in any
securities being registered pursuant to any other registration
statement filed by the Trust and the Company under the Securities
Act.
(n) Neither the Company nor any of its subsidiaries has
sustained, since the date of the latest audited financial statements
included in the Prospectus, any material loss or interference with
its business from fire, explosion, flood or other calamity, whether
or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since such date, there has not
been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any material adverse change,
or any development involving a prospective material adverse change,
in or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Registration Statements.
(o) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statements
or included in the Prospectus present fairly the financial condition
and results of operations of the entities purported to be shown
thereby, at the dates and for the periods indicated, and have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved,
except as otherwise stated therein.
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(p) Price Waterhouse LLP, who have certified certain financial
statements of the Company and BCBF, whose reports appear in the
Prospectus and who have delivered the initial letter referred to in
Section 7(g) hereof, are independent public accountants as required
by the Securities Act and the Rules and Regulations.
(q) There are no legal or governmental proceedings pending to
which the Company or any of its subsidiaries is a party or of which
any property or asset of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or any of
its subsidiaries, are reasonably likely to have a material adverse
effect on the consolidated financial position, stockholders' equity,
results of operations, business or prospects of the Company and its
subsidiaries; and to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental
authorities or by others.
(r) There are no contracts or other documents which are
required to be described in the Prospectus or filed as exhibits to
either of the Registration Statements by the Securities Act or by
the Rules and Regulations which have not been described in the
Prospectus or filed as exhibits to either of the Registration
Statements or incorporated therein by reference as permitted by the
Rules and Regulations.
(s) No relationship, direct or indirect, exists between or
among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other
hand, which is required to be described in the Prospectus which is
not so described.
(t) The Company has filed all federal, state and local income
and franchise tax returns required to be filed through the date
hereof and has paid all taxes due thereon, and no tax deficiency has
been determined adversely to the Company or any of its subsidiaries
which has had (nor does the Company have any knowledge of any tax
deficiency which, if determined adversely to the Company or any of
its subsidiaries, is reasonably likely to have) a material adverse
effect on the consolidated financial position, stockholders' equity,
results of operations, business or prospects of the Company and its
subsidiaries.
(u) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Registration Statements, the Company has not (i)
issued or granted any securities,(ii) incurred any liability or
obligation, direct or contingent, other than liabilities and
obligations which were incurred in the ordinary course of
business,(iii) entered into any transaction not in the ordinary
course of business or (iv)declared or paid any dividend on its
capital stock.
(v) The Company (i) makes and keeps accurate books and records
and (ii) maintains internal accounting controls which provide
reasonable assurance that (A)
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<PAGE>
transactions are executed in accordance with management's
authorization,(B) transactions are recorded as necessary to permit
preparation of its financial statements and to maintain
accountability for its assets,(C) access to its assets is permitted
only in accordance with management's authorization and (D) the
reported accountability for its assets is compared with existing
assets at reasonable intervals.
(w) Neither the Company nor any of the Company's subsidiaries
is in violation of its charter (or other organizational document) or
by-laws; the Trust is not in violation of its certificate of Trust
or Declaration; and neither the Trust, the Company nor any of the
Company's subsidiaries (i) is in default in any material respect,
and no event has occurred which, with notice or lapse of time or
both, would constitute such a default, in the due performance or
observance of any term, covenant or condition contained in any
material indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which it is a party or by which it is
bound or to which any of its properties or assets is subject or (ii)
is in violation in any material respect of any law, ordinance,
governmental rule, regulation or court decree to which it or its
properties or assets may be subject or has failed to obtain any
material license, permit, certificate, franchise or other
governmental authorization or permit necessary to the ownership of
its properties or assets or to the conduct of its business.
(x) Neither the Trust nor the Company nor any subsidiary of the
Company is an "investment company" within the meaning of such term
under the Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder.
2. Purchase of the Capital Securities by the Underwriters. On the
basis of the representations and warranties contained in, and subject to the
terms and conditions of, this Agreement, the Trust agrees to sell
$125,000,000 of it's Capital Securities to the several Underwriters and each
of the Underwriters, severally and not jointly, agrees to purchase the
respective liquidation amount of Capital Securities set forth opposite that
Underwriter's name in Schedule 1 hereto. The respective purchase obligations
of the Underwriters with respect to the Capital Securities shall be rounded
among the Underwriters to avoid fractional shares, as the Representatives may
determine.
The Trust shall not be obligated to deliver any of the certificates
evidencing the Capital Securities to be delivered on the Delivery Date (as
hereinafter defined) except upon payment for all the Capital Securities to be
purchased on the Delivery Date as provided herein.
3. Offering of Capital Securities by the Underwriters. Upon
authorization by the Representatives of the release of the Capital
Securities, the several Underwriters propose to offer the Capital Securities
for sale upon the terms and conditions set forth in the Prospectus; provided,
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<PAGE>
however, that no Capital Securities registered pursuant to the Rule 462(b)
Registration Statement, if any, shall be offered prior to the Effective Time
thereof.
4. Delivery of and Payment for the Capital Securities. Delivery of
and payment for the Capital Securities shall be made at the office of Simpson
Thacher & Bartlett at 425 Lexington Avenue, New York, New York, 10017, at
10:00 A.M., New York City time, on the third (fourth, if pricing occurs after
4:30 p.m. New York City time) full business day following the date of this
Agreement or at such other date or place as shall be determined by agreement
between the Representatives and the Company and the Trust. This date and
time are sometimes referred to as the "Delivery Date." On the Delivery Date,
the Trust shall deliver or cause to be delivered certificates representing
the Capital Securities to the Representatives for the account of each
Underwriter against payment to or upon the order of the Trust of the purchase
price by wire transfer. Time shall be of the essence, and delivery at the
time and place specified pursuant to this Agreement is a further condition of
the obligation of each Underwriter hereunder. Upon delivery, the
certificates evidencing the Capital Securities shall be registered in such
names and in such denominations as the Representatives shall request in
writing not less than two full business days prior to the Delivery Date. For
the purpose of expediting the checking and packaging of the certificates for
the Capital Securities, the Company shall make the certificates representing
the Capital Securities available for inspection by the Representatives in New
York, New York, not later than 2:00 P.M., New York City time, on the business
day prior to the Delivery Date.
As compensation for the Underwriters' commitment and in view of the
fact that the proceeds of the sale of the Capital Securities and the Common
Securities will be used to purchase the Debentures, the Company will pay, on
the Closing Date, to the Underwriters a commission of __% of the liquidation
amount of the Capital Securities purchased by the Underwriters on the Closing
Date by wire transfer to a bank account designated by Lehman Brothers Inc.
5. Further Agreements of the Company. The Trust and the Company
agree:
(a) To prepare the Rule 462(b) Registration Statement, if
necessary, in a form approved by the Representatives and to file
such Rule 462(b) Registration Statement with the Commission not
later than the day following the execution and delivery of this
Agreement; to prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than 10:00 A.M., New York City
time, on the day following the execution and delivery of this
Agreement; to make no further amendment or any supplement to the
Registration Statements or to the Prospectus except as permitted
herein; to advise the Representatives, promptly after it receives
notice thereof of the time when any amendment to either Registration
Statement has been filed or becomes effective or any supplement to
the Prospectus or any amended Prospectus has been filed and to
provide the Representatives with copies thereof; to advise the
Representatives, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order
preventing or
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<PAGE>
suspending the use of any Preliminary Prospectus or the Prospectus,
of the suspension of the qualification of the Capital Securities for
offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any
request by the Commission for the amending or supplementing of the
Registration Statements or the Prospectus or for additional
information; and, in the event of the issuance of any stop order or
of any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or suspending any such qualification,
to use promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to Lehman Brothers Inc. a signed copy
of each of the Registration Statements as originally filed with the
Commission, and each amendment thereto filed with the Commission,
including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives in New York
City such number of the following documents as the Representatives
shall reasonably request: (i) conformed copies of the Registration
Statements as originally filed with the Commission and each
amendment thereto (in each case excluding exhibits other than this
Agreement and the computation of per share earnings) and (ii) each
Preliminary Prospectus, the Prospectus (not later than 10:00 A.M.,
New York City time, of the day following the execution and delivery
of this Agreement) and any amended or supplemented Prospectus (not
later than 10:00 A.M., New York City time, on the day following the
date of such amendment or supplement); and, if the delivery of a
prospectus is required at any time after the Effective Time of the
Primary Registration Statement in connection with the offering or
sale of the Capital Securities (or any other securities relating
thereto) and if at such time any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made when such
Prospectus is delivered, not misleading, or, if for any other reason
it shall be necessary to amend or supplement the Prospectus in order
to comply with the Securities Act, to notify the Representatives
and, upon their request, to prepare and furnish without charge to
each Underwriter and to any dealer in securities as many copies as
the Representatives may from time to time reasonably request of an
amended or supplemented Prospectus which will correct such statement
or omission or effect such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statements or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested by
the Commission;
(e) Prior to filing with the Commission (i) any amendment to
either of the Registration Statements or supplement to the
Prospectus or (ii) any Prospectus
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<PAGE>
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy
thereof to the Representatives and counsel for the Underwriters and
obtain the consent of the Representatives to the filing;
(f) As soon as practicable after the Effective Date of the
Primary Registration Statement, to make generally available to the
holders of Capital Securities and to deliver to the Representatives
an earnings statement of the Company and its subsidiaries (which
need not be audited) complying with Section 11(a) of the Securities
Act and the Rules and Regulations (including, at the option of the
Company, Rule 158);
(g) For a period of five years following the Effective Date of
the Primary Registration Statement, to furnish to the
Representatives (i) copies of all materials furnished by the Company
to its shareholders generally, (ii) copies of all public reports and
all reports and financial statements furnished by the Company to the
principal national securities exchange or automated quotation system
upon which the Company's Common Stock may be listed or quoted
pursuant to requirements of or agreements with such exchange or
system, (iii) copies of all reports filed by the Company with the
Commission pursuant to the Exchange Act or any rule or regulation of
the Commission thereunder and (iv) copies of the publicly available
reports filed by the Bank with the OTS;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Capital
Securities for offering and sale under the securities laws of such
jurisdictions as the Representatives may request and to comply with
such laws so as to permit the continuance of sales and dealings
therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Capital Securities; provided that
in connection therewith the Company shall not be required to qualify
as a foreign corporation or to file a general consent to service of
process in any jurisdiction; and
(i) During the period beginning from the date of this 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, the Trust and the Company 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 Lehman Brothers Inc., on behalf of the
Representatives.
6. Expenses. The Company agrees to pay all expenses incidental to
the performance of its and the Trust's obligations under the Operative
Documents, including (a) the costs incident to the authorization, issuance,
sale and delivery of the Capital Securities and any taxes payable in that
connection; (b) the costs incident to the preparation, printing and filing
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<PAGE>
under the Securities Act of the Registration Statements and any amendments
and exhibits thereto; (c) the costs of distributing the Registration
Statements as originally filed and each amendment thereto and any
post-effective amendments thereof (including, in each case, exhibits), any
Preliminary Prospectus, the Prospectus and any amendment or supplement to the
Prospectus, all as provided in this Agreement; (d) the costs of reproducing
and distributing the Operative Documents; (e) the costs of distributing the
terms of agreement relating to the organization of the underwriting syndicate
and selling group to the members thereof by mail, telex or other means of
communication; (f) the filing fees incident to securing any required review
by the National Association of Securities Dealers, Inc. of the terms of sale
of the Capital Securities; (g) any applicable listing or other fees; (h) the
fees and expenses of qualifying the Capital Securities under the securities
laws of the several jurisdictions as provided in Section 5(h) and of
preparing, printing and distributing a Blue Sky Memorandum (including related
fees and expenses of counsel to the Underwriters); and (i) all other costs
and expenses incident to the performance of the obligations of the Trust and
the Company under this Agreement; provided that, except as provided in this
Section 6 and in Section 11, the Underwriters shall pay their own costs and
expenses, including the costs and expenses of their counsel, any transfer
taxes on the Capital Securities which they may sell and the expenses of
advertising any offering of the Capital Securities made by the Underwriters.
7. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when
made and on the Delivery Date, of the representations and warranties of the
Company and the Trust contained herein, to the performance by the Company of
its obligations hereunder, and to each of the following additional terms and
conditions:
(a) The Rule 462(b) Registration Statement, if any, and the
Prospectus shall have been timely filed with the Commission in
accordance with Section 5(a); no stop order suspending the
effectiveness of either of the Registration Statements or any part
thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and any
request of the Commission for inclusion of additional information in
either of the Registration Statements or the Prospectus or otherwise
shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to the Delivery Date that either of the
Registration Statements or the Prospectus or any amendment or
supplement thereto contains any untrue statement of a fact which, in
the opinion of Simpson Thacher & Bartlett, counsel for the
Underwriters, is material or omits to state any fact which, in the
opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not
misleading.
(c) All corporate proceedings and other legal matters incident
to the authorization, form and validity of the Operative Documents,
and all other legal matters relating to this Agreement and the
transactions contemplated hereby shall be satisfactory in all
respects to counsel for the Underwriters, the Company and
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<PAGE>
the Trust shall have furnished to such counsel all documents and
information that they may reasonably request to enable them to pass
upon such matters.
(d) Elias, Matz, Tiernan & Herrick L.L.P. shall have furnished
to the Representatives its written opinion, as counsel to the Trust
and the Company, addressed to the Underwriters and dated the
Delivery Date, in form and substance satisfactory to the
Representatives, to the effect that:
(i) The Company is a savings and loan holding company
duly registered under HOLA;
(ii) The Bank has been duly organized and is validly
existing as a federal savings bank under the laws of the United
States of America, with full corporate power and authority to
own its properties and conduct its business as described in the
Registration Statements and the Prospectus, and is a member of
the Federal Home Loan Bank of New York;
(iii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of
capital stock of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and
conform to the description thereof contained in the Prospectus;
and all of the issued shares of capital stock of the Bank have
been duly and validly authorized and issued and are fully paid,
non-assessable and are directly or indirectly owned of record
and, to such counsel's knowledge, beneficially by the Company,
free and clear of all liens, encumbrances, equities or claims;
(iv) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property or asset
of the Company or any of its subsidiaries is the subject which,
if determined adversely to the Company or any of its
subsidiaries, reasonably could be expected to have a material
adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or
prospects of the Company and its subsidiaries; and, to such
counsel's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or by others;
(v) The Primary Registration Statement was declared
effective under the Securities Act as of the date and time
specified in such opinion, the Rule 462(b) Registration
Statement, if any, was filed with the Commission on the date
specified therein, the Prospectus was filed with the Commission
pursuant to the subparagraph of Rule 424(b) of the Rules and
Regulations specified in such opinion on the date specified
therein and no stop order suspending the effectiveness of
either of the Registration
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Statements has been issued and, to the knowledge of such
counsel, no proceeding for that purpose is pending or
threatened by the Commission;
(vi) The Registration Statements, as of their respective
Effective Dates, and the Prospectus, as of its date, and any
further amendments or supplements thereto, as of their
respective dates, made by the Trust and the Company prior to
the Delivery Date (other than the financial statements and
other financial and statistical data contained therein, as to
which such counsel need express no opinion) complied as to form
in all material respects with the requirements of the
Securities Act and the Rules and Regulations;
(vii) The statements contained in the Prospectus under the
captions "Regulation", "Taxation-Federal Taxation" and
"Description of Capital Stock", insofar as they describe
federal statutes, rules and regulations, constitute a fair
summary thereof and the opinion of such counsel filed as
Exhibit 8 to the Registration Statements is confirmed and the
Underwriters may rely upon such opinion as if it were addressed
to them;
(viii) The statements made in the Prospectus under the
captions "Description of Junior Subordinated Debentures", "The
Trust", "Description of Capital Securities", "Description of
Guarantee" and "Relationship Among the Capital Securities, the
Junior Subordinated Debentures and the Guarantee", insofar as
such statements purport to constitute summaries of the terms of
the Capital Securities, the Junior Subordinated Debentures and
the Guarantee Agreement, constitute accurate summaries of the
terms of the Capital Securities, Junior Subordinated Debentures
and Guarantee Agreement;
(ix) The statements in the Prospectus under the caption
"Certain United States Federal Income Tax Consequences" are
accurate and fairly summarize the matters referred to therein;
(x) To such counsel's knowledge, there are no contracts or
other documents which are required to be described in the
Prospectus or filed as exhibits to the Registration Statements
by the Securities Act or by the Rules and Regulations which
have not been described or filed as exhibits to the
Registration Statements or incorporated therein by reference as
permitted by the Rules and Regulations;
(xi) This Agreement has been duly authorized, executed and
delivered by the Company;
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(xii) The Declaration has been duly authorized, executed
and delivered by the Company;
(xiii) The Indenture has been duly authorized, executed
and delivered by the Company and, assuming the due
authorization, execution and delivery thereof by the Indenture
Trustee, constitutes a legal, valid and binding obligation of
the Company, enforceable against the Company in accordance with
its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other
similar laws relating or affecting creditors' rights generally,
general equitable principles (whether considered in a
proceeding in equity or at law) and an implied covenant of good
faith and fair dealing; and the Debentures have been duly
authorized, executed and delivered by the Company in accordance
with the provisions of the Indenture and, assuming due
authentication by the Trustee, when delivered to and paid for
by the Trust as contemplated by this Agreement, will constitute
legal, valid and binding obligations of the Company entitled to
the benefits of the Indenture and enforceable against the
Company in accordance with their terms (subject to the effects
of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating or
affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at
law) and an implied covenant of good faith and fair dealing);
(xiv) The Guarantee Agreement has been duly authorized,
executed and delivered by the Company and, assuming due
authorization, execution and delivery thereof by the Guarantee
Trustee, constitutes a legal, valid and binding obligation of
the Company, enforceable against the Company in accordance with
its terms (subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other
similar laws relating or affecting creditors' rights generally,
general equitable principles (whether considered in a
proceeding in equity or at law) and an implied covenant of good
faith and fair dealing);
(xv) The issue and sale of the Capital Securities being
delivered on the Delivery Date by the Trust and the compliance
by the Trust and the Company with all of the provisions of the
Operative Documents and the consummation of the transactions
contemplated hereby and thereby will not conflict with or
result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or any of
its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound or to which any of the properties or
assets of the Company or any of its subsidiaries is subject,
except for such conflicts, breaches, violations or defaults
which individually or in the aggregate would not have a
material adverse effect
15
<PAGE>
on the operations, business or condition of the Company and its
subsidiaries taken as a whole, nor will such actions result in
any violation of the provisions of the charter or by-laws of
the Company or any of its subsidiaries or any statute or any
order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties
or assets; and, except for the registration of the Capital
Securities under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as
may be required under the Exchange Act and applicable state or
foreign securities laws in connection with the purchase and
distribution of the Capital Securities by the Underwriters, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or
body is required for the execution, delivery and performance of
the Operative Documents by the Trust or the Company and the
consummation of the transactions contemplated hereby and
thereby;
(xvi) The savings accounts of depositors in the Bank are
insured by the FDIC to the fullest extent permitted by law and
the rules and regulations of the FDIC, and no proceedings for
the termination of such insurance are pending, or to such
counsel's knowledge, threatened; and
(xvii) To such counsel's knowledge, neither the Company
nor any of its subsidiaries is party to or otherwise the
subject of any consent decree, memorandum of understanding,
written agreement or similar supervisory or enforcement
agreement or understanding with the OTS, the FDIC or any other
government authority or agency responsible for the supervision,
regulation or insurance of depository institutions or their
holding companies.
In rendering such opinion, such counsel may (i) state that its
opinion is limited to matters governed by the Federal laws of the
United States of America and the laws of Florida. Such counsel
shall also have furnished to the Representatives a written
statement, addressed to the Underwriters and dated the Delivery
Date, in form and substance satisfactory to the Representatives, to
the effect that (x) such counsel has, in its capacity as special
counsel to the Company, participated in conferences with officers
and other representatives of the Company, representatives of the
independent public accountants of the Company and representatives of
the Representatives at which the contents of the Registration
Statements and the Prospectus have been discussed, and (y) based on
the foregoing, no facts have come to the attention of such counsel
which lead it to believe that the Registration Statements, as of
their respective Effective Dates, contained any untrue statement of
a material fact or omitted to state any material fact required to be
stated therein or necessary in order to make the statements therein
not misleading, or that the Prospectus contains any untrue statement
of a
16
<PAGE>
material fact or omits to state any material fact required to be
stated therein or necessary in order to make the statements therein,
in light of the circumstances under which they were made, not
misleading. The foregoing opinion and statement may be qualified by
a statement to the effect that such counsel does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statements or the
Prospectus, except for the statements made in the Prospectus under
the captions "Regulation", "Taxation-Federal Taxation", "Description
of Capital Stock", "Description of Junior Subordinated Debentures",
"The Trust", "Description of Capital Securities", "Description of
Guarantee" and "Relationship Among the Capital Securities, the
Junior Subordinated Debentures and the Guarantee", insofar as such
statements relate to the Capital Securities and concern legal
matters.
(e) John R. Erbey, Managing Director, General Counsel and Secretary
of the Company, shall have furnished to the Representatives its written
opinion addressed to the Underwriters and dated the Delivery Date, in
form and substance satisfactory to the Representatives, to the effect
that:
(i) All of the issued shares of capital stock of each
Significant Subsidiary of the Company have been duly and
validly authorized and issued and are fully paid,
non-assessable and are directly or indirectly owned of record
and beneficially by the Company, free and clear of all liens,
encumbrances, equities or claims;
(ii) Each of the Company's Significant Subsidiaries has
been duly incorporated and is validly existing as a corporation
in good standing under the laws of its jurisdiction of
incorporation; the Company and each of its subsidiaries are
duly qualified to do business and are in good standing as
foreign corporations in each jurisdiction in which their
respective ownership or lease of property or the conduct of
their respective businesses requires such qualification (other
than those jurisdictions in which the failure to so qualify
would not have a materially adverse effect on the Company or
the Company and its subsidiaries taken as a whole), and have
all the power and authority necessary to own or hold their
respective properties and conduct the businesses in which they
are engaged;
(iii) Other than as set forth in the Prospectus, there are
no legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of which any
property or asset of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or
any of its subsidiaries, reasonably could be expected to have a
material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or
prospects of the Company and its subsidiaries; and, to the best
of such counsel's
17
<PAGE>
knowledge, no such proceedings are threatened or contemplated
by governmental authorities or by others;
(iv) This Agreement has been duly authorized, executed and
delivered by the Company;
(v) The Declaration has been duly authorized, executed
and delivered by the Company;
(vi) The Indenture has been duly authorized, executed and
delivered by the Company and, assuming the due authorization,
execution and delivery thereof by the Indenture Trustee,
constitutes a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its
terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other
similar laws relating or affecting creditors' rights generally,
general equitable principles (whether considered in a
proceeding in equity or at law) and an implied covenant of good
faith and fair dealing; and the Debentures have been duly
authorized, executed and delivered by the Company in accordance
with the provisions of the Indenture and, assuming due
authentication by the Trustee, when delivered to and paid for
by the Trust as contemplated by this Agreement, will constitute
legal, valid and binding obligations of the Company entitled to
the benefits of the Indenture and enforceable against the
Company in accordance with their terms (subject to the effects
of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating or
affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at
law) and an implied covenant of good faith and fair dealing);
(vii) The Guarantee Agreement has been duly authorized,
executed and delivered by the Company and, assuming due
authorization, execution and delivery thereof by the Guarantee
Trustee, constitutes a legal, valid and binding obligation of
the Company, enforceable against the Company in accordance with
its terms (subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other
similar laws relating or affecting creditors' rights generally,
general equitable principles (whether considered in a
proceeding in equity or at law) and an implied covenant of good
faith and fair dealing); and
(viii) The issue and sale of the Capital Securities being
delivered on the Delivery Date by the Trust and the compliance
by the Trust and the Company with all of the provisions of the
Operative Documents and the consummation of the transactions
contemplated hereby and thereby will not conflict with or
result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed
18
<PAGE>
of trust, loan agreement or other agreement or instrument known
to such counsel to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries
is bound or to which any of the properties or assets of the
Company or any of its subsidiaries is subject, except for such
conflicts, breaches, violations or defaults which individually
or in the aggregate would not have a material adverse effect on
the operations, business or condition of the Company and its
subsidiaries taken as a whole, nor will such actions result in
any violation of the provisions of the charter (or other
organizational document) or by-laws of the Company or any of
its subsidiaries or any statute or any decree, judgment or
order of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any
of their properties or assets; and, except for the registration
of the Capital Securities under the Securities Act and such
consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state or foreign securities laws in connection with
the purchase and distribution of the Capital Securities by the
Underwriters, no consent, approval, authorization or order of,
or filing or registration with, any such court or governmental
agency or body is required for the execution, delivery and
performance of the Operative Documents by the Trust and the
Company and the consummation of the transactions contemplated
hereby and thereby.
In rendering such opinion, such counsel may (i) state that its
opinion is limited to matters governed by the Federal laws of the
United States of America and the laws of Florida. Such counsel
shall also have furnished to the Representatives a written
statement, addressed to the Underwriters and dated the Delivery
Date, in form and substance satisfactory to the Representatives, to
the effect that (x) such counsel has acted as counsel to the Company
in connection with the preparation of the Registration Statements,
and (y) based on the foregoing, no facts have come to the attention
of such counsel which lead it to believe that the Registration
Statements, as of their respective Effective Dates, contained any
untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading, or that the Prospectus contains
any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under
which they were made, not misleading. The foregoing opinion and
statement may be qualified by a statement to the effect that such
counsel does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statements or the Prospectus.
(f) Richards Layton & Finger shall have furnished to the
Representatives its written opinion, as special counsel to the Trust
and the Company, addressed
19
<PAGE>
to the Underwriters and dated the Delivery Date, in form and
substance satisfactory to the Representatives, to the effect that:
(i) The Trust has been duly created and is validly
existing in good standing as a business trust under the
Delaware Act, and all filings required under the laws of the
State of Delaware with respect to the creation and valid
existence of the Trust as a business trust have been made;
(ii) Under the Delaware Act and the Declaration, the Trust
has the trust power and authority to own its property and
conduct its business as set forth in the Declaration;
(iii) The Declaration constitutes a valid and binding
obligation of the Company and the Trustees, and is enforceable
against the Company and the Trustees in accordance with its
terms, subject, as to enforcement, to the effect upon the
Declaration of (i) bankruptcy, insolvency, moratorium,
receivership, reorganization, liquidation, fraudulent transfer
and other similar laws relating to the rights and remedies of
creditors generally, (ii) principles of equity, including
applicable law relating to fiduciary duties (regardless of
whether considered and applied in a proceeding in equity or at
law), and (iii) the effect of applicable public policy on the
enforceability of provisions relating to indemnification or
contribution;
(iv) Under the Delaware Act and the Declaration, the Trust
has the trust power and authority (i) to execute and deliver,
and to perform its obligations under, this Agreement and (ii)
to issue and perform its obligations under the Capital
Securities and the Common Securities;
(v) Under the Delaware Act and the Declaration, the
execution and delivery by the Trust of this Agreement, and the
performance by the Trust of its obligations hereunder, have
been duly authorized by all necessary trust action on the part
of the Trust;
(vi) The Capital Securities have been duly authorized by
the Declaration and are duly and validly issued and, subject to
the qualifications set forth herein, fully paid and
nonassessable undivided beneficial interests in the assets of
the Trust and are entitled to the benefits of the Declaration.
The holders of the Capital Securities, as beneficial owners of
the Trust, will be entitled to the same limitation of personal
liability extended to stockholders of private corporations for
profit organized under the General Corporation Law of the State
of Delaware. Such counsel may note that the holders of Capital
Securities may be obligated, pursuant to the Declaration, (i)
to provide indemnity and/or
20
<PAGE>
security in connection with and pay taxes or governmental
charges arising from transfers or exchanges of certificates for
Capital Securities and the issuance of replacement certificates
for Capital Securities, and (ii) to provide security or
indemnity in connection with requests of or directions to the
Property Trustee to exercise its rights and powers under the
Declaration;
(vii) Under the Delaware Act and the Declaration, the
issuance of the Capital Securities is not subject to preemptive
rights;
(viii) The issuance and sale by the Trust of the Capital
Securities, the execution, delivery and performance by the
Trust of this Agreement, the consummation by the Trust of the
transactions contemplated hereby and compliance by the Trust
with its obligations hereunder, and the performance by the
Company, as sponsor, of its obligations under the Declaration
(A) do not violate (i) any of the provisions of the certificate
of trust of the Trust or the Declaration or (ii) any applicable
Delaware law or administrative regulation (except that such
counsel need express no opinion with respect to the securities
laws of the State of Delaware) and (B) do not require any
consent, approval, license, authorization or validation of, or
filing or registration with, any Delaware legislative,
administrative or regulatory body under the laws or
administrative regulations of the State of Delaware (except
that such counsel need express no opinion with respect to the
securities laws of the state of Delaware); and
(ix) Assuming that the Trust derives no income from or in
connection with sources within the State of Delaware and has no
assets, activities (other than maintaining the Delaware Trustee
and the filing of documents with the Secretary of State of the
State of Delaware) or employees in the State of Delaware, the
holders of the Capital Securities (other than those holders of
Capital Securities who reside or are domiciled in the State of
Delaware) will have no liability for income taxes imposed by
the State of Delaware solely as a result of their participation
in the Trust, and the Trust will not be liable for any income
tax imposed by the State of Delaware.
(g) With respect to the letter of Price Waterhouse LLP
delivered to the Representatives concurrently with the execution of
this Agreement (the "initial letter"), the Trust and the Company
shall have furnished to the Representatives a letter (the
"bring-down letter") of such accountants, addressed to the
Underwriters and dated the Delivery Date (i) confirming that they
are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants under Rule
2-01 of Regulation S-X of the Commission, (ii) stating, as of the
date of the
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bring-down letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date not
more than three days prior to the date of the bring-down letter),
the conclusions and findings of such firm with respect to the
financial information and other matters covered by the initial
letter and (iii) confirming in all material respects the conclusions
and findings set forth in the initial letter.
(h) The Company shall have furnished to the Representatives a
certificate, dated the Delivery Date, of its Chairman of the Board,
its President, a Managing Director or a Vice President and its chief
financial officer stating that, to the best of his or her knowledge,
(i) the representations, warranties and agreements of the
Company and the Trust in Section 1 are true and correct as of
the Delivery Date; each of the Company and the Trust has
complied in all material respects with all its agreements
contained herein; and the conditions set forth in Section 7(a)
have been fulfilled;
(ii) (A) neither the Company nor any of its subsidiaries
has sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference
with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus
or (B) since such date there has not been any change in the
capital stock or long-term debt of the Company or any of its
subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results
of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Registration
Statements; and
(iii) they have carefully examined the Registration
Statements and the Prospectus and, in their opinion (A) the
Registration Statements, as of their respective Effective
Dates, and the Prospectus, as of each of the Effective Dates,
did not include any untrue statement of a material fact and did
not omit to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading, and (B) since the Effective Date of the Primary
Registration Statement, no event has occurred which should have
been set forth in a supplement or amendment to either of the
Registration Statements or the Prospectus.
(i)(i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference with
its business from fire, explosion, flood or
22
<PAGE>
other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus or
(ii) since such date there shall not have been any change in the
capital stock or long-term debt of the Company or any of its
subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of
the Company and its subsidiaries, otherwise than as set forth or
contemplated in the Registration Statements, the effect of which, in
any such case described in clause (i) or (ii), is, in the judgment
of the Representatives, so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or
the delivery of the Capital Securities being delivered on the
Delivery Date on the terms and in the manner contemplated in the
Prospectus.
(j) Subsequent to the execution and delivery of this Agreement
(i) no downgrading shall have occurred in the rating accorded the
Company's debt securities by any "nationally recognized statistical
rating organization", as that term is defined by the Commission for
purposes of Rule 436(g)(2) of the Rules and Regulations and (ii) no
such organization shall have publicly announced that it has under
surveillance or review, with possible negative implications, its
rating of any of the Company's debt securities.
(k) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following:(i) trading in
securities generally on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market, or trading in any
securities of the Company on any exchange or in the over-the-counter
market, shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the Commission,
by such exchange or by any other regulatory body or governmental
authority having jurisdiction,(ii) a banking moratorium shall have
been declared by Federal or state authorities,(iii) the United
States shall have become engaged in hostilities, there shall have
been an escalation in hostilities involving the United States or
there shall have been a declaration of a national emergency or war
by the United States or (iv) there shall have occurred such a
material adverse change in general economic, political or financial
conditions (or the effect of international conditions on the
financial markets in the United States shall be such) as to make it,
in the judgment of a majority in interest of the several
Underwriters, impracticable or inadvisable to proceed with the
public offering or delivery of the Capital Securities being
delivered on the Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(l) The consummation of the Common Stock Offering (as defined
in the Prospectus) shall have occurred.
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All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance satisfactory to
counsel for the Underwriters.
8. Indemnification and Contribution.
(a) The Trust and the Company shall, jointly and severally,
indemnify and hold harmless each Underwriter, its officers and employees and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint
or several, or any action in respect thereof (including, but not limited to,
any loss, claim, damage, liability or action relating to purchases and sales
of the Capital Securities), to which that Underwriter, officer, employee or
controlling person may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
based upon,(i) any untrue statement or alleged untrue statement of a material
fact contained (A) in any Preliminary Prospectus, either of the Registration
Statements or the Prospectus, or in any amendment or supplement thereto, or
(B) in any blue sky application or other document prepared or executed by the
Trust or the Company (or based upon any written information furnished by the
Trust or the Company) specifically for the purpose of qualifying any or all
of the Capital Securities under the securities laws of any state or other
jurisdiction (any such application, document or information being hereinafter
called a "Blue Sky Application"),(ii) the omission or alleged omission to
state in any Preliminary Prospectus, either of the Registration Statements or
the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or necessary to
make the statements therein not misleading, or (iii) any act or failure to
act, or any alleged act or failure to act, by any Underwriter in connection
with, or relating in any manner to, the Capital Securities or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company and the Trust
shall not be liable in the case of any matter covered by this clause (iii) to
the extent that it is determined in a final judgement by a court of competent
jurisdiction that such loss, claim, damage, liability or action resulted
directly from any such act or failure to act undertaken or omitted to be
taken by such Underwriter through its gross negligence or wilful misconduct),
and shall reimburse each Underwriter and each such officer, employee and
controlling person promptly upon demand for any legal or other expenses
reasonably incurred by that Underwriter, officer, employee or controlling
person in connection with investigating or defending or preparing to defend
against any such loss, claim, damage, liability or action as such expenses
are incurred; provided, however, that the Trust and the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement or omission or alleged omission made in any
Preliminary Prospectus, either of the Registration Statements or the
Prospectus, or in any such amendment or supplement, or in any Blue Sky
Application in reliance upon and in conformity with the written information
furnished to the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein and described in Section 8(e);
and provided further that as to any Preliminary Prospectus this indemnity
agreement shall not inure to the benefit of any Underwriter, its officers or
employees or any person controlling that Underwriter on account of any loss,
claim, damage,
24
<PAGE>
liability or action arising from the sale of Capital Securities to any person
by that Underwriter if that Underwriter failed to send or give a copy of the
Prospectus, as the same may be amended or supplemented, to that person within
the time required by the Securities Act, and the untrue statement or alleged
untrue statement of any material fact or omission or alleged omission to
state a material fact in such Preliminary Prospectus was corrected in the
Prospectus, unless such failure resulted from non-compliance by the Trust and
the Company with Section 5(c). The foregoing indemnity agreement is in
addition to any liability which the Trust or the Company may otherwise have
to any Underwriter or to any officer, employee or controlling person of that
Underwriter.
(b) Each Underwriter, severally and not jointly, shall indemnify
and hold harmless the Trust and the Company, their officers and employees,
each of their directors and each person, if any, who controls the Trust or
the Company within the meaning of the Securities Act, from and against any
loss, claim, damage or liability, joint or several, or any action in respect
thereof, to which the Trust or the Company or any such director, officer or
controlling person may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
based upon,(i) any untrue statement or alleged untrue statement of a material
fact contained (A) in any Preliminary Prospectus, either of the Registration
Statements or the Prospectus, or in any amendment or supplement thereto, or
(B) in any Blue Sky Application or (ii) the omission or alleged omission to
state in any Preliminary Prospectus, either of the Registration Statements or
the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or necessary to
make the statements therein not misleading, but in each case only to the
extent that the untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with the written
information furnished to the Company through the Representatives by or on
behalf of that Underwriter specifically for inclusion therein and described
in Section 8(e), and shall reimburse the Trust and the Company and any such
director, officer or controlling person for any legal or other expenses
reasonably incurred by the Trust or the Company or any such director, officer
or controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or action
as such expenses are incurred. The foregoing indemnity agreement is in
addition to any liability which any Underwriter may otherwise have to the
Company or any such director, officer or controlling person.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however,
that the failure to notify the indemnifying party shall not relieve it from
any liability which it may have under this Section 8 except to the extent it
has been materially prejudiced by such failure and, provided further, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have to an indemnified party otherwise than under this
Section 8. If any such claim or action shall be brought against an
indemnified party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein and, to the
extent that it wishes, jointly with any other similarly notified indemnifying
25
<PAGE>
party, to assume the defense thereof with counsel satisfactory to the
indemnified party. After notice from the indemnifying party to the
indemnified party of its election to assume the defense of such claim or
action, the indemnifying party shall not be liable to the indemnified party
under this Section 8 for any legal or other expenses subsequently incurred by
the indemnified party in connection with the defense thereof other than
reasonable costs of investigation; provided, however, that any indemnified
party shall have the right to employ separate counsel in any such action and
to participate in the defense thereof but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
employment thereof has been specifically authorized by the indemnifying party
in writing, (ii) such indemnified party shall have been advised by such
counsel that there may be one or more legal defenses available to it which
are different from or additional to those available to the indemnifying party
and in the reasonable judgment of such counsel it is advisable for such
indemnified party to employ separate counsel or (iii) the indemnifying party
has failed to assume the defense of such action and employ counsel reasonably
satisfactory to the indemnified party, in which case, if such indemnified
party notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action on behalf
of such indemnified party, it being understood, however, that the
indemnifying party shall not, in connection with any one such action or
separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys at any time for all such indemnified parties, which firm shall be
designated in writing by the Representatives, if the indemnified parties
under this Section 8 consist of any Underwriter or any of their respective
officers, employees or controlling persons, or by the Company, if the
indemnified parties under this Section 8 consist of the Trust or the Company
or any of the their directors, officers, employees or controlling persons.
No indemnifying party shall (i) without the prior written consent of the
indemnified parties (which consent shall not be unreasonably withheld),
settle or compromise or consent to the entry of any judgment with respect to
any pending or threatened claim, action, suit or proceeding in respect of
which indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such claim or
action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with its written
consent or if there be a final judgment of the plaintiff in any such action,
the indemnifying party agrees to indemnify and hold harmless any indemnified
party from and against any loss of liability by reason of such settlement or
judgment.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a
result of such loss, claim, damage or liability, or action in respect
thereof,(i) in such proportion as shall be appropriate to reflect the
relative benefits received by the Trust and the Company on the one hand and
the Underwriters on the other from the offering of the Capital Securities or
(ii) if the
26
<PAGE>
allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Trust and the Company on the one hand and the Underwriters on the other with
respect to the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations. The relative benefits received by the
Trust and the Company on the one hand and the Underwriters on the other with
respect to such offering shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Capital Securities purchased
under this Agreement (before deducting expenses) received by the Trust and
the Company, on the one hand, and the total underwriting discounts and
commissions received by the Underwriters with respect to the Capital
Securities purchased under this Agreement, on the other hand, bear to the
total gross proceeds from the offering of the Capital Securities under this
Agreement, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to whether
the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Trust, the Company and the Underwriters agree
that it would not be just and equitable if contributions pursuant to this
Section 8(d) were to be determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an
indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section 8(d) shall be
deemed to include, for purposes of this Section 8(d), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8(d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Capital Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise paid or become liable to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 8(d) are
several in proportion to their respective underwriting obligations and not
joint.
(e) The Underwriters severally confirm that the statements with
respect to the public offering of the Capital Securities set forth on the
cover page of, and under the caption "Underwriting" in, the Prospectus are
correct and constitute the only information furnished in writing to the
Company by or on behalf of the Underwriters specifically for inclusion in the
Registration Statements and the Prospectus.
9. Defaulting Underwriters.
If, on the Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting Underwriters shall be obligated
27
<PAGE>
to purchase the Capital Securities which the defaulting Underwriter agreed
but failed to purchase on the Delivery Date in the respective proportions
which the liquidation amount of Capital Securities opposite the name of each
remaining non-defaulting Underwriter in Schedule 1 hereto bears to the total
liquidation amount of Capital Securities set opposite the names of all the
remaining non-defaulting Underwriters in Schedule 1 hereto; provided,
however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Capital Securities on the Delivery Date if
the total liquidation amount of Capital Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase on such date
exceeds 9.09% of the total liquidation amount of Capital Securities to be
purchased on the Delivery Date, and any remaining non-defaulting Underwriter
shall not be obligated to purchase more than 110% of the liquidation amount
of Capital Securities which it agreed to purchase on the Delivery Date
pursuant to the terms of Section 2. If the foregoing maximums are exceeded,
the remaining non-defaulting Underwriters, or those other underwriters
satisfactory to the Representatives who so agree, shall have the right, but
shall not be obligated, to purchase, in such proportion as may be agreed upon
among them, all the Capital Securities to be purchased on the Delivery Date.
If the remaining Underwriters or other underwriters satisfactory to the
Representatives do not elect to purchase the shares which the defaulting
Underwriter or Underwriters agreed but failed to purchase on the Delivery
Date, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter or the Trust and the Company, except that the
Trust and the Company will continue to be liable for the payment of expenses
to the extent set forth in Sections 6 and 11. As used in this Agreement, the
term "Underwriter" includes, for all purposes of this Agreement unless the
context requires otherwise, any party not listed in Schedule 1 hereto who,
pursuant to this Section 9, purchases Capital Securities which a defaulting
Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of
any liability it may have to the Trust or the Company for damages caused by
its default. If other underwriters are obligated or agree to purchase the
Capital Securities of a defaulting or withdrawing Underwriter, either the
Representatives or the Trust may postpone the Delivery Date for up to seven
full business days in order to effect any changes that in the opinion of
counsel for the Company or counsel for the Underwriters may be necessary in
the Registration Statement, the Prospectus or in any other document or
arrangement.
10. Termination. The obligations of the Underwriters hereunder may
be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Capital Securities if, prior
to that time, any of the events described in Sections 7(i), 7(j) or 7(k)
shall have occurred or if the Underwriters shall decline to purchase the
Capital Securities for any reason permitted under this Agreement.
11. Reimbursement of Underwriters' Expenses. If (a) the Trust
shall fail to tender the Capital Securities for delivery to the Underwriters
for any reason permitted under this Agreement, or (b) the Underwriters shall
decline to purchase the Capital Securities for any reason permitted under
this Agreement (including the termination of this Agreement pursuant to
Section 10), the Company shall reimburse the Underwriters for the reasonable
fees and expenses of their counsel and for such other out-of-pocket expenses
as shall have been incurred by them in
28
<PAGE>
connection with this Agreement and the proposed purchase of the Capital
Securities, and upon demand the Company shall pay the full amount thereof to
the Representatives. If this Agreement is terminated pursuant to Section 9
by reason of the default of one or more Underwriters, the Company shall not
be obligated to reimburse any defaulting Underwriter on account of those
expenses.
12. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-528-8822);
(b) if to the Trust or the Company, shall be delivered or sent
by mail, telex or facsimile transmission to the address of the
Company set forth in the Primary Registration Statement, Attention:
Secretary (Fax: 561-681-8177);
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by
the Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Trust and
the Company shall be entitled to act and rely upon any request, consent,
notice or agreement given or made on behalf of the Underwriters by Lehman
Brothers Inc. on behalf of the Representatives.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Trust, the
Company, and their respective successors. This Agreement and the terms and
provisions hereof are for the sole benefit of only those persons, except that
(A) the representations, warranties, indemnities and agreements of the Trust
and the Company contained in this Agreement shall also be deemed to be for
the benefit of the officers and employees of each Underwriter and the person
or persons, if any, who control each Underwriter within the meaning of
Section 15 of the Securities Act and (B) the indemnity agreement of the
Underwriters contained in Section 8(b) of this Agreement shall be deemed to
be for the benefit of directors, officers and employees of the Company and
any person controlling the Company within the meaning of Section 15 of the
Securities Act. Nothing in this Agreement is intended or shall be construed
to give any person, other than the persons referred to in this Section 13,
any legal or equitable right, remedy or claim under or in respect of this
Agreement or any provision contained herein.
14. Survival. The respective indemnities, representations,
warranties and agreements of the Trust and the Company and the Underwriters
contained in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall survive the delivery of and payment for the
Capital Securities and shall remain in full force and effect, regardless of
any investigation made by or on behalf of any of them or any person
controlling any of them.
29
<PAGE>
15. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement,(a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
16. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of New York.
17. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning
or interpretation of, this Agreement.
30
<PAGE>
If the foregoing correctly sets forth the agreement among the
Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
Ocwen Financial Corporation
By
-----------------------------------
William C. Erbey
Chairman, President and
Chief Executive Officer
Ocwen Capital Trust I
By: Ocwen Financial Corporation, as Sponsor
By
-----------------------------------
[ ]
Accepted:
Lehman Brothers Inc.
Friedman, Billings, Ramsey & Co., Inc.
Morgan Stanley & Co. Incorporated
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By Lehman Brothers Inc.
By
-----------------------------------
Authorized Representative
31
<PAGE>
SCHEDULE 1
Liquidation amount of
Underwriters Capital Securities
Lehman Brothers Inc.............................
Friedman, Billings, Ramsey & Co., Inc...........
Morgan Stanley & Co. Incorporated...............
-------------------
Total.................................... $
-------------------
-------------------
<PAGE>
- -----------------------------------------------------------------------------
AMENDED AND RESTATED DECLARATION OF TRUST
OCWEN CAPITAL TRUST I
Dated as of August __, 1997
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION> Page
<S> ----
<C>
ARTICLE 1
INTERPRETATION AND DEFINITIONS............................................ 1
Section 1.1 Interpretation and Definitions..................................... 1
"Affiliate".......................................................................... 2
"Authorized Officer"................................................................. 2
"Bankruptcy Event"................................................................... 2
"Book Entry Interest"................................................................ 3
"Business Day........................................................................ 3
"Business Trust Act"................................................................. 3
"Capital Security.................................................................... 3
"Capital Security Beneficial Owner".................................................. 3
"Capital Security Certificate"....................................................... 3
"Certificate"........................................................................ 3
"Certificate of Trust"............................................................... 3
"Clearing Agency".................................................................... 3
"Clearing Agency Participant"........................................................ 3
"Closing Date"....................................................................... 3
"Code"............................................................................... 3
"Commission"......................................................................... 4
"Common Security".................................................................... 4
"Common Security Certificate"........................................................ 4
"Compounded Distributions"........................................................... 4
"Corporate Trust Office"............................................................. 4
"Covered Person"..................................................................... 4
"Debenture Issuer"................................................................... 4
"Debenture Issuer Indemnified Person"................................................ 4
"Debenture Trustee".................................................................. 4
"Debentures"......................................................................... 4
"Definitive Capital Security Certificates"........................................... 4
"Delaware Trustee"................................................................... 4
"Depositary.......................................................................... 4
"Direct Action"...................................................................... 5
"Distribution"....................................................................... 5
"DTC"................................................................................ 5
"Exchange Act"....................................................................... 5
"Fiduciary Indemnified Person"....................................................... 5
"Fiscal Year"........................................................................ 5
"Global Certificate"................................................................. 5
"Guarantee".......................................................................... 5
"Holder"............................................................................. 5
"Indemnified Person"................................................................. 5
i
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<S> <C>
"Indenture".......................................................................... 5
"Indenture Event of Default"......................................................... 5
"Investment Company"................................................................. 5
"Investment Company Act"............................................................. 5
"Investment Company Event"........................................................... 5
"Legal Action"....................................................................... 6
"List of Holders".................................................................... 6
"Majority in Liquidation Amount"..................................................... 6
"Officers' Certificate".............................................................. 6
"Paying Agent"....................................................................... 6
"Payment Amount"..................................................................... 6
"Person"............................................................................. 6
"Property Account"................................................................... 7
"Property Trustee"................................................................... 7
"Pro Rata"........................................................................... 7
"Quorum"............................................................................. 7
"Redemption/Distribution Notice"..................................................... 7
"Redemption Price"................................................................... 7
"Regular Trustee".................................................................... 7
"Regulatory Capital Event............................................................ 7
"Responsible Officer"................................................................ 7
"Rule 3a-5".......................................................................... 8
"Securities"......................................................................... 8
"Securities Act"..................................................................... 8
"Special Event"...................................................................... 8
"Sponsor"............................................................................ 8
"Successor Delaware Trustee"......................................................... 8
"Successor Entity"................................................................... 8
"Successor Property Trustee"......................................................... 8
"Super Majority"..................................................................... 8
"Tax Event".......................................................................... 8
"10% in Liquidation Amount".......................................................... 8
"Treasury Regulations"............................................................... 9
"Trust Enforcement Event"............................................................ 9
"Trust Indenture Act"................................................................ 9
"Trustee" or "Trustees".............................................................. 9
"Trustees' Authorization Certificate"................................................ 9
ARTICLE 2
TRUST INDENTURE ACT.............................................. 9
Section 2.1 Trust Indenture Act; Application................................... 9
Section 2.2 Lists of Holders................................................... 9
Section 2.3 Reports by the Property Trustee .................................. 10
Section 2.4 Periodic Reports to the Property Trustee........................... 10
ii
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Section 2.5 Evidence of Compliance with Conditions Precedent................... 10
Section 2.6 Trust Enforcement Events; Waiver................................... 11
Section 2.7 Trust Enforcement Event; Notice.................................... 12
ARTICLE 3
ORGANIZATION................................................ 13
Section 3.1 Name and Organization.............................................. 13
Section 3.2 Office............................................................. 13
Section 3.3 Purpose............................................................ 13
Section 3.4 Authority.......................................................... 14
Section 3.5 Title to Property of the Trust..................................... 14
Section 3.6 Powers and Duties of the Regular Trustees.......................... 14
Section 3.7 Prohibition of Actions by the Trust and the Trustees............... 17
Section 3.8 Powers and Duties of the Property Trustee.......................... 19
Section 3.9 Certain Duties and Responsibilities of the Property Trustee........ 20
Section 3.10 Certain Rights of Property Trustee................................ 22
Section 3.11 Delaware Trustee.................................................. 25
Section 3.12 Execution of Documents............................................ 25
Section 3.13 Not Responsible for Recitals or Issuance of Securities............ 25
Section 3.14 Duration of Trust................................................. 26
Section 3.15 Mergers........................................................... 26
Section 3.16 Property Trustee May File Proofs of Claim......................... 28
ARTICLE 4
SPONSOR.................................................. 29
Section 4.1 Responsibilities of the Sponsor.................................... 29
Section 4.2 Indemnification and Expenses of the Trustee........................ 29
Section 4.3 Right to Proceed................................................... 30
ARTICLE 5
TRUST COMMON SECURITIES HOLDER................................. 30
Section 5.1 Debenture Issuer's Purchase of Common Securities................... 30
Section 5.2 Covenants of the Common Securities Holder.......................... 30
ARTICLE 6
TRUSTEES................................................. 30
Section 6.1 Number of Trustees................................................. 30
Section 6.2 Delaware Trustee................................................... 31
Section 6.3 Property Trustee; Eligibility...................................... 31
Section 6.4 Qualifications of Regular Trustees and Delaware Trustee Generally.. 32
Section 6.5 Initial Trustees and Initial Delaware Trustee...................... 32
iii
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<TABLE>
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<S> <C>
Section 6.6 Appointment, Removal and Resignation of Trustees................... 32
Section 6.7 Vacancies among Trustees........................................... 34
Section 6.8 Effect of Vacancies................................................ 34
Section 6.9 Meetings........................................................... 34
Section 6.10 Delegation of Power............................................... 35
Section 6.11 Merger, Conversion, Consolidation or Succession to Business....... 35
ARTICLE 7
TERMS OF SECURITIES.......................................... 35
Section 7.1 General Provisions Regarding Securities............................ 35
Section 7.2 Distributions...................................................... 38
Section 7.3 Redemption of Securities........................................... 38
Section 7.4 Redemption Procedures.............................................. 39
Section 7.5 Voting Rights of Capital Securities................................ 41
Section 7.6 Voting Rights of Common Securities................................. 43
Section 7.7 Paying Agent....................................................... 44
Section 7.8 Transfer of Securities............................................. 45
Section 7.9 Transfer and Exchange of Certificates.............................. 45
Section 7.10 Deemed Security Holders........................................... 45
Section 7.11 Book Entry Interests.............................................. 46
Section 7.12 Notices to Clearing Agency........................................ 46
Section 7.13 Appointment of Successor Clearing Agency.......................... 46
Section 7.14 Definitive Capital Security Certificates.......................... 47
Section 7.15 Mutilated, Destroyed, Lost or Stolen Certificates................. 47
ARTICLE 8
DISSOLUTION AND TERMINATION OF TRUST............................... 48
Section 8.1 Dissolution and Termination of Trust............................... 48
Section 8.2 Liquidation Distribution Upon Dissolution of the Trust............. 49
ARTICLE 9
LIMITATION OF LIABILITY OF
HOLDERS, TRUSTEES OR OTHERS.................................. 49
Section 9.1 Liability.......................................................... 49
Section 9.2 Exculpation........................................................ 50
Section 9.3 Fiduciary Duty..................................................... 50
Section 9.4 Indemnification.................................................... 51
Section 9.5 Outside Businesses................................................. 54
ARTICLE 10
ACCOUNTING................................................ 54
iv
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<S> <C>
Section 10.1 Fiscal Year....................................................... 54
Section 10.2 Certain Accounting and Tax Matters................................ 54
Section 10.3 Banking........................................................... 55
Section 10.4 Withholding....................................................... 55
ARTICLE 11
AMENDMENTS AND MEETINGS....................................... 56
Section 11.1 Amendments........................................................ 56
Section 11.2 Meetings of the Holders; Action by Written Consent................ 58
ARTICLE 12
REPRESENTATIONS OF PROPERTY TRUSTEE
AND DELAWARE TRUSTEE.......................................... 59
Section 12.1 Representations and Warranties of the Property Trustee............ 59
Section 12.2 Representations and Warranties of the Delaware Trustee............ 60
ARTICLE 13
MISCELLANEOUS............................................. 61
Section 13.1 Notices........................................................... 61
Section 13.2 Governing Law..................................................... 62
Section 13.3 Intention of the Parties.......................................... 62
Section 13.4 Headings.......................................................... 62
Section 13.5 Successors and Assigns............................................ 62
Section 13.6 Partial Enforceability............................................ 62
Section 13.7 Counterparts...................................................... 62
v
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<PAGE>
AMENDED AND RESTATED DECLARATION OF TRUST
THIS AMENDED AND RESTATED DECLARATION OF TRUST ("Declaration") dated
as of August __, 1997 among Ocwen Financial Corporation, a Florida corporation,
as Sponsor, William C. Erbey, John R. Erbey and Christine A. Reich as the
initial Regular Trustees, The Chase Manhattan Bank, as the initial Property
Trustee and Chase Manhattan Bank Delaware, as the initial Delaware Trustee, not
in their individual capacities but solely as Trustees, and the holders, from
time to time, of undivided beneficial ownership interests in the Trust to be
issued pursuant to this Declaration.
WHEREAS, Ocwen Capital Trust I (the "Trust") was established as a
business trust under the Business Trust Act (as defined herein) pursuant to a
Declaration of Trust dated as of June 6, 1997, (the "Original Declaration") and
a Certificate of Trust filed with the Secretary of State of the State of
Delaware on June 6, 1997; and
WHEREAS, pursuant to the Original Declaration, the Sponsor removed
Mark Ferrucci as a trustee of the Trust and appointed Chase Manhattan Bank
Delaware as a trustee of the Trust; and
WHEREAS, to reflect such removal and appointment of trustees of the
Trust, a Restated Certificate of Trust (the "Certificate of Trust") was filed
with the Secretary of State of the State of Delaware; and
WHEREAS, the sole purpose of the Trust shall be to issue and sell
certain securities representing undivided beneficial ownership interests in the
assets of the Trust, to invest the proceeds from such sales in the Debentures
issued by the Debenture Issuer (as those terms are hereinafter defined) and to
engage in only those activities necessary or incidental thereto; and
WHEREAS, all of the Trustees and the Sponsor, by this Declaration,
amend and restate each and every term and provision of the Original Declaration.
NOW, THEREFORE, it being the intention of the parties hereto that the
Trust constitute a business trust under the Business Trust Act, the Trustees
hereby declare that all assets contributed to the Trust be held in trust for the
benefit of the holders, from time to time, of the Securities representing
undivided beneficial ownership interests in the assets of the Trust issued
hereunder, subject to the provisions of this Declaration.
ARTICLE 1
INTERPRETATION AND DEFINITIONS
Section 1.1 Interpretation and Definitions.
Unless the context otherwise requires:
<PAGE>
(a) capitalized terms used in this Declaration but not defined in the
preamble above have the respective meanings assigned to them in this Section
1.1;
(b) a term defined anywhere in this Declaration has the same meaning
throughout;
(c) all references to "the Declaration" or "this Declaration" are to
this Declaration as modified, supplemented or amended from time to time;
(d) all references in this Declaration to Articles and Sections are
to Articles and Sections of this Declaration unless otherwise specified;
(e) a term defined in the Trust Indenture Act has the same meaning
when used in this Declaration unless otherwise defined in this Declaration or
unless the context otherwise requires; and
(f) a reference to the singular includes the plural and vice versa.
"Affiliate" has the same meaning as given to that term in Rule 405 of
the Securities Act or any successor rule thereunder.
"Authorized Officer" of a Person means any Person that is authorized
to bind such Person.
"Bankruptcy Event" means, with respect to any Person:
(a) the entry of a decree or order by a court having jurisdiction in the
premises judging such Person as bankrupt or insolvent, or approving as properly
filed a petition seeking reorganization, arrangement, adjudication or
composition of or in respect of such Person under any applicable federal or
state bankruptcy, insolvency, reorganization or other similar law, or appointing
a receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of such Person or of any substantial part of its property or ordering
the winding up or liquidation of its affairs, and the continuance of any such
decree or order unstayed and in effect for a period of 60 consecutive days; or
(b) the institution by such Person of proceedings to be adjudicated as a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under any applicable federal or
state bankruptcy, insolvency, reorganization or other similar law, or the
consent by it to the filing of any such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or similar official) of
such Person or of any substantial part of its property, or the making by it of
an assignment for the benefit of creditors, or the admission by it in writing of
its inability to pay its debts generally as they become due and its willingness
to be adjudicated as bankrupt, or the taking of corporate action by such Person
in furtherance of any such action.
2
<PAGE>
"Book Entry Interest" means a beneficial interest in a Global
Certificate, ownership and transfers of which shall be maintained and made
through book entries by a Clearing Agency as described in Section 7.11
"Business Day" means any day other than a Saturday or 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 Debenture Trustee is closed for business.
"Business Trust Act" means Chapter 38 of Title 12 of the Delaware
Code, 12 Del. Code Section 3801 et seq., as it may be amended from time to time,
or any successor legislation.
"Capital Security" has the meaning specified in Section 7.1.
"Capital Security Beneficial Owner" means, with respect to a Book
Entry Interest, a Person who is the beneficial owner of such Book Entry
Interest, as reflected on the books of the Clearing Agency, or on the books of a
Person maintaining an account with such Clearing Agency (directly as a Clearing
Agency Participant or as an indirect participant, in each case in accordance
with the rules of such Clearing Agency).
"Capital Security Certificate" means a certificate representing a
Capital Security.
"Certificate" means a Common Security Certificate or a Capital
Security Certificate.
"Certificate of Trust" has the meaning specified in the recitals
hereto.
"Clearing Agency" means an organization registered as a "Clearing
Agency" pursuant to Section 17A of the Exchange Act that is acting as depositary
for the Capital Securities and in whose name or in the name of a nominee of that
organization shall be registered a Global Certificate and which shall undertake
to effect book entry transfers and pledges of the Capital Securities.
"Clearing Agency Participant" means a broker, dealer, bank, other
financial institution or other Person for whom from time to time the Clearing
Agency effects book entry transfers and pledges of securities deposited with the
Clearing Agency.
"Closing Date" means the date on which the Capital Securities are
issued and sold.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor legislation. A reference to a specific section of the
Code refers not only to such specific section but also to any corresponding
provision of any federal tax statute enacted after the date of this Declaration,
as such specific section or corresponding provision
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is in effect on the date of application of the provisions of this Declaration
containing such reference.
"Commission" means the Securities and Exchange Commission.
"Common Security" has the meaning specified in Section 7.1
"Common Security Certificate" means a definitive certificate in fully
registered form representing a Common Security.
"Compounded Distributions" has the meaning set forth in Section
7.2(a).
"Corporate Trust Office" means the office of the Property Trustee at
which the corporate trust business of the Property Trustee shall, at any
particular time, be principally administered, which office at the date of
execution of this Declaration is located at 450 West 33rd Street, 15th Floor,
New York, New York 10001-2697, Attention: Global Trust Services; telecopy no.
(212) 946-8154.
"Covered Person" means (a) any officer, director, shareholder,
partner, member, representative, employee or agent of (i) the Trust or (ii) the
Trust's Affiliates; and (b) any Holder.
"Debenture Issuer" means Ocwen Financial Corporation in its capacity
as issuer of the Debentures under the Indenture or any successor entity
resulting from any consolidation, amalgamation, merger or other business
combination.
"Debenture Issuer Indemnified Person" means (a) any Regular Trustee;
(b) any Affiliate of any Regular Trustee; (c) any officers, directors,
shareholders, members, partners, employees, representatives or agents of any
Regular Trustee or any Affiliate thereof; or (d) any officer, employee or agent
of the Trust or its Affiliates.
"Debenture Trustee" means The Chase Manhattan Bank, in its capacity as
trustee under the Indenture until a successor is appointed thereunder, and
thereafter means such successor trustee.
"Debentures" means the series of debentures to be issued by the
Debenture Issuer under the Indenture to be held by the Property Trustee.
"Definitive Capital Security Certificates" has the meaning set forth
in Section 7.11.
"Delaware Trustee" has the meaning set forth in Section 6.2.
"Depositary" means, with respect to Securities issuable in whole or in
part in the form of one or more Global Securities, a clearing agency registered
under the Exchange Act that is designated to act as Depositary for such
Securities.
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"Direct Action" shall have the meaning set forth in Section 7.5(c).
"Distribution" means a distribution payable to Holders in accordance
with Section 7.2.
"DTC" means The Depository Trust Company, the initial Depositary.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor legislation.
"Fiduciary Indemnified Person" has the meaning set forth in Section
9.4(b).
"Fiscal Year" has the meaning set forth in Section 10.1.
"Global Certificate" has the meaning set forth in Section 7.11.
"Guarantee" means the guarantee agreement of the Sponsor in respect of
the Capital Securities and the Common Securities.
"Holder" means a Person in whose name a Certificate representing a
Security is registered, such Person being a beneficial owner within the meaning
of the Business Trust Act; provided, however, that in determining whether the
Holders of the requisite liquidation amount of Capital Securities have voted on
any matter provided for in this Declaration, then for the purpose of such
determination only (and not for any other purpose hereunder), if the Capital
Securities remain in the form of one or more Global Certificates, the term
"Holders" shall mean the holder of the Global Certificate acting at the
direction of the Capital Security Beneficial Owners.
"Indemnified Person" means a Debenture Issuer Indemnified Person or a
Fiduciary Indemnified Person.
"Indenture" means the Indenture dated as of August __, 1997, among the
Debenture Issuer and the Debenture Trustee, and any indenture supplemental
thereto pursuant to which the Debentures are to be issued.
"Indenture Event of Default" has the meaning given to the term "Event
of Default" in the Indenture.
"Investment Company" means an investment company as defined in the
Investment Company Act and the regulations promulgated thereunder.
"Investment Company Act" means the Investment Company Act of 1940, as
amended from time to time, or any successor legislation.
"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
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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, which Change in 1940 Act Law
becomes effective on or after the Closing Date.
"Legal Action" has the meaning set forth in Section 3.6(g).
"List of Holders" has the meaning specified in Section 2.2(a).
"Majority in Liquidation Amount" means, except as provided in the
terms of the Capital Securities or by the Trust Indenture Act, Holder(s) of
outstanding Securities, voting together as a single class, or, as the context
may require, Holders of outstanding Capital Securities or Holders of outstanding
Common Securities, voting separately as a class, who are the record owners of
more than 50% of the aggregate liquidation amount (including the stated amount
that would be paid on redemption, liquidation or otherwise, plus accrued and
unpaid Distributions to the date upon which the voting percentages are
determined) of all outstanding Securities of the relevant class.
"Officers' Certificate" means, with respect to any Person (other than
Regular Trustees who are natural persons), a certificate signed by two
Authorized Officers of such Person. Any Officers' Certificate delivered with
respect to compliance with a condition or covenant provided for in this
Declaration shall include:
(a) a statement that each officer signing the Officers' Certificate
has read the covenant or condition and the definitions relating thereto;
(b) a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers' Certificate;
(c) a statement that each such officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(d) a statement as to whether, in the opinion of each such officer,
such condition or covenant has been complied with; provided, that the term
"Officers' Certificate", when used with reference to Regular Trustees who are
natural persons shall mean a certificate signed by two of the Regular Trustees
which otherwise satisfies the foregoing requirements.
"Paying Agent" has the meaning specified in Section 7.7.
"Payment Amount" has the meaning specified in Section 7.2(a).
"Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, trust,
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unincorporated association, or government or any agency or political
subdivision thereof, or any other entity of whatever nature.
"Property Account" has the meaning set forth in Section 3.8(c).
"Property Trustee" means the Trustee meeting the eligibility
requirements set forth in Section 6.3.
"Pro Rata" means pro rata to each Holder according to the aggregate
liquidation amount of the Securities held by the relevant Holder in relation to
the aggregate liquidation amount of all Securities outstanding.
"Quorum" means a majority of the Regular Trustees or, if there are
only two Regular Trustees, both of them.
"Redemption/Distribution Notice" has the meaning set forth in Section
7.4.
"Redemption Price" has the meaning set forth in Section 7.3.
"Regular Trustee" means any Trustee other than the Property Trustee
and the Delaware Trustee.
"Regulatory Capital Event" means that the Sponsor 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 for interpreting or applying such laws or regulations which amendment
or change is effective or such pronouncement or decision is announced on or
after the Closing Date, 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 Sponsor 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 Debentures in connection with the liquidation of
the Trust by the Sponsor 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.
"Responsible Officer" means, with respect to the Property Trustee, any
officer within the Corporate Trust Office of the Property Trustee, including any
vice-president, any assistant vice-president, the secretary, any assistant
secretary, the treasurer, any assistant treasurer or other officer of the
Corporate Trust Office of the Property Trustee customarily performing functions
similar to those performed by any of the above designated officers and also
means, with respect to a particular corporate trust matter, any other officer to
whom such matter is referred because of that officer's knowledge of and
familiarity with the particular subject.
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"Rule 3a-5" means Rule 3a-5 under the Investment Company Act or any
successor rule thereunder.
"Securities" means the Common Securities and the Capital Securities.
"Securities Act" means the Securities Act of 1933, as amended from
time to time, or any successor legislation.
"Special Event" means a Tax Event, a Regulatory Capital Event or an
Investment Company Event.
"Sponsor" means Ocwen Financial Corporation, a Delaware corporation,
or any successor entity resulting from a merger, consolidation, amalgamation or
other business combination, in its capacity as sponsor of the Trust.
"Successor Delaware Trustee" has the meaning specified in Section
6.6(b).
"Successor Entity" has the meaning specified in Section 3.15(b)(i).
"Successor Property Trustee" has the meaning specified in Section
6.6(b).
"Super Majority" has the meaning set forth in Section 2.6(a)(ii).
"Tax 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 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 such
proposed change, pronouncement or decision is announced on or after the Closing
Date, 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 the United States federal
income tax with respect to income received or accrued on the Debentures, (ii)
interest payable by the Sponsor on such Debentures is not, or within 90 days of
the date of such opinion, will not be, deductible by the Sponsor, 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.
"10% in Liquidation Amount" means, except as provided in the terms of
the Capital Securities or by the Trust Indenture Act, Holder(s) of outstanding
Securities, voting together as a single class, or, as the context may require,
Holders of outstanding Capital Securities or Holders of outstanding Common
Securities, voting separately as a class, who are the record owners of 10% or
more of the aggregate liquidation amount (including the stated amount that would
be paid on redemption, liquidation or otherwise, plus accrued and unpaid
Distributions to the date upon which the voting percentages are determined) of
all outstanding Securities of the relevant class.
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"Treasury Regulations" means the income tax regulations, including
temporary and proposed regulations, promulgated under the Code by the United
States Treasury, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
"Trust Enforcement Event" in respect of the Securities means an
Indenture Event of Default has occurred and is continuing in respect of the
Debentures.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended from time to time, or any successor legislation.
"Trustee" or "Trustees" means each Person who has signed this
Declaration as a trustee, so long as such Person shall continue in office in
accordance with the terms hereof, and all other Persons who may from time to
time be duly appointed, qualified and serving as Trustees in accordance with the
provisions hereof, and references herein to a Trustee or the Trustees shall
refer to such Person or Persons solely in their capacity as trustees hereunder.
"Trustees' Authorization Certificate" means a written certificate
signed by two of the Regular Trustees for the purpose of establishing the terms
and form of the Capital Securities and the Common Securities as determined by
the Regular Trustees.
ARTICLE 2
TRUST INDENTURE ACT
Section 2.1 Trust Indenture Act; Application.
(a) This Declaration is subject to the provisions of the Trust
Indenture Act that are required to be part of this Declaration and shall, to the
extent applicable, be governed by such provisions.
(b) The Property Trustee shall be the only Trustee which is a Trustee
for the purposes of the Trust Indenture Act.
(c) If and to the extent that any provision of this Declaration
conflicts with the duties imposed by Sections 310 to 317, inclusive, of the
Trust Indenture Act, such imposed duties shall control.
(d) The application of the Trust Indenture Act to this Declaration
shall not affect the Trust's classification as a grantor trust for United States
Federal income tax purposes and shall not affect the nature of the Securities as
equity securities representing undivided beneficial ownership interests in the
assets of the Trust.
Section 2.2 Lists of Holders.
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(a) Each of the Sponsor and the Regular Trustees on behalf of the
Trust shall provide the Property Trustee with a list, in such form as the
Property Trustee may reasonably require, of the names and addresses of the
Holders of the Securities ("List of Holders"), (i) not later than __________ __
and ___________ __ of each year and current as of such date, and (ii) at any
other time, within 30 days of receipt by the Trust of a written request from the
Property Trustee for a List of Holders as of a date no more than 15 days before
such List of Holders is given to the Property Trustee; provided that neither the
Sponsor nor the Regular Trustees on behalf of the Trust shall be obligated to
provide such List of Holders at any time the List of Holders does not differ
from the most recent List of Holders given to the Property Trustee by the
Sponsor and the Regular Trustees on behalf of the Trust. The Property Trustee
shall preserve, in as current a form as is reasonably practicable, all
information contained in Lists of Holders given to it or which it receives in
the capacity as Paying Agent (if acting in such capacity), provided that the
Property Trustee may destroy any List of Holders previously given to it on
receipt of a new List of Holders.
(b) The Property Trustee shall comply with its obligations under, and
shall be entitled to the benefits of, Sections 311(a), 311(b) and 312(b) of the
Trust Indenture Act.
Section 2.3 Reports by the Property Trustee.
Within 60 days after May 15 of each year (commencing with the year of
the first anniversary of the issuance of the Capital Securities), the Property
Trustee shall provide to the Holders of the Capital Securities such reports as
are required by Section 313 of the Trust Indenture Act, if any, in the form and
in the manner provided by Section 313 of the Trust Indenture Act. The Property
Trustee shall also comply with the requirements of Section 313(d) of the Trust
Indenture Act.
Section 2.4 Periodic Reports to the Property Trustee.
Each of the Sponsor and the Regular Trustees on behalf of the Trust
shall provide to the Property Trustee such documents, reports and information as
required by Section 314 (if any) of the Trust Indenture Act and the compliance
certificate required by Section 314 of the Trust Indenture Act in the form, in
the manner and at the times required by Section 314 of the Trust Indenture Act,
provided that such compliance certificate shall be delivered on or before 120
days after the end of each calendar year of the Sponsor.
Section 2.5 Evidence of Compliance with Conditions Precedent.
Each of the Sponsor and the Regular Trustees on behalf of the Trust
shall provide to the Property Trustee such evidence of compliance with any
conditions precedent, if any, provided for in this Declaration that relate to
any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any
certificate or opinion required to be given by an officer pursuant to Section
314(c)(1) may be given in the form of an Officers' Certificate.
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Section 2.6 Trust Enforcement Events; Waiver.
(a) The Holders of a Majority in Liquidation Amount of the Capital
Securities may, by vote, on behalf of the Holders of all of the Capital
Securities, waive any past Trust Enforcement Event in respect of the Capital
Securities and its consequences, provided that, if the underlying Indenture
Event of Default:
(i) is not waivable under the Indenture, the Trust Enforcement
Event under the Declaration shall also not be waivable; or
(ii) requires the consent or vote of greater than a majority in
principal amount of the holders of the Debentures (a "Super
Majority") to be waived under the Indenture, the Trust
Enforcement Event under the Declaration may only be waived
by the vote of the Holders of at least the proportion in
liquidation amount of the Capital Securities that the
relevant Super Majority represents of the aggregate
principal amount of the Debentures outstanding.
The foregoing provisions of this Section 2.6(a) shall be in lieu of
Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of
the Trust Indenture Act is hereby expressly excluded from this Declaration and
the Securities, as permitted by the Trust Indenture Act. Upon such waiver, any
such default shall cease to exist, and any Trust Enforcement Event with respect
to the Capital Securities arising therefrom shall be deemed to have been cured,
for every purpose of this Declaration and the Capital Securities, but no such
waiver shall extend to any subsequent or other Trust Enforcement Event with
respect to the Capital Securities or impair any right consequent thereon. Any
waiver by the Holders of the Capital Securities of a Trust Enforcement Event
with respect to the Capital Securities shall also be deemed to constitute a
waiver by the Holders of the Common Securities of any such Trust Enforcement
Event with respect to the Common Securities for all purposes of this Declaration
without any further act, vote, or consent of the Holders of the Common
Securities.
(b) The Holders of a Majority in Liquidation Amount of the Common
Securities may, by vote, on behalf of the Holders of all of the Common
Securities, waive any past Trust Enforcement Event in respect of the Common
Securities and its consequences, provided that, if the underlying Indenture
Event of Default:
(i) is not waivable under the Indenture, except where the
Holders of the Common Securities are deemed to have waived
such Trust Enforcement Event under the Declaration as
provided below in this Section 2.6(b), the Trust Enforcement
Event under the Declaration shall also not be waivable; or
(ii) requires the consent or vote of a Super Majority to be
waived under the Indenture, except where the Holders of the
Common
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Securities are deemed to have waived such Trust Enforcement
Event under the Declaration as provided below in this
Section 2.6(b), the Trust Enforcement Event under the
Declaration may only be waived by the vote of the Holders of
at least the proportion in liquidation amount of the Common
Securities that the relevant Super Majority represents of
the aggregate principal amount of the Debentures
outstanding;
provided further, each Holder of Common Securities will be deemed to have waived
any Trust Enforcement Event and all Trust Enforcement Events with respect to the
Common Securities and the consequences thereof until all Trust Enforcement
Events with respect to the Capital Securities have been cured, waived or
otherwise eliminated, and until such Trust Enforcement Events with respect to
the Capital Securities have 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 in accordance with the terms of the
Securities. The foregoing provisions of this Section 2.6(b) shall be in lieu of
Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act and such
Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act are hereby
expressly excluded from this Declaration and the Securities, as permitted by the
Trust Indenture Act. Subject to the foregoing provisions of this Section
2.6(b), upon such waiver, any such default shall cease to exist and any Trust
Enforcement Event with respect to the Common Securities arising therefrom shall
be deemed to have been cured for every purpose of this Declaration, but no such
waiver shall extend to any subsequent or other Trust Enforcement Event with
respect to the Common Securities or impair any right consequent thereon.
(c) A waiver of an Indenture Event of Default by the Property Trustee
at the direction of the Holders of the Capital Securities constitutes a waiver
of the corresponding Trust Enforcement Event with respect to the Capital
Securities under this Declaration. The foregoing provisions of this Section
2.6(c) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and
such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly
excluded from this Declaration and the Securities, as permitted by the Trust
Indenture Act.
Section 2.7 Trust Enforcement Event; Notice.
(a) The Property Trustee shall, within 90 days after the occurrence
of a Trust Enforcement Event, transmit by mail, first class postage prepaid, to
the Holders, notices of all defaults with respect to the Securities actually
known to a Responsible Officer of the Property Trustee, unless such defaults
have been cured before the giving of such notice (the term "defaults" for the
purposes of this Section 2.7(a) being hereby defined to be an Indenture Event of
Default, not including any periods of grace provided for therein and
irrespective of the giving of any notice provided therein); provided that,
except for a default in the payment of principal of (or premium, if any) or
interest on any of the Debentures, the Property Trustee shall be protected in
withholding such notice if and so long as a Responsible Officer of the
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Property Trustee in good faith determines that the withholding of such notice
is in the interests of the Holders.
(b) The Property Trustee shall not be deemed to have knowledge of any
default except:
(i) a default under Sections 501(1) and 501(2) of the Indenture;
or
(ii) any default as to which the Property Trustee shall have
received written notice or of which a Responsible Officer of
the Property Trustee charged with the administration of this
Declaration shall have actual knowledge.
ARTICLE 3
ORGANIZATION
Section 3.1 Name and Organization.
The Trust is named "Ocwen Capital Trust I" as such name may be
modified from time to time by the Regular Trustees following written notice to
the Delaware Trustee, the Property Trustee and the Holders. The Trust's
activities may be conducted under the name of the Trust or any other name deemed
advisable by the Regular Trustees.
Section 3.2 Office.
The address of the principal office of the Trust is c/o Ocwen
Financial Corporation, The Forum, Suite 1000, 1675 Palm Beach Lakes Boulevard,
West Palm Beach, Florida 33401. On 10 Business Days' written notice to the
Delaware Trustee, the Property Trustee and the Holders, the Regular Trustees may
designate another principal office.
Section 3.3 Purpose.
The exclusive purposes and functions of the Trust are (a) to issue and
sell Securities and use the gross proceeds from such sale to acquire the
Debentures, and (b) except as otherwise limited herein, to engage in only those
other activities necessary or incidental thereto. The Trust shall not borrow
money, issue debt or reinvest proceeds derived from investments, mortgage or
pledge any of its assets or otherwise undertake (or permit to be undertaken) any
activity that would cause the Trust not to be classified for United States
federal income tax purposes as a grantor trust.
The Trust will be classified as a grantor trust for United States
federal income tax purposes under Subpart E of Subchapter J of the Code,
pursuant to which the owners of the Capital Securities and the Common Securities
will be treated as the owners of the Trust's assets for United States federal
income tax purposes and, consequently, such owners will
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include directly in their gross income their pro rata share of the income
paid or accrued on the Debentures as if the Trust did not exist. By the
acceptance of this Trust, none of the Trustees, the Sponsor, the Holders or
the Capital Securities Beneficial Owners will take any position for United
States federal income tax purposes which is contrary to the classification of
the Trust as a grantor trust.
Section 3.4 Authority.
(a) Subject to the limitations provided in this Declaration and to
the specific duties of the Property Trustee, the Regular Trustees shall have
exclusive authority to carry out the purposes of the Trust. An action taken by
the Regular Trustees in accordance with their powers shall constitute the act of
and serve to bind the Trust and an action taken by the Property Trustee on
behalf of the Trust in accordance with its powers shall constitute the act of
and serve to bind the Trust. In dealing with the Trustees acting on behalf of
the Trust, no Person shall be required to inquire into the authority of the
Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely
conclusively on the power and authority of the Trustees as set forth in this
Declaration.
(b) Except as expressly set forth in this Declaration and except if a
meeting of the Regular Trustees is called with respect to any matter over which
the Regular Trustees have power to act, any power of the Regular Trustees may be
exercised by, or with the consent of, any one such Regular Trustee; and
(c) Except as required by applicable law, any Regular Trustee is
authorized to execute on behalf of the Trust any documents which the Regular
Trustees have the power and authority to cause the Trust to execute pursuant to
Section 3.6.
Section 3.5 Title to Property of the Trust.
Except as provided in Section 3.8 with respect to the Debentures and
the Property Account or as otherwise provided in this Declaration, legal title
to all assets of the Trust shall be vested in the Trust. The Holders shall not
have legal title to any part of the assets of the Trust, but shall have an
undivided beneficial interest in the assets of the Trust.
Section 3.6 Powers and Duties of the Regular Trustees.
The Regular Trustees shall have the exclusive power, duty and
authority to cause the Trust to engage in the following activities:
(a) to establish the terms and form of the Capital Securities and the
Common Securities in the manner specified in Section 7.1 and issue and sell the
Capital Securities and the Common Securities in accordance with this
Declaration; provided, however, that the Trust may issue no more than one series
of Capital Securities and no more than one series of Common Securities, and,
provided further, that there shall be no interests in the Trust other than the
Securities, and the issuance of Securities shall be limited to a one-time,
simultaneous issuance of both Capital Securities and Common Securities on the
Closing Date;
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(b) in connection with the issue and sale of the Capital Securities
to:
(i) execute and file any documents prepared by the Sponsor, or
take any acts as determined by the Sponsor to be necessary,
in order to qualify or register all or part of the Capital
Securities in any State in which the Sponsor has determined
to qualify or register such Capital Securities for sale;
(ii) if deemed necessary or desirable by the Sponsor, execute and
file an application, prepared by the Sponsor, to the New
York Stock Exchange, Inc. or any other national stock
exchange or the Nasdaq National Market for listing upon
notice of issuance of any Capital Securities, the Guarantees
and the Debentures; and
(iii) if deemed necessary or desirable by the Sponsor, execute and
file with the Commission a registration statement on Form
8-A, including any amendments thereto, prepared by the
Sponsor, relating to the registration of the Capital
Securities, the Guarantees and the Debentures under Section
12(b) of the Exchange Act.
(c) to acquire the Debentures with the proceeds of the sale of the
Capital Securities and the Common Securities; provided, however, that the
Regular Trustees shall cause legal title to the Debentures to be held of record
in the name of the Property Trustee for the benefit of the Holders;
(d) to give the Sponsor and the Property Trustee prompt written
notice of the occurrence of a Special Event; provided that the Regular Trustees
shall consult with the Sponsor and the Property Trustee before taking or
refraining from taking any action in relation to any such Special Event;
(e) to establish a record date with respect to all actions to be
taken hereunder that require a record date be established, including and with
respect to, for the purposes of Section 316(c) of the Trust Indenture Act,
Distributions, voting rights, redemptions and exchanges, and to issue relevant
notices to the Holders as to such actions and applicable record dates;
(f) to take all actions and perform such duties as may be required of
the Regular Trustees pursuant to the terms of the Securities;
(g) to bring or defend, pay, collect, compromise, arbitrate, resort
to legal action or otherwise adjust claims or demands of or against the Trust
("Legal Action"), unless pursuant to Section 3.8(e), the Property Trustee has
the exclusive power to bring such Legal Action;
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(h) to employ or otherwise engage employees and agents (who may be
designated as officers with titles) and managers, contractors, advisors and
consultants to conduct only those services that the Regular Trustees have
authority to conduct directly, and to and pay reasonable compensation for such
services;
(i) to cause the Trust to comply with the Trust's obligations under
the Trust Indenture Act;
(j) to give the certificate required by Section 314(a)(4) of the
Trust Indenture Act to the Property Trustee, which certificate may be executed
by any Regular Trustee;
(k) to incur expenses that are necessary or incidental to carry out
any of the purposes of the Trust;
(l) to act as, or appoint another Person to act as, registrar and
transfer agent for the Securities or to appoint a Paying Agent for the
Securities as provided in Section 7.7;
(m) to give prompt written notice to the Holders of the Securities of
any notice received from the Debenture Issuer of its election to defer payments
of interest on the Debentures by extending the interest payment period under the
Debentures as authorized by the Indenture;
(n) to take all action that may be necessary or appropriate for the
preservation and the continuation of the Trust's valid existence, rights,
franchises and privileges as a statutory business trust under the laws of the
State of Delaware and of each other jurisdiction in which such existence is
necessary to protect the limited liability of the Holders or to enable the Trust
to effect the purposes for which the Trust was created;
(o) to take any action, not inconsistent with applicable law, the
Certificate of Trust or the Declaration, that the Regular Trustees determine in
their discretion to be necessary or desirable in carrying out the purposes and
functions of the Trust as set out in Section 3.3 or the activities of the Trust
as set out in this Section 3.6, so long as such actions do not materially
adversely affect the interests of the Holders of the Capital Securities,
including, but not limited to:
(i) causing the Trust not to be deemed to be an Investment
Company required to be registered under the Investment
Company Act;
(ii) causing the Trust to be classified for United States federal
income tax purposes as a grantor trust; and
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(iii) cooperating with the Debenture Issuer to ensure that the
Debentures will be treated as indebtedness of the Debenture
Issuer for United States federal income tax purposes.
(p) to take all action necessary to cause all applicable tax returns
and tax information reports that are required to be filed with respect to the
Trust to be duly prepared and filed by the Regular Trustees, on behalf of the
Trust; and
(q) to execute all documents or instruments, perform all duties and
powers, and do all things for and on behalf of the Trust in all matters
necessary or incidental to the foregoing.
The Regular Trustees must exercise the powers set forth in this
Section 3.6 in a manner that is consistent with the purposes and functions of
the Trust set out in Section 3.3, and the Regular Trustees shall have no power
to, and shall not, take any action that is inconsistent with the purposes and
functions of the Trust set forth in Section 3.3.
Subject to this Section 3.6, the Regular Trustees shall have none of
the powers or the authority of the Property Trustee set forth in Section 3.8.
The Regular Trustees shall take all actions on behalf of the Trust in
a manner that is consistent with the purposes and functions of the Trust as set
forth in Section 3.3 that are not specifically required by the Declaration to be
taken by any other Trustee.
Pursuant to Section 1009 of the Indenture, any expenses incurred by
the Regular Trustees pursuant to this Section 3.6 shall be reimbursed by the
Debenture Issuer.
Section 3.7 Prohibition of Actions by the Trust and the Trustees.
(a) The Trust shall not, and the Trustees (including the Property
Trustee) shall cause the Trust not to, engage in any activity other than as
required or authorized by this Declaration. In particular, the Trust shall not
and the Trustees (including the Property Trustee) shall cause the Trust not to:
(i) invest any proceeds received by the Trust from holding the
Debentures, but shall distribute all such proceeds to
Holders pursuant to the terms of this Declaration and of the
Securities;
(ii) acquire any assets other than the Debentures (and any
interest or proceeds received thereon);
(iii) possess Trust property for other than a Trust purpose;
(iv) make any loans or incur any indebtedness other than loans
represented by the Debentures;
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(v) possess any power or otherwise act in such a way as to vary
the Trust assets;
(vi) possess any power or otherwise act in such a way as to vary
the terms of the Securities in any way whatsoever (except to
the extent expressly authorized in this Declaration or by
the terms of the Securities);
(vii) issue any securities or other evidences of beneficial
ownership of, or beneficial interest in, the Trust other
than the Securities;
(viii) other than as provided in this Declaration or by the terms
of the Securities, (A) direct the time, method and place of
exercising any trust or power conferred upon the Debenture
Trustee with respect to the Debentures, (B) waive any past
default that is waivable under the Indenture, (C) exercise
any right to rescind or annul any declaration that the
principal of all the Debentures shall be due and payable, or
(D) consent to any amendment, modification or termination of
the Indenture or the Debentures where such consent shall be
required unless, in each case, the Trust shall have received
(X) the prior approval of the Majority in Liquidation Amount
of the Capital Securities; provided, however, that where a
consent or action under the Indenture would require the
consent or act of the Holders of more than a majority of the
aggregate liquidation amount of Debentures affected thereby,
only the Holders of the percentage of the aggregate stated
liquidation amount of the Capital Securities which is at
least equal to the percentage required under the Indenture
may direct the Property Trustee to give such consent to take
such action and (Y) an opinion of counsel to the effect that
such modification will not cause more than an insubstantial
risk that the Trust will be deemed an Investment Company
required to be registered under the Investment Company Act,
or the Trust will not be classified as a grantor trust for
United States federal income tax purposes;
(ix) take any action inconsistent with the status of the Trust as
a grantor trust for United States federal income tax
purposes; or
(x) 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.
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Section 3.8 Powers and Duties of the Property Trustee.
(a) The legal title to the Debentures shall be owned by and held of
record in the name of the Property Trustee in trust for the benefit of the Trust
and the Holders. The right, title and interest of the Property Trustee to the
Debentures shall vest automatically in each Person who may hereafter be
appointed as Property Trustee in accordance with Sections 6.3 and 6.6. Such
vesting and cessation of title shall be effective whether or not conveyancing
documents with regard to the Debentures have been executed and delivered.
(b) The Property Trustee shall not transfer its right, title and
interest in the Debentures to the Regular Trustees or to the Delaware Trustee
(if the Property Trustee does not also act as Delaware Trustee).
(c) The Property Trustee shall:
(i) establish and maintain a segregated non-interest bearing
trust account (the "Property Account") in the name of and
under the exclusive control of the Property Trustee on
behalf of the Holders and, upon the receipt of payments of
funds made in respect of the Debentures held by the Property
Trustee, deposit such funds into the Property Account and
make payments to the Holders from the Property Account in
accordance with Section 7.2. Funds in the Property Account
shall be held uninvested until disbursed in accordance with
this Declaration. The Property Account shall be an account
that is maintained with a banking institution the rating on
whose long-term unsecured indebtedness is categorized as at
least "investment grade" by a "nationally recognized
statistical rating organization," as that term is defined
for purposes of Rule 436(g)(2) under the Securities Act;
(ii) engage in such ministerial activities as shall be necessary
or appropriate to effect the redemption of the Capital
Securities and the Common Securities to the extent the
Debentures are redeemed or mature; and
(iii) upon written notice of distribution issued by the Regular
Trustees in accordance with the terms of the Securities,
engage in such ministerial activities as so directed and as
shall be necessary or appropriate to effect the distribution
of the Debentures to Holders upon the occurrence of a
Special Event.
(d) The Property Trustee shall take all actions and perform such
duties as may be specifically required of the Property Trustee pursuant to the
terms of the Securities.
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(e) Subject to Section 3.9(a), the Property Trustee shall take any
Legal Action which arises out of or in connection with a Trust Enforcement Event
of which a Responsible Officer of the Property Trustee has actual knowledge or
the Property Trustee's duties and obligations under this Declaration or the
Trust Indenture Act.
(f) The Property Trustee shall continue to serve as a Trustee until
either:
(i) the Trust has been completely liquidated and the proceeds of
the liquidation distributed to the Holders pursuant to the
terms of the Securities; or
(ii) a Successor Property Trustee (as defined herein) has been
appointed and has accepted that appointment in accordance
with Section 6.6.
(g) Subject to such limitations as are necessary to ensure compliance
with Section 3.3, the Property Trustee shall have the legal power to exercise
all of the rights, powers and privileges of a holder of Debentures under the
Indenture and, if a Trust Enforcement Event actually known to a Responsible
Officer of the Property Trustee occurs and is continuing, the Property Trustee
shall, for the benefit of Holders, enforce its rights as holder of the
Debentures subject to the rights of the Holders pursuant to the terms of such
Securities.
(h) Subject to this Section 3.8, the Property Trustee shall have none
of the duties, liabilities, powers or the authority of the Regular Trustees set
forth in Section 3.6.
The Property Trustee shall exercise the powers set forth in this
Section 3.8 in a manner that is consistent with the purposes and functions of
the Trust set out in Section 3.3, and the Property Trustee shall have no power
to, and shall not, take any action that is inconsistent with the purposes and
functions of the Trust set out in Section 3.3.
Section 3.9 Certain Duties and Responsibilities of the Property
Trustee.
(a) The Property Trustee, before the occurrence of any Trust
Enforcement Event and after the curing of all Trust Enforcement Events that may
have occurred, shall undertake to perform only such duties as are specifically
set forth in this Declaration and in the Securities and no implied covenants
shall be read into this Declaration or the Securities against the Property
Trustee. In case a Trust Enforcement Event has occurred (that has not been
cured or waived pursuant to Section 2.6) of which a Responsible Officer of the
Property Trustee has actual knowledge, the Property Trustee shall exercise such
of the rights and powers vested in it by this Declaration, and use the same
degree of care and skill in their exercise, as a prudent person would exercise
or use under the circumstances in the conduct of his or her own affairs.
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(b) No provision of this Declaration shall be construed to relieve
the Property Trustee from liability for its own negligent action, its own
negligent failure to act or its own willful misconduct, except that:
(i) prior to the occurrence of a Trust Enforcement Event and
after the curing or waiving of all such Trust Enforcement
Events that may have occurred:
a. the duties and obligations of the Property Trustee
shall be determined solely by the express provisions of
this Declaration and the Securities and the Property
Trustee shall not be liable except for the performance
of such duties and obligations as are specifically set
forth in this Declaration, and no implied covenants or
obligations shall be read into this Declaration or the
Securities against the Property Trustee; and
b. in the absence of bad faith on the part of the Property
Trustee, the Property Trustee may conclusively rely, as
to the truth of the statements and the correctness of
the opinions expressed therein, upon any certificates
or opinions furnished to the Property Trustee and
conforming to the requirements of this Declaration; but
in the case of any such certificates or opinions that
by any provision hereof are specifically required to be
furnished to the Property Trustee, the Property Trustee
shall be under a duty to examine the same to determine
whether or not they conform to the requirements of this
Declaration;
(ii) the Property Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer of the
Property Trustee, unless it shall be proved that the
Property Trustee was negligent in ascertaining the pertinent
facts;
(iii) the Property Trustee shall not be liable with respect to any
action taken or omitted to be taken by it without
negligence, in good faith in accordance with the direction
of the Holders of not less than a Majority in Liquidation
Amount of the Securities relating to the time, method and
place of conducting any proceeding for any remedy available
to the Property Trustee, or exercising any trust or power
conferred upon the Property Trustee under this Declaration;
(iv) no provision of this Declaration shall require the Property
Trustee to expend or risk its own funds or otherwise incur
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personal financial liability in the performance of any of
its duties or in the exercise of any of its rights or
powers, if it shall have reasonable grounds for believing
that the repayment of such funds or liability is not
reasonably assured to it under the terms of this Declaration
or indemnity reasonably satisfactory to the Property Trustee
against such risk or liability is not reasonably assured to
it;
(v) the Property Trustee's sole duty with respect to the
custody, safe-keeping and physical preservation of the
Debentures and the Property Account shall be to deal with
such property in a similar manner as the Property Trustee
deals with similar property for its own account, subject to
the protections and limitations on liability afforded to the
Property Trustee under this Declaration and the Trust
Indenture Act;
(vi) the Property Trustee shall have no duty or liability for or
with respect to the value, genuineness, existence or
sufficiency of the Debentures or the payment of any taxes or
assessments levied thereon or in connection therewith;
(vii) the Property Trustee shall not be liable for any interest on
any money received by it except as it may otherwise agree
with the Sponsor. Money held by the Property Trustee need
not be segregated from other funds held by it except in
relation to the Property Account maintained by the Property
Trustee pursuant to Section 3.8(c)(i) and except to the
extent otherwise required by law; and
(viii) the Property Trustee shall not be responsible for monitoring
the compliance by the Regular Trustees or the Sponsor with
their respective duties under this Declaration, nor shall
the Property Trustee be liable for any default or misconduct
of the Regular Trustees or the Sponsor.
Section 3.10 Certain Rights of Property Trustee.
(a) Subject to the provisions of Section 3.9:
(i) the Property Trustee may conclusively rely and shall be
fully protected in acting or refraining from acting upon any
resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other
paper or document believed by it to be genuine and to have
been signed, sent or presented by the proper party or
parties;
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(ii) any direction or act of the Sponsor or the Regular Trustees
contemplated by this Declaration shall be sufficiently
evidenced by an Officers' Certificate (or, with respect to
the establishment of the terms and form of the Securities by
the Regular Trustees, by a Trustees' Authorization
Certificate);
(iii) whenever in the administration of this Declaration, the
Property Trustee shall deem it desirable that a matter be
proved or established before taking, suffering or omitting
any action hereunder, the Property Trustee (unless other
evidence is herein specifically prescribed) may, in the
absence of bad faith on its part, request and conclusively
rely upon an Officers' Certificate which, upon receipt of
such request, shall be promptly delivered by the Sponsor or
the Regular Trustees;
(iv) the Property Trustee shall have no duty to see to any
recording, filing or registration of any instrument
(including any financing or continuation statement or any
filing under tax or securities laws) or any rerecording,
refiling or registration thereof;
(v) the Property Trustee may consult with counsel of its choice
or other experts and the advice or opinion of such counsel
and experts with respect to legal matters or advice within
the scope of such experts' area of expertise shall be full
and complete authorization and protection in respect of any
action taken, suffered or omitted by it hereunder in good
faith and in accordance with such advice or opinion, such
counsel may be counsel to the Sponsor or any of its
Affiliates, and may include any of its employees. The
Property Trustee shall have the right at any time to seek
instructions concerning the administration of this
Declaration from any court of competent jurisdiction;
(vi) the Property Trustee shall be under no obligation to
exercise any of the rights or powers vested in it by this
Declaration at the request or direction of any Holder,
unless such Holder shall have provided to the Property
Trustee security and indemnity, reasonably satisfactory to
the Property Trustee, against the costs, expenses (including
attorneys, fees and expenses and the expenses of the
Property Trustee's agents, nominees or custodians) and
liabilities that might be incurred by it in complying with
such request or direction, including such reasonable
advances as may be requested by the Property Trustee;
provided that, nothing contained in this Section 3.10(a)
shall be taken to relieve the Property Trustee, upon the
occurrence of an Indenture Event of Default, of its
obligation to exercise the rights and powers vested in it by
this Declaration;
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(vii) the Property Trustee shall not be bound to make any
investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other
paper or document, but the Property Trustee, in its
discretion, may make such further inquiry or investigation
into such facts or matters as it may see fit;
(viii) the Property Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or
by or through agents, custodians, nominees or attorneys and
the Property Trustee shall not be responsible for any
misconduct or negligence on the part of any agent or
attorney appointed with due care by it hereunder;
(ix) any action taken by the Property Trustee or its agents
hereunder shall bind the Trust and the Holders, and the
signature of the Property Trustee or its agents alone shall
be sufficient and effective to perform any such action and
no third party shall be required to inquire as to the
authority of the Property Trustee to so act or as to its
compliance with any of the terms and provisions of this
Declaration, both of which shall be conclusively evidenced
by the Property Trustee's or its agent's taking such action;
(x) whenever in the administration of this Declaration the
Property Trustee shall deem it desirable to receive
instructions with respect to enforcing any remedy or right
or taking any other action hereunder, the Property Trustee
(i) may request instructions from the Holders which
instructions may only be given by the Holders of the same
proportion in liquidation amount of the Securities as would
be entitled to direct the Property Trustee under the terms
of the Securities in respect of such remedy, right or
action, (ii) may refrain from enforcing such remedy or right
or taking such other action until such instructions are
received, and (iii) shall be protected in conclusively
relying on or acting in or accordance with such
instructions;
(xi) 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 this Declaration or is unsure of the application of any
provision of this 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,
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take such action as is directed by the Sponsor and will have
no liability except for its own bad faith, negligence or
willful misconduct;
(xii) except as otherwise expressly provided by this Declaration,
the Property Trustee shall not be under any obligation to
take any action that is discretionary under the provisions
of this Declaration; and
(xiii) the Property Trustee shall not be liable for any action
taken, suffered or omitted to be taken by it without
negligence, in good faith and reasonably believed by it to
be authorized or within the discretion, rights or powers
conferred upon it by this Declaration.
(b) No provision of this Declaration shall be deemed to impose any
duty or obligation on the Property Trustee to perform any act or acts or
exercise any right, power, duty or obligation conferred or imposed on it, in any
jurisdiction in which it shall be illegal, or in which the Property Trustee
shall be unqualified or incompetent in accordance with applicable law, to
perform any such act or acts, or to exercise any such right, power, duty or
obligation. No permissive power or authority available to the Property Trustee
shall be construed to be a duty.
Section 3.11 Delaware Trustee.
Notwithstanding any other provision of this Declaration other than
Section 6.2, the Delaware Trustee shall not be entitled to exercise any powers,
nor shall the Delaware Trustee have any of the duties and responsibilities of
the Regular Trustees or the Property Trustee described in this Declaration.
Except as set forth in Section 6.2, the Delaware Trustee shall be a Trustee for
the sole and limited purpose of fulfilling the requirements of Section 3807 of
the Business Trust Act.
Section 3.12 Execution of Documents.
Except as otherwise required by applicable law, any Regular Trustee is
authorized to execute on behalf of the Trust any documents that the Regular
Trustees have the power and authority to execute pursuant to Section 3.6.
Section 3.13 Not Responsible for Recitals or Issuance of Securities.
The recitals contained in this Declaration and the Securities shall be
taken as the statements of the Sponsor, and the Trustees do not assume any
responsibility for their correctness. The Trustees make no representations as
to the value or condition of the property of the Trust or any part thereof. The
Trustees make no representations as to the validity or sufficiency of this
Declaration, the Securities or the Debentures or the Indenture.
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Section 3.14 Duration of Trust.
The Trust shall exist until dissolved pursuant to the provisions of
Article 8 hereof.
Section 3.15 Mergers.
(a) The Trust may not consolidate, amalgamate, merge with or into, or
be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, except as described in Sections
3.15(b) and (c) and Section 8.2.
(b) The Trust may, with the consent of the Regular Trustees and
without the consent of the Holders, the Delaware Trustee or the Property
Trustee, consolidate, amalgamate, merge with or into, be replaced by or convey,
transfer or lease its properties substantially as an entirety to a trust
organized as such under the laws of any State; provided that:
(i) if the Trust is not the successor, such successor entity
(the "Successor Entity") either:
a. expressly assumes all of the obligations of the Trust
with respect to the 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 with respect to Distributions and
payments upon liquidation, redemption and otherwise;
(ii) if the Trust is not the Successor Entity, the Sponsor
expressly appoints a trustee of such Successor Entity that
possesses the same powers and duties as the Property Trustee
as the holder of the Debentures;
(iii) the Capital Securities or any Successor Securities are
listed, or any Successor Securities will be listed upon
notification of issuance, on any national securities
exchange or with any other or organization on which the
Capital Securities are then listed or quoted, 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;
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(v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the
rights, preferences and privileges of the Holders (including
the holders of 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 Sponsor has
received an opinion of qualified 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
(including the holders of any Successor Securities) in
any material respect (other than with respect to any
dilution of the Holders' interest in the new entity);
b. following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the
Trust nor the Successor Entity will be required to
register as an Investment Company; and
c. following such merger, consolidation, amalgamation or
replacement, the Trust (or the Successor Entity) will
continue to be classified as a grantor trust for United
States federal income tax purposes;
(viii) the Sponsor 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 Securities Guarantee; and
(ix) such Successor Entity (if not the Trust) expressly assumes
all of the obligations of the Trust with respect to the
Trustees.
(c) Notwithstanding Section 3.15(b), the Trust shall not, except with
the consent of Holders of 100% in aggregate liquidation amount of the
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 Person or permit any other Person 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
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Successor Entity to be classified as other than a grantor trust for United
States federal income tax purposes and each Holder of the Securities not to be
treated as owning an undivided interest in the Debentures.
Section 3.16 Property Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
similar judicial proceeding relative to the Trust or any other obligor upon the
Securities or the property of the Trust or of such other obligor or their
creditors, the Property Trustee (irrespective of whether any Distributions on
the Securities shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Property Trustee shall
have made any demand on the Trust for the payment of any past due Distributions)
shall be entitled and empowered, to the fullest extent permitted by law, by
intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of any
Distributions owing and unpaid in respect of the Securities (or, if the
Securities are original issue discount Securities, such portion of the
liquidation amount as may be specified in the terms of such Securities) and to
file such other papers or documents as may be necessary or advisable in order to
have the claims of the Property Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Property Trustee, its
and counsel) and of the Holders allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder to make such payments to the Property Trustee and, in the event the
Property Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Property Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Property Trustee, its
agents and counsel, and any other amounts due the Property Trustee.
Nothing herein contained shall be deemed to authorize the Property
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement adjustment or compensation affecting the
Securities or the rights of any Holder thereof or to authorize the Property
Trustee to vote in respect of the claim of any Holder in any such proceeding.
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ARTICLE 4
SPONSOR
Section 4.1 Responsibilities of the Sponsor.
In connection with the issue and sale of the Capital Securities, the
Sponsor shall have the exclusive right and responsibility to engage in the
following activities:
(a) to prepare for filing by the Trust with the Commission and
execute on behalf of the Trust registration statements on the applicable
form, including any amendments thereto, pertaining to the Capital Securities,
the Guarantee and the Debentures;
(b) to determine the States in which to take appropriate action to
qualify or register for sale all or part of the Capital Securities and to do
any and all such acts, other than actions which must be taken by the Trust,
and advise the Trust of actions it must take, and prepare for execution and
filing any documents to be executed and filed by the Trust, as the Sponsor
deems necessary or advisable in order to comply with the applicable laws of
any such States;
(c) to prepare for filing by the Trust an application to the New
York Stock Exchange, Inc. or any other national stock exchange or the Nasdaq
National Market for listing upon notice of issuance of any Capital
Securities, the Guarantee and the Debentures;
(d) to prepare for filing by the Trust with the Commission a
registration statement on Form 8-A, including any amendments thereto,
relating to the registration of the Capital Securities, the Guarantee and the
Debentures under Section 12(b) of the Exchange Act; and
(e) to negotiate the terms of, and execute and deliver, on behalf
of the Trust, an underwriting agreement and other related agreements
providing for the sale of the Capital Securities.
Section 4.2 Indemnification and Expenses of the Trustee.
Pursuant to Section 1009 of the Indenture, the Sponsor, in its
capacity as Debenture Issuer, agrees to indemnify the Property Trustee and
the Delaware Trustee for, and to hold each of them harmless against, any
loss, liability or expense incurred without negligence or bad faith on the
part of the Property Trustee or the Delaware Trustee, as the case may be,
arising out of or in connection with the acceptance or administration of the
trust or trusts hereunder, including the costs and expenses of defending
either of them against any claim or liability in connection with the exercise
or performance of any of their respective powers or duties hereunder. The
provisions of this Section 4.2 shall survive the resignation or removal of
the Delaware Trustee or the Property Trustee or the termination of this
Declaration.
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4.3 Right to Proceed
The Sponsor acknowledges the rights of the Holders of Capital
Securities, in the event of a failure of the Debenture Issuer to make any
required payment on the Debentures when due under the Indenture, to directly
institute a proceeding against the Debenture Issuer for enforcement of its
payment obligations on the Debentures.
ARTICLE 5
TRUST COMMON SECURITIES HOLDER
Section 5.1 Debenture Issuer's Purchase of Common Securities.
On the Closing Date, the Debenture Issuer will purchase all of the
Common Securities issued by the Trust, for an amount at least equal to 3% of
the capital of the Trust, at the same time as the Capital Securities are sold.
Section 5.2 Covenants of the Common Securities Holder.
For so long as the Capital Securities remain outstanding, the
Sponsor will covenant (i) to maintain directly 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 this Declaration, (iii) to use its commercially reasonable
efforts to ensure that the Trust will not be an Investment Company, and (iv)
to take no action which 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.
ARTICLE 6
TRUSTEES
Section 6.1 Number of Trustees.
The number of Trustees initially shall be five (5), and:
(a) at any time before the issuance of any Securities, the Sponsor
may, by written instrument, increase or decrease the number of Trustees; and
(b) after the issuance of any Securities, the number of Trustees
may be increased or decreased by vote of the Holders of a Majority in
Liquidation Amount of the Common Securities voting as a class at a meeting of
the Holders of the Common Securities
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or by written consent in lieu of such meeting; provided that the number of
Trustees shall be at least three; and provided further that (1) the Delaware
Trustee, in the case of a natural person, shall be a person who is a resident
of the State of Delaware or that, if not a natural person, is an entity which
has its principal place of business in the State of Delaware; (2) at least
one Regular Trustee is an employee or officer of, or is affiliated with, the
Sponsor; and (3) one Trustee shall be the Property Trustee for so long as
this Declaration is required to qualify as an indenture under the Trust
Indenture Act, and such Trustee may also serve as Delaware Trustee if it
meets the applicable requirements.
Section 6.2 Delaware Trustee.
If required by the Business Trust Act, one Trustee (the "Delaware
Trustee") shall be:
(a) a natural person who is a resident of the State of Delaware; or
(b) if not a natural person, an entity which has its principal
place of business in the State of Delaware, and otherwise meets the
requirements of applicable law, provided that, if the Property Trustee has
its principal place of business in the State of Delaware and otherwise meets
the requirements of applicable law, then the Property Trustee shall also be
the Delaware Trustee and Section 3.11 shall have no application.
Section 6.3 Property Trustee; Eligibility.
(a) There shall at all times be one Trustee which shall act as
Property Trustee which shall:
(i) not be an Affiliate of the Sponsor; and
(ii) be a corporation organized and doing business under the
laws of the United States of America or any State or
Territory thereof or of the District of Columbia, or a
Person permitted by the Commission to act as an
institutional trustee under the Trust Indenture Act,
authorized under such laws to exercise corporate trust
owners, having a combined capital and surplus of at
least 50 million U.S. dollars ($50,000,000), and
subject to supervision or examination by Federal,
State, Territorial or District of Columbia authority.
If such Person publishes reports of condition at least
annually, pursuant to law or to the requirements of the
supervising or examining authority referred to above,
then for the purposes of this Section 6.3(a)(ii), the
combined capital and surplus of such Person shall be
deemed to be its combined capital and surplus as set
forth in its most recent report of condition so
published.
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(b) If at any time the Property Trustee shall cease to be eligible
to so act under Section 6.3(a), the Property Trustee shall immediately resign
in the manner and with the effect set forth in Section 6.6(c).
(c) If the Property Trustee has or shall acquire any "conflicting
interest" within the meaning of Section 310(b) of the Trust Indenture Act,
the Property Trustee and the Holder of the Common Securities (as if it were
the Obliger referred to in Section 310(b) of the Trust Indenture Act) shall
in all respects comply with the provisions of Section 310(b) of the Trust
Indenture Act.
(d) The Guarantee and the Indenture shall be deemed to be
specifically described in this Declaration for purposes of clause (i) of the
first provision contained in Section 310(b) of the Trust Indenture Act.
(e) The initial Property Trustee shall be:
The Chase Manhattan Bank
Global Trust Services
450 West 33rd Street, 15th Floor
New York, New York 10001-2697
Section 6.4 Qualifications of Regular Trustees and Delaware Trustee
Generally.
Each Regular Trustee and the Delaware Trustee (unless the Property
Trustee also acts as Delaware Trustee) shall be either a natural person who
is at least 21 years of age or a legal entity that shall act through one or
more Authorized Officers.
Section 6.5 Initial Trustees and Initial Delaware Trustee.
(a) The initial Regular Trustees shall be:
William C. Erbey, John R. Erbey and Christine A. Reich, the business
address of all of whom is c/o Ocwen Financial Corporation, The Forum, Suite
1000, 1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401.
(b) The initial Delaware Trustee shall be:
Chase Manhattan Bank Delaware
1201 Market Street, 9th Floor
Wilmington, Delaware 19801
Section 6.6 Appointment, Removal and Resignation of Trustees.
(a) Subject to Section 6.6(b), Trustees may be appointed or removed
without cause at any time:
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(i) until the issuance of any Securities, by written
instrument executed by the Sponsor; and
(ii) after the issuance of any Securities, by vote of the
Holders of a Majority in Liquidation Amount of the
Common Securities voting as a class at a meeting of the
Holders of the Common Securities.
(b) The Trustee that acts as Property Trustee shall not be removed
in accordance with Section 6.6(a) until a successor Trustee possessing the
qualifications to act as Property Trustee under Section 6.3 (a "Successor
Property Trustee") has been appointed and has accepted such appointment by
written instrument executed by such Successor Property Trustee and delivered
to the Regular Trustees and the Sponsor. The Trustee that acts as Delaware
Trustee shall not be removed in accordance with Section 6.6(a) until a
successor Trustee possessing the qualifications to act as Delaware Trustee
under Sections 6.2 and 6.4 (a "Successor Delaware Trustee") has been
appointed and has accepted such appointment by written instrument executed by
such Successor Delaware Trustee and delivered to the Regular Trustees and the
Sponsor.
(c) A Trustee appointed to office shall hold office until his or
its successor shall have been appointed, until his death or its dissolution
or until his or its removal or resignation. Any Trustee may resign from
office (without need for prior or subsequent accounting) by an instrument in
writing signed by the Trustee and delivered to the Sponsor and the Trust,
which resignation shall take effect upon such delivery or upon such later
date as is specified therein; provided, however, that:
(i) No such resignation of the Trustee that acts as the
Property Trustee shall be effective:
a. until a Successor Property Trustee has been appointed
and has accepted such appointment by instrument
executed by such Successor Property Trustee and
delivered to the Trust, the Sponsor and the resigning
Property Trustee; or
b. until the assets of the Trust have been completely
liquidated and the proceeds thereof distributed to the
holders of the Securities; and
(ii) No such resignation of the Trustee that acts as the
Delaware Trustee shall be effective until a Successor
Delaware Trustee has been appointed and has accepted
such appointment by instrument executed by such
Successor Delaware Trustee and delivered to the Trust,
the Sponsor and the resigning Delaware Trustee.
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(d) The Holders of the Common Securities shall use their best
efforts to promptly appoint a Successor Delaware Trustee or Successor
Property Trustee, as the case may be, if the Property Trustee or the Delaware
Trustee delivers an instrument of resignation in accordance with this Section
6.6.
(e) If no Successor Property Trustee or Successor Delaware Trustee,
as the case may be, shall have been appointed and accepted appointment as
provided in this Section 6.6 within 60 days after delivery to the Sponsor and
the Trust of an instrument of resignation or removal, the resigning or
removed Property Trustee or Delaware Trustee, as applicable, may petition any
court of competent jurisdiction for appointment of a Successor Property
Trustee or Successor Delaware Trustee, as applicable. Such court may
thereupon, after prescribing such notice, if any, as it may deem proper,
appoint a Successor Property Trustee or Successor Delaware Trustee, as the
case may be.
(f) No Property Trustee or Delaware Trustee shall be liable for the
acts or omissions to act of any Successor Property Trustee or Successor
Delaware Trustee, as the case may be.
Section 6.7 Vacancies among Trustees.
If a Trustee ceases to hold office for any reason and the number of
Trustees is not reduced pursuant to Section 6.1, or if the number of Trustees
is increased pursuant to Section 6.1, a vacancy shall occur. A resolution
certifying the existence of such vacancy by the Regular Trustees or, if there
are more than two, a majority of the Regular Trustees shall be conclusive
evidence of the existence of such vacancy. The vacancy shall be filled with
a Trustee appointed in accordance with Section 6.6.
Section 6.8 Effect of Vacancies.
The death, resignation, retirement, removal, bankruptcy,
dissolution, liquidation, incompetence or incapacity to perform the duties of
a Trustee shall not operate to annul, dissolve or terminate the Trust.
Whenever a vacancy in the number of Regular Trustees shall occur, until such
vacancy is filled by the appointment of a Regular Trustee in accordance with
Section 6.6, the Regular Trustees in office, regardless of their number,
shall have all the powers granted to the Regular Trustees and shall discharge
all the duties imposed upon the Regular Trustees by this Declaration.
Section 6.9 Meetings.
If there is more than one Regular Trustee, meetings of the Regular
Trustees shall be held from time to time upon the call of any Regular
Trustee. Regular meetings of the Regular Trustees may be held at a time and
place fixed by resolution of the Regular Trustees. Notice of any in-person
meetings of the Regular Trustees shall be hand delivered or otherwise
delivered in writing (including by facsimile,
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with a hard copy by overnight courier) not less than 48 hours before such
meeting. Notice of any telephonic meetings of the Regular Trustees shall be
hand delivered or otherwise delivered in writing (including by facsimile,
with a hard copy by overnight courier) not less than 24 hours before a
meeting. Notices shall contain a brief statement of the time, place and
anticipated purposes of the meeting. The presence (whether in person or by
telephone) of a Regular Trustee at a meeting shall constitute a waiver of
notice of such meeting except where a Regular Trustee attends a meeting for
the express purpose of objecting to the transaction of any activity on the
ground that the meeting has not been lawfully called or convened. Unless
provided otherwise in this Declaration, any action of the Regular Trustees
may be taken at a meeting by vote of a majority of the Regular Trustees
present (whether in person or by telephone) and eligible to vote with respect
to such matter, provided that a Quorum is present, or without a meeting by
the unanimous written consent of the Regular Trustees. In the event there is
only one Regular Trustee, any and all action of such Regular Trustee shall be
evidenced by a written consent of such Regular Trustee.
Section 6.10 Delegation of Power.
(a) Any Regular Trustee may, by power of attorney consistent with
applicable law, delegate to any natural person over the age of 21 his, her or
its power for the purpose of executing any documents contemplated in Section
3.6, including any registration statement or amendment thereto filed with the
Commission, or making any other governmental filing.
(b) The Regular Trustees shall have power to delegate from time to
time to such of their number or to officers of the Trust the doing of such
things and the execution of such instruments either in the name of the Trust
or the names of the Regular Trustees or otherwise as the Regular Trustees may
deem expedient, to the extent such delegation is not prohibited by applicable
law or contrary to the provisions of the Trust, as set forth herein.
Section 6.11 Merger, Conversion, Consolidation or Succession to
Business.
Any Person into which the Property Trustee, the Delaware Trustee or
any Regular Trustee that is not a natural person, as the case may be, may be
merged or converted or with which either may be consolidated, or any Person
resulting from any merger, conversion or consolidation to which such Trustee
shall be a party, or any Person succeeding to all or substantially all the
corporate trust business of such Trustee, shall be the successor of such
Trustee hereunder, provided such Person shall be otherwise qualified and
eligible under this Article, without the execution or filing of any paper or
any further act on the part of any of the parties hereto.
ARTICLE 7
TERMS OF SECURITIES
Section 7.1 General Provisions Regarding Securities.
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(a) The Regular Trustees shall on behalf of the Trust issue one
class of Capital Securities representing undivided beneficial ownership
interests in the assets of the Trust (the "Capital Securities") and one class
of Common Securities representing undivided beneficial ownership interests in
the assets of the Trust (the "Common Securities").
(i) Capital Securities. The Capital Securities of the
Trust have an aggregate liquidation amount with respect
to the assets of the Trust of One Hundred Twenty-Five
Million Dollars ($125,000,000) and a liquidation amount
with respect to the assets of the Trust of $1,000 per
Capital Security The Capital Security Certificates
evidencing the Capital Securities shall be
substantially in the form of Exhibit A to the
Declaration, with such changes and additions thereto or
deletions therefrom as may be required by ordinary
usage, custom or practice or to conform to the rules of
any stock exchange on which the Capital Securities are
listed.
(ii) Common Securities. The Common Securities of the Trust
have an aggregate liquidation amount with respect to
the assets of the Trust of Three Million Eight Hundred
Sixty-Six Thousand Dollars ($3,866,000) and a
liquidation amount with respect to the assets of the
Trust of $1,000 per Common Security. The Common
Security Certificates evidencing the Common Securities
shall be substantially in the form of Exhibit B to the
Declaration, with such changes and additions thereto or
deletions therefrom as may be required by ordinary
usage, custom or practice.
(b) 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 date on which such
Distributions or Redemption Price is payable, an Indenture Event of Default
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
amounts payable on redemption the full amount of the Redemption Price for 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 the Redemption Price of, the Capital Securities then due and payable.
The Trust shall issue no securities or other interests in the assets of the
Trust other than the Capital Securities and the Common Securities.
(c) The Certificates shall be signed on behalf of the Trust by a
Regular Trustee. Such signature shall be the manual or facsimile signature
of any present or any future Regular Trustee. In case a Regular Trustee of
the Trust who shall have signed any of
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the Certificates shall cease to be such Regular Trustee before the
Certificates so signed shall be delivered by the Trust, such Certificates
nevertheless may be delivered as though the person who signed such
Certificates had not ceased to be such Regular Trustee; and any Certificate
may be signed on behalf of the Trust by such persons who, at the actual date
of execution of such Certificate, shall be the Regular Trustees of the Trust,
although at the date of the execution and delivery of the Declaration any
such person was not such a Regular Trustee. Certificates shall be printed,
lithographed or engraved or may be produced in any other manner as is
reasonably acceptable to the Regular Trustees, as evidenced by their
execution thereof, and may have such letters, numbers or other marks of
identification or designation and such legends or endorsements as the Regular
Trustees may deem appropriate, or as may be required to comply with any law
or with any rule or regulation of any stock exchange on which Securities may
be listed, or to conform to usage.
A Capital Securities Certificate shall not be valid until
authenticated by the manual signature of an authorized officer of the
Property Trustee. Such signature shall be conclusive evidence that the
Capital Securities Certificate has been authenticated under this Declaration.
Upon a written order of the Trust signed by one Regular Trustee, the
Property Trustee shall authenticate the Capital Securities Certificate for
original issue. The aggregate number of Capital Securities outstanding at
any time shall not have an aggregate liquidation amount which exceeds the
liquidation amount set forth in Section 7.1(a)(i).
The Property Trustee may appoint an authenticating agent acceptable
to the Trust to authenticate Capital Securities Certificates. An
authenticating agent may authenticate Capital Securities Certificates
whenever the Property Trustee may do so. Each reference in this Declaration
to authentication by the Property Trustee includes authentication by such
agent. An authenticating agent has the same rights as the Property Trustee
to deal with the Sponsor or an Affiliate of the Sponsor.
(d) The consideration received by the Trust for the issuance of the
Securities shall constitute a contribution to the capital of the Trust and
shall not constitute a loan to the Trust.
(e) Except to the extent set forth in Section 9.1(b), upon issuance
of the Securities as provided in this Declaration, the Securities so issued
shall be deemed to be validly issued, fully paid and non-assessable undivided
beneficial interests in the assets of the Trust.
(f) Every Person, by virtue of having become a Holder or a Capital
Security Beneficial Owner in accordance with the terms of this Declaration,
shall be deemed to have expressly assented and agreed to the terms of, and
shall be bound by, this Declaration and the terms of the Securities, the
Guarantee, the Indenture and the Debentures.
(g) The Securities shall have no preemptive or similar rights.
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Section 7.2 Distributions.
(a) Holders shall be entitled to receive cumulative cash Distributions
at the rate per annum of ____% of the stated liquidation amount of $1,000 per
Trust Security, calculated on the basis of a 360-day year consisting of twelve
30-day months. For any period shorter than a full 180 day semi-annual period,
distributions will be computed on the basis of the actual number of days elapsed
in such 180 day semi-annual period based on a 30 day month. Subject to
Section 7.1(b), Distributions shall be made on the Capital Securities and the
Common Securities on a Pro Rata basis. Distributions on the Securities shall,
from the date of original issue, accrue and be cumulative and shall be payable
semi-annually only to the extent that the Trust has funds available for the
payment of such Distributions in the Property Account. Distributions not paid
on the scheduled payment date will accumulate and compound semi-annually at the
rate of ____% per annum ("Compounded Distributions"). "Distributions" shall
mean ordinary cumulative Distributions together with any Compounded
Distributions. If and to the extent that the Debenture Issuer makes a payment
of interest (including Compounded Interest (as defined in the Indenture)),
premium and/or principal on the Debentures held by the Property Trustee (the
amount of any such payment being a "Payment Amount"), the Property Trustee shall
and is directed, to the extent funds are available for that purpose, to make a
Pro Rata Distribution of the Payment Amount to Holders, subject to the terms of
Section 7.1(b).
(b) Distributions on the Securities will be cumulative, will accrue
from the date of initial issuance and will be payable semi-annually in arrears
on each ___________ and _____________, commencing _____________, 1997, when, as
and if available for payment, by the Property Trustee, except as otherwise
described below. If Distributions are not paid when scheduled, the accrued
Distributions shall be paid to the Holders as they appear on the books and
records of the Trust on the record date as determined under Section 7.2(c).
(c) Distributions on the Securities will be payable to the Holders
thereof as they appear on the books and records of the Trust on the relevant
record dates, which relevant record date shall be the 15th of the month prior to
the relevant payment dates. In the event that any date on which Distributions
are payable on the Securities is not a Business Day, payment of the distribution
payable on such date will be made on the next succeeding day which is a Business
Day (without any interest or other payment in respect of any such delay) with
the same force and effect as if made on such date.
Section 7.3 Redemption of Securities.
(a) Upon the repayment or redemption, in whole or in part, of the
Debentures, the proceeds from such repayment or redemption shall be
simultaneously applied Pro Rata (subject to Section 7.1(b)) to redeem Securities
having an aggregate liquidation amount equal to the aggregate principal amount
of the Debentures so repaid or redeemed for an amount equal to the redemption
price paid by the Debenture Issuer in respect of such Debentures plus an amount
equal to accrued and unpaid Distributions thereon through the date of the
redemption or such lesser amount as shall be received by the Trust in respect of
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the Debentures so repaid or redeemed (the "Redemption Price"). Holders will be
given not less than 30 or more than 60 days notice of such redemption.
(b) If fewer than all the outstanding Securities are to be so
redeemed, the Common Securities and the Capital Securities will be redeemed Pro
Rata and the Capital Securities to be redeemed will be redeemed as described in
Section 7.4 below.
(c) If, at any time, a Special Event shall occur and be continuing,
the Regular Trustees may elect to, unless the Debentures are redeemed, within 90
days following the occurrence of such Special Event, subject to the receipt of
any necessary regulatory approval, dissolve the Trust upon not less than 30 nor
more than 60 days' notice and, after satisfaction of creditors, if any, cause
the Debentures to be distributed to the holders of the Capital Securities in
liquidation of the Trust.
(d) On the date fixed by the Regular Trustees for any distribution of
Debentures, upon dissolution of the Trust, (i) the Capital Securities and the
Common Securities will no longer be deemed to be outstanding and (ii)
certificates representing Securities will be deemed to represent the Debentures
having an aggregate principal amount equal to the stated liquidation amount of,
and bearing accrued and unpaid Distributions equal to accrued and unpaid
Distributions on, such Securities until such certificates are presented to the
Sponsor or its agent for transfer or reissuance.
Section 7.4 Redemption Procedures.
(a) Notice of any redemption of, or notice of distribution of
Debentures in exchange for, the Securities (a "Redemption/Distribution Notice")
will be given by the Trust by mail to each Holder to be redeemed or exchanged
not fewer than 30 nor more than 60 days before the date fixed for redemption or
exchange thereof which, in the case of a redemption, will be the date fixed for
redemption of the Debentures. For purposes of the calculation of the date of
redemption or exchange and the dates on which notices are given pursuant to this
Section 7.4, a Redemption/Distribution Notice shall be deemed to be given on the
day such notice is first mailed by first-class mail, postage prepaid, to
Holders. Each Redemption/Distribution Notice shall be addressed to the Holders
at the address of each such Holder appearing in the books and records of the
Trust. No defect in the Redemption/Distribution Notice or in the mailing of
either thereof with respect to any Holder shall affect the validity of the
redemption or exchange proceedings with respect to any other Holder.
(b) If fewer than all the outstanding Securities are to be so
redeemed, the Common Securities and the Capital Securities will be redeemed Pro
Rata and the Capital Securities to be redeemed will be redeemed as described in
Section 7.4 below. The Trust may not redeem the Securities in part unless all
accrued and unpaid Distributions have been paid in full on all Capital
Securities then outstanding plus accrued but unpaid Distributions to the date of
redemption. For all purposes of this Declaration, unless the context otherwise
requires, all provisions relating to the redemption of Capital Securities shall
relate, in the case
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of any Capital Security redeemed or to be redeemed only in part, to the
portion of the aggregate liquidation preference of Capital Securities which
has been or is to be redeemed.
(c) If Securities are to be redeemed and the Trust gives a
Redemption/Distribution Notice, which notice may only be issued if the
Debentures are redeemed as set out in this Section 7.4 (which notice will be
irrevocable), then (A) while the Capital Securities are in book-entry only
form, by 12:00 noon, New York City time, on the redemption date, the Property
Trustee, to the extent funds are available, will deposit irrevocably with the
DTC (in the case of book-entry form Capital Securities) or its nominee (or
successor Clearing Agency or its nominee) funds sufficient to pay the
applicable Redemption Price with respect to the Capital Securities and will
give the DTC irrevocable instructions and authority to pay the Redemption
Price to the Holders of the Capital Securities, and (B) with respect to
Capital Securities issued in definitive form and Common Securities, the
Property Trustee, to the extent funds are available, will irrevocably deposit
with the Paying Agent 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. If a Redemption/Distribution Notice shall have been given and
funds deposited as required, if applicable, then immediately prior to the
close of business on the date of such deposit, or on the redemption date, as
applicable, distributions will cease to accrue on the Securities so called
for redemption and all rights of Holders of such Securities will cease,
except the right of the Holders of such Securities to receive the Redemption
Price, but without interest on such Redemption Price. If any date fixed for
redemption of Securities is not a Business Day, then payment of the
Redemption Price 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) 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 such
date fixed for redemption. If payment of the Redemption Price in respect of
any Securities is improperly withheld or refused and not paid either by the
Property Trustee or by the Sponsor as guarantor pursuant to the Guarantee,
Distributions on such Capital Securities will continue to accrue at the then
applicable rate from the original redemption date to the actual date of
payment, in which case the actual payment date will be considered the date
fixed for redemption for purposes of calculating the Redemption Price. For
these purposes, the applicable Redemption Price shall not include
Distributions which are being paid to Holders who were Holders on a relevant
record date. Upon satisfaction of the foregoing conditions, then immediately
prior to the close of business on the date of such deposit or payment, all
rights of Holders of such Securities so called for redemption will cease,
except the right of the Holders to receive the Redemption Price, but without
interest on such Redemption Price, and from and after the date fixed for
redemption, such Securities will not accrue distributions or bear interest.
(d) If less than all the outstanding Securities are to be redeemed on
a redemption date, then the aggregate liquidation amount of Securities to be
redeemed shall be allocated on a Pro Rata basis among the Common Securities and
the Capital Securities. 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
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Capital Securities not previously called for redemption, by such method
(including, without limitation, by lot) 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 registrar
in writing of the Capital Securities selected for redemption and, in the case
of any Capital Securities selected for partial redemption, the liquidation
amount thereof to be redeemed. For all purposes of this Declaration, unless
the context otherwise requires, all provisions relating to the redemption of
Capital Securities shall relate, in the case of any Capital Securities
redeemed or to be redeemed only in part, to the portion of the liquidation
amount of Capital Securities that has been or is to be redeemed.
(e) Subject to the foregoing and applicable law (including, without
limitation, United States federal securities laws), the Debenture Issuer 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.
Section 7.5 Voting Rights of Capital Securities.
(a) Except as provided under this Article VII and as otherwise
required by the Business Trust Act, the Trust Indenture Act and other applicable
law, the Holders of the Capital Securities will have no voting rights.
(b) Subject to the requirement of the Property Trustee obtaining a tax
opinion in certain circumstances set forth in Section 7.5(d) below, the Holders
of a Majority in 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 Property Trustee, or direct to the exercise of any trust or
power conferred upon the Property Trustee under the Declaration, including the
right to direct the Property Trustee, as Holder of the Debentures, to (i)
exercise the remedies available to it under the Indenture as a Holder of the
Debentures or (ii) consent to any amendment or modification of the Indenture or
the Debentures where such consent shall be required; provided, however, that
where a consent or action under the Indenture would require the consent or act
of the Holders of more than a majority of the aggregate liquidation amount of
Debentures affected thereby, only the Holders of the percentage of the aggregate
stated liquidation amount of the Capital Securities which is at least equal to
the percentage required under the Indenture may direct the Property Trustee to
give such consent to take such action.
(c) If the Property Trustee fails to enforce its rights under the
Debentures after a Holder of record of Capital Securities has made a written
request, such Holder of record of Capital Securities may, to the fullest extent
permitted by law, directly institute a legal proceeding directly against the
Debenture Issuer to enforce the Property Trustee's rights under the Indenture
without first instituting any legal proceeding against the Property Trustee or
any other Person. Notwithstanding the foregoing, if a Trust Enforcement Event
has occurred and is continuing and such event is attributable to the failure of
the Debenture Issuer to pay interest,
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principal or other required payments on the Debentures on the date such
interest, principal or other payment is otherwise payable, then a Holder of
Capital Securities may, on or after the respective due dates specified in the
Debentures directly institute a proceeding against the Debenture Issuer for
enforcement of payment on Debentures having a principal amount equal to the
aggregate liquidation amount of Capital Securities held by such Holder (a
"Direct Action). In connection with such Direct Action, the rights of the
Holders of the Common Securities will be subrogated to the rights of such
Holder of Capital Securities to the extent of any payment made by the
Debenture Issuer to such Holder of Capital Securities in such Direct Action.
Except as provided otherwise in this Section 7.5(c), the Holders of Capital
Securities will not be able to exercise directly any other remedy available
to the holders of Debentures.
(d) The Property Trustee shall notify all Holders of the Capital
Securities of any notice of any Indenture Event of Default received from the
Debenture Issuer with respect to the Debentures. Such notice shall state that
such Indenture Event of Default also constitutes a Trust Enforcement Event.
Except with respect to directing the time, method, and place of conducting a
proceeding for a remedy, the Property Trustee shall be under no obligation to
take any of the actions described in clause 7.5(b)(i) and (ii) above unless the
Property Trustee has obtained an opinion of independent tax counsel to the
effect that taking such action will not cause the Trust to be classified for
United States federal income tax purposes as other than a grantor trust.
(e) In the event the consent of the Property Trustee, as the Holder of
the Debentures, is required under the Indenture with respect to any amendment or
modification of the Indenture, the Property Trustee shall request the direction
of the Holders with respect to such amendment or modification and shall vote
with respect to such amendment or modification as directed by a Majority in
Liquidation Amount of the Securities voting together as a single class;
provided, however, that where a consent under the Indenture would require the
consent of the Holders of more than a majority of the aggregate principal amount
of the Debentures, the Property Trustee may only give such consent at the
direction of the Holders of at least the same proportion in aggregate stated
liquidation amount of the Securities. The Property Trustee shall not take any
such action in accordance with the directions of the Holders unless the Property
Trustee has obtained an opinion of tax counsel to the effect that, as a result
of such action, the Trust will not be classified as other than a grantor trust
for United States federal income tax purposes.
(f) A waiver of an Indenture Event of Default with respect to the
Debentures will constitute a waiver of the corresponding Trust Enforcement
Event.
(g) Any required approval or direction of Holders of Capital
Securities may be given at a separate meeting of Holders of Capital Securities
convened for such purpose, at a meeting of all of the Holders or pursuant to
written consent. The Regular Trustees will cause a 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 mailed to
each Holder of record of Capital Securities. Each such notice will include a
statement setting forth the following information: (i) the date of such meeting
or the date by which such action is to be taken; (ii) a description of any
resolution proposed for adoption at such meeting on
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which such Holders are entitled to vote or of such matter upon which written
consent is sought; and (iii) instructions for the delivery of proxies or
consents.
(h) No vote or consent of the Holders of Capital Securities will be
required for the Trust to redeem and cancel Capital Securities or distribute
Debentures in accordance with the Declaration.
(i) Notwithstanding that Holders of Capital Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Securities that are owned at such time by the Debenture Issuer, the Trustees or
any Person directly or indirectly controlled by, or under direct or indirect
common control with, the Debenture Issuer or any Trustees, shall not be entitled
to vote or consent and shall, for purposes of such vote or consent, be treated
as if such Securities were not outstanding, provided, however that Persons
otherwise eligible to vote to whom the Debenture Issuer or any of its
subsidiaries have pledged Capital Securities may vote or consent with respect to
such pledged Capital Securities under any of the circumstances described herein.
(j) Holders of the Capital Securities will have no rights to appoint
or remove the Trustees, who may be appointed, removed or replaced solely by the
Sponsor, as the Holder of all of the Common Securities.
Section 7.6 Voting Rights of Common Securities.
(a) Except as provided under this Section 7.6 or as otherwise required
by the Business Trust Act, the Trust Indenture Act or other applicable law or
provided by the Declaration, the Holders of the Common Securities will have no
voting rights.
(b) The Holders of the Common Securities are entitled, in accordance
with Article V of the Declaration, to vote to appoint, remove or replace any
Trustee or to increase or decrease the number of Trustees.
(c) Subject to Section 2.6 of the Declaration and only after all Trust
Enforcement Events with respect to the Capital Securities have been cured,
waived, or otherwise eliminated and subject to the requirement of the Property
Trustee obtaining a tax opinion in certain circumstances set forth in this
paragraph (c), the Holders of a Majority in Liquidation Amount of the Common
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee, or direct the
exercise of any trust or power conferred upon the Property Trustee under the
Declaration, including the right to direct the Property Trustee, as Holder of
the Debentures, to (i) exercise the remedies available to it under the Indenture
as a Holder of the Debentures, or (ii) consent to any amendment or modification
of the Indenture or the Debentures where such consent shall be required;
provided, however, that where a consent or action under the Indenture would
require the consent or act of the Holders of more than a majority of the
aggregate liquidation amount of Debentures affected thereby, only the Holders of
the percentage of the aggregate stated liquidation amount of the Common
Securities which is at least equal to the percentage required under the
Indenture may direct the Property Trustee to
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have such consent or take such action. Except with respect to directing the
time, method, and place of conducting a proceeding for a remedy, the Property
Trustee shall be under no obligation to take any of the actions described in
clause 7.6(c)(i) and (ii) above unless the Property Trustee has obtained an
opinion of independent tax counsel to the effect that, as a result of such
action, for United States federal income tax purposes the Trust will not fail
to be classified as a grantor trust.
(d) If the Property Trustee fails to enforce its rights under the
Debentures after a Holder of record of Common Securities has made a written
request, such Holder of record of Common Securities may, to the fullest extent
permitted by law, directly institute a legal proceeding directly against the
Debenture Issuer to enforce the Property Trustee's rights under the Debentures
without first instituting any legal proceeding against the Property Trustee or
any other Person.
(e) A waiver of an Indenture Event of Default with respect to the
Debentures will constitute a waiver of the corresponding Trust Enforcement
Event.
(f) Any required approval or direction of Holders of Common
Securities may be given at a separate meeting of Holders of Common Securities
convened for such purpose, at a meeting of all of the Holders or pursuant to
written consent. The Regular Trustees will cause a notice of any meeting at
which Holders of Common Securities are entitled to vote, or of any matter on
which action by written consent of such Holders is to be taken, to be mailed
to each Holder of record of Common Securities. Each such notice will include
a statement setting forth the following information: (i) the date of such
meeting or the date by which such action is to be taken; (ii) a description
of any resolution proposed for adoption at such meeting on which such Holders
are entitled to vote or of such matter upon which written consent is sought;
and (iii) instructions for the delivery of proxies or consents.
(g) No vote or consent of the Holders of the Common Securities will be
required for the Trust to redeem and cancel Common Securities or to distribute
Debentures in accordance with the Declaration and the terms of the Securities.
Section 7.7 Paying Agent.
In the event that the Capital Securities are not in book-entry only
form, the Trust shall maintain in the Borough of Manhattan, City of New York,
State of New York, an office or agency where the Capital Securities may be
presented for payment ("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 Sponsor. The term "Paying Agent"
includes any additional paying agent. The Trust may change any Paying Agent
without prior notice to the Holders. The Trust shall notify the Property
Trustee of the name and address of any Paying Agent not a party to this
Declaration. If the Trust fails to appoint or maintain another entity as Paying
Agent, the Property Trustee shall act as such. The Paying Agent shall be
permitted to resign as Paying Agent upon 30 days' written notice to the Property
Trustee and the Sponsor. 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
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bank or trust company acceptable to the Regular Trustees and the Sponsor)
to act as Paying Agent. The Trust or any of its Affiliates may act as Paying
Agent.
Section 7.8 Transfer of Securities.
(a) Securities may only be transferred, in whole or in part, in
accordance with the terms and conditions set forth in this Declaration and in
the terms of the Securities. To the fullest extent permitted by law, any
transfer or purported transfer of any Security not made in accordance with this
Declaration shall be null and void.
(b) Subject to this Article 7, Capital Securities shall be freely
transferable. The Common Securities are not transferable.
(c) The Trust shall not be required (i) to register or cause to be
registered the transfer or exchange of 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.
Section 7.9 Transfer and Exchange of Certificates.
The Regular Trustees shall provide for the registration of
Certificates and of transfers or exchanges of Certificates, which will be
effected without charge but only upon payment (with such indemnity as the
Regular Trustees may require) in respect of any tax or other government charges
that may be imposed in relation to it. Upon surrender for registration of
transfer of any Certificate, the Regular Trustees shall cause one or more new
Certificates to be issued in the name of the designated transferee or
transferees. Upon surrender for exchange of any Certificate, the Regular
Trustees shall cause one or more new Certificates in the same aggregate
liquidation amount as the Certificate surrendered for exchange to be issued in
the name of the Holder of the Certificate so surrendered. Every Certificate
surrendered for registration of transfer or for exchange shall be accompanied by
a written instrument of transfer in form satisfactory to the Regular Trustees
duly executed by the Holder or such Holder's attorney duly authorized in
writing. Each Certificate surrendered for registration of transfer or for
exchange shall be canceled by the Regular Trustees. A transferee of a
Certificate shall be entitled to the rights and subject to the obligations of a
Holder hereunder upon the receipt by such transferee of a Certificate. By
acceptance of a Certificate, each transferee shall be deemed to have agreed to
be bound by this Declaration.
Section 7.10 Deemed Security Holders.
The Trustees may treat the Person in whose name any Certificate shall
be registered on the books and records of the Trust as the sole holder of such
Certificate and of the Securities represented by such Certificate for purposes
of receiving Distributions and for all other purposes whatsoever and,
accordingly, shall not be bound to recognize any equitable
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or other claim to or interest in such Certificate or in the Securities
represented by such Certificate on the part of any Person, whether or not the
Trust shall have actual or other notice thereof.
Section 7.11 Book Entry Interests.
The Capital Securities, the Capital Securities Certificates, on
original issuance, will be issued in the form of one or more fully registered,
global Capital Security Certificates (each a "Global Certificate"), to be
delivered to DTC, the initial Clearing Agency, by, or on behalf of, the Trust.
Such Global Certificates shall initially be registered on the books and records
of the Trust in the name of Cede & Co., the nominee of DTC, and no Capital
Security Beneficial Owner will receive a definitive Capital Security Certificate
representing such Capital Security Beneficial Owner's interests in such Global
Certificates, except as provided in Section 7.14. Unless and until definitive,
fully registered Capital Security Certificates (the "Definitive Capital Security
Certificates") have been issued to the Capital Security Beneficial Owners
pursuant to Section 7.14:
(a) the provisions of this Section 7.11 shall be in full force and
effect;
(b) the Trust and the Trustees shall be entitled to deal with the
Clearing Agency for all purposes of this Declaration (including the payment of
Distributions on the Global Certificates and receiving approvals, votes or
consents hereunder) as the Holder of the Capital Securities and the sole holder
of the Global Certificates and shall have no obligation to the Capital Security
Beneficial Owners;
(c) to the extent that the provisions of this Section 7.11 conflict
with any other provisions of this Declaration, the provisions of this Section
7.11 shall control; and
(d) the rights of the Capital Security Beneficial Owners shall be
exercised only through the Clearing Agency and shall be limited to those
established by law and agreements between such Capital Security Beneficial
Owners and the Clearing Agency and/or the Clearing Agency Participants.
Section 7.12 Notices to Clearing Agency.
Whenever a notice or other communication to the Capital Security
Holders is required under this Declaration, unless and until Definitive Capital
Security Certificates shall have been issued to the Capital Security Beneficial
Owners pursuant to Section 7.14, the Regular Trustees shall give all such
notices and communications specified herein to be given to the Capital Security
Holders to the Clearing Agency, and shall have no notice obligations to the
Capital Security Beneficial Owners.
Section 7.13 Appointment of Successor Clearing Agency.
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If any Clearing Agency elects to discontinue its services as
securities depositary with respect to the Capital Securities, the Regular
Trustees may, in their sole discretion, appoint a successor Clearing Agency with
respect to such Capital Securities.
Section 7.14 Definitive Capital Security Certificates.
If:
(a) a Clearing Agency elects to discontinue its services as
securities depositary with respect to the Capital Securities and a successor
Clearing Agency is not appointed within 90 days after such discontinuance
pursuant to Section 7.13; or
(b) the Regular Trustees elect after consultation with the Sponsor to
terminate the book entry system through the Clearing Agency with respect to the
Capital Securities,
then:
Definitive Capital Security Certificates shall be prepared by the
Regular Trustees on behalf of the Trust with respect to such Capital Securities;
and upon surrender of the Global Certificates by the Clearing Agency,
accompanied by registration instructions, the Regular Trustees shall cause
Definitive Capital Security Certificates to be delivered to the Capital Security
Beneficial Owners in accordance with the instructions of the Clearing Agency.
Neither the Trustees nor the Trust shall be liable for any delay in delivery of
such instructions and each of them may conclusively rely on, and shall be
protected in relying on, said instructions of the Clearing Agency. The
Definitive Capital Security Certificates shall be printed, lithographed or
engraved or may be produced in any other manner as is reasonably acceptable to
the Regular Trustees, as evidenced by their execution thereof, and may have such
letters, numbers or other marks of identification or designation and such
legends or endorsements as the Regular Trustees may deem appropriate, or as may
be required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which Capital
Securities may be listed, or to conform to usage.
Section 7.15 Mutilated, Destroyed, Lost or Stolen Certificates.
If:
(a) any mutilated Certificates should be surrendered to the Regular
Trustees, or if the Regular Trustees shall receive evidence to their
satisfaction of the destruction, loss or theft of any Certificate; and
(b) there shall be delivered to the Regular Trustees such security or
indemnity as may be required by them to keep each of them, the Sponsor and the
Trust harmless,
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then:
in the absence of notice that such Certificate shall have been
acquired by a bona fide purchaser, any Regular Trustee on behalf of the Trust
shall execute and deliver, in exchange for or in lieu of any such mutilated,
destroyed, lost or stolen Certificate, a new Certificate of like denomination.
In connection with the issuance of any new Certificate under this Section 7.15,
the Regular Trustees may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection therewith.
Any duplicate Certificate issued pursuant to this Section shall constitute
conclusive evidence of an ownership interest in the relevant Securities, as if
originally issued, whether or not the lost, stolen or destroyed Certificate
shall be found at any time.
ARTICLE 8
DISSOLUTION AND TERMINATION OF TRUST
Section 8.1 Dissolution and Termination of Trust.
(a) The Trust shall automatically dissolve upon the earliest of:
(i) the occurrence of a Bankruptcy Event in respect of, or the
dissolution or liquidation of, the Sponsor or the Holder of the Common
Securities;
(ii) the election of the Regular Trustees, following the
occurrence and continuation of a Special Event and subject to the
receipt of any necessary approvals by the Federal Reserve, pursuant to
which the Trust shall have been dissolved in accordance with the terms
of the Securities and this Declaration, and all of the Debentures
shall have been distributed to the Holders of Securities in exchange
for all of the Securities;
(iii) the redemption of all of the Capital Securities in
connection with the redemption of all of the Debentures; and
(iv) the entry of an order for dissolution of the Trust by a
court of competent jurisdiction.
(b) As soon as is practicable after the occurrence of an event
referred to in Section 8.1(a) and upon completion of the winding up of the
Trust, the Trustees shall terminate the Trust by filing a certificate of
cancellation with the Secretary of State of the State of Delaware.
(c) The provisions of Section 3.9 and Article 9 shall survive the
termination of the Trust.
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Section 8.2 Liquidation Distribution Upon Dissolution of the Trust.
(a) In the event of any voluntary or involuntary liquidation,
dissolution, winding-up or termination of the Trust (each a "Liquidation"), the
Holders of the Securities on the date of the Liquidation will be entitled to
receive, out of the assets of the Trust available for distribution to Holders
after paying or making reasonable provision to pay all claims and obligations of
the Trust in accordance with Section 3808(e) of the Business Trust Act,
distributions in cash or other immediately available funds in an amount equal to
the aggregate of the stated liquidation amount of $1,000 per Security plus
accrued and unpaid Distributions thereon to the date of payment (such amount
being the "Liquidation Distribution"), unless, in connection with such
Liquidation, after paying or making reasonable provision to pay all claims and
obligations of the Trust in accordance with Section 3808(e) of the Business
Trust Act, Debentures in an aggregate principal amount equal to the aggregate
stated liquidation amount of, with a distribution rate identical to the
distribution rate of, and accrued and unpaid distributions equal to accrued and
unpaid distributions on, such Securities shall be distributed on a Pro Rata
basis to the Holders of the Securities in exchange for such Securities. Upon
the exchange of the Securities for such Debentures, the Securities shall no
longer be deemed outstanding. Any Definitive Capital Security Certificates will
be deemed to represent 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 Debenture Issuer will issue to such Holder, and the Debenture
Trustee will authenticate, a certificate representing such Debentures. The
Property Trustee shall establish such procedures as it shall deem appropriate to
effect the distribution of Debentures in exchange for the Securities.
(b) If, upon any such Liquidation, the 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 Securities shall be paid on a Pro Rata basis. The Holders
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 preference over the Common Securities with regard to
such distributions.
ARTICLE 9
LIMITATION OF LIABILITY OF
HOLDERS, TRUSTEES OR OTHERS
Section 9.1 Liability.
(a) Except as expressly set forth in this Declaration, the Securities
Guarantee and the terms of the Securities, the Sponsor shall not be:
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(i) personally liable for the return of any portion of the
capital contributions (or any return thereon) of the
Holders, which shall be made solely from assets of the
Trust; and
(ii) required to pay to the Trust or to any Holder any
deficit upon dissolution of the Trust or otherwise.
(b) The Holder of the Common Securities shall be liable for all of
the debts and obligations of the Trust (other than with respect to the
Securities) to the extent not satisfied out of the Trust's assets.
(c) Pursuant to Section 3803(a) of the Business Trust Act, the
Holders of the Capital Securities shall be entitled to the same limitation of
personal liability extended to stockholders of private corporations for profit
organized under the General Corporation Law of the State of Delaware.
Section 9.2 Exculpation.
(a) No Indemnified Person shall be liable, responsible or accountable
in damages or otherwise to the Trust or any Covered Person for any loss, damage
or claim incurred by reason of any act or omission performed or omitted by such
Indemnified Person in good faith on behalf of the Trust and in a manner such
Indemnified Person reasonably believed to be within the scope of the authority
conferred on such Indemnified Person by this Declaration or by law, except that
an Indemnified Person shall be liable for any such loss, damage or claim
incurred by reason of such Indemnified Person's gross negligence or willful
misconduct with respect to such acts or omissions; provided that with respect to
the Property Trustee, such Trustee shall be liable for any such loss, damage or
claim incurred by reason of such Trustee's negligent action or negligent failure
to act with respect to such acts or omissions.
(b) An Indemnified Person shall be fully protected in relying in good
faith upon the records of the Trust and upon such information, opinions, reports
or statements presented to the Trust by any Person as to matters the Indemnified
Person reasonably believes are within such other Person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Trust, including information, opinions, reports or statements as to the value
and amount of the assets, liabilities, profits, losses or any other facts
pertinent to the existence and amount of assets from which Distributions to
Holders might properly be paid.
Section 9.3 Fiduciary Duty.
(a) To the extent that, at law or in equity, an Indemnified Person
has duties (including fiduciary duties) and liabilities relating thereto to the
Trust or to any other Covered Person, an Indemnified Person acting under this
Declaration shall not be liable to the Trust or to an other Covered Person for
its good faith reliance on the provisions of this Declaration. The provisions
of this Declaration, to the extent that they restrict the duties and liabilities
of
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an Indemnified Person otherwise existing at law or in equity (other than the
duties imposed on the Property Trustee under the Trust Indenture Act), are
agreed by the parties hereto to replace such other duties and liabilities of
such Indemnified Person.
(b) Unless otherwise expressly provided herein:
(i) whenever a conflict of interest exists or arises
between any Covered Person and any Indemnified Person;
or
(ii) whenever this Declaration or any other agreement
contemplated herein provides that an Indemnified Person
shall act in a manner that is, or provides terms that
are, fair and reasonable to the Trust or any Holder,
the Indemnified Person shall resolve such conflict of interest, take such action
or provide such terms, considering in each case the relative interest of each
party (including its own interest) to such conflict, agreement, transaction or
situation and the benefits and burdens relating to such interests, any customary
or accepted industry practices and any applicable generally accepted accounting
practices or principles. In the absence of bad faith by the Indemnified Person,
the resolution, action or term so made, taken or provided by the Indemnified
Person shall not constitute a breach of this Declaration or any other agreement
contemplated herein or of any duty or obligation of the Indemnified Person at
law or in equity or otherwise.
(c) Whenever in this Declaration an Indemnified Person is permitted
or required to make a decision:
(i) in its "discretion" or under a grant of similar
authority, the Indemnified Person shall be entitled to
consider such interests and factors as it desires,
including its own interests, and shall have no duty or
obligation to give any consideration to any interest of
or factors affecting the Trust or any other Person; or
(ii) in its "good faith" or under another express standard,
the Indemnified Person shall act under such express
standard and shall not be subject to any other or
different standard imposed by this Declaration or by
applicable law.
Section 9.4 Indemnification.
(a)(i) Pursuant to Section 1009 of the Indenture, the Debenture Issuer
shall indemnify, to the full extent permitted by law, any Debenture Issuer
Indemnified Person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Trust) by reason of the fact that he is or was a Debenture Issuer
Indemnified Person against expenses (including reasonable attorneys' fees and
expenses), judgments, fines and amounts paid in settlement with the Debenture
Issuer's prior
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written consent actually and reasonably incurred by him in connection with such
action, suit or proceeding 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 Trust,
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the Debenture Issuer Indemnified Person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Trust, and, with respect to any criminal action or proceeding,
had reasonable cause to believe that his conduct was unlawful.
(ii) The Debenture Issuer shall indemnify, to the full extent
permitted by law, any Debenture Issuer Indemnified Person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Trust to procure a judgment in its
favor by reason of the fact that he is or was a Debenture Issuer Indemnified
Person against expenses (including reasonable attorneys' fees and expenses)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit 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 Trust
and except that no such indemnification shall be made in respect of any claim,
issue or matter as to which such Debenture Issuer Indemnified Person shall have
been adjudged to be liable to the Trust unless and only to the extent that the
Court of Chancery of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such Court
of Chancery or such other court shall deem proper.
(iii) Any indemnification under paragraphs (i) and (ii) of this
Section 9.4(a) (unless ordered by a court) shall be made by the Debenture Issuer
only as authorized in the specific case upon a determination that
indemnification of the Debenture Issuer Indemnified Person is proper in the
circumstances because he has met the applicable standard of conduct set forth in
paragraphs (i) and (ii). Such determination shall be made (1) by the Regular
Trustees by a majority vote of a quorum consisting of such Regular Trustees who
were not parties to such action, suit or proceeding, (2) if such a quorum is not
obtainable, or, even if obtainable, if a quorum of disinterested Regular
Trustees so directs, by independent legal counsel in a written opinion, or (3)
by the Common Security Holder of the Trust.
(iv) Expenses (including attorneys' fees) incurred by a Debenture
Issuer Indemnified Person in defending a civil, criminal, administrative or
investigative action, suit or proceeding referred to in paragraphs (i) and (ii)
of this Section 9.4(a) shall be paid by the Debenture Issuer in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Debenture Issuer Indemnified Person to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Debenture Issuer as authorized in this Section 9.4(a).
Notwithstanding the foregoing, no advance shall be made by the Debenture Issuer
if a determination is reasonably and promptly made (i) by the Regular Trustees
by a majority vote of a quorum of disinterested Regular Trustees, (ii) if such a
quorum is not obtainable, or, even if obtainable, if a quorum
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of disinterested Regular Trustees so directs, by independent legal counsel in a
written opinion or (iii) the Common Security Holder of the Trust, that, based
upon the facts known to the Regular Trustees, counsel or the Common Security
Holder at the time such determination is made, such Debenture Issuer Indemnified
Person acted in bad faith or in a manner that such Person did not believe to be
in or not opposed to the best interests of the Trust, or, with respect to any
criminal proceeding, that such Debenture Issuer Indemnified Person believed or
had reasonable cause to believe his conduct was unlawful. In no event shall any
advance be made in instances where the Regular Trustees, independent legal
counsel or Common Security Holder reasonably determine that such Person
deliberately breached his duty to the Trust or its Common or Capital Security
Holders.
(v) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other paragraphs of this Section 9.4(a) shall not be
deemed exclusive of any other rights to which those seeking indemnification and
advancement of expenses may be entitled under any agreement, vote of
stockholders or disinterested directors of the Debenture Issuer or Capital
Security Holders of the Trust or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office. All
rights to indemnification under this Section 9.4(a) shall be deemed to be
provided by a contract between the Debenture Issuer and each Debenture Issuer
Indemnified Person who serves in such capacity at any time while this Section
9.4(a) is in effect. Any repeal or modification of this Section 9.4(a) shall
not affect any rights or obligations then existing.
(vi) The Debenture Issuer or the Trust may purchase and maintain
insurance on behalf of any Person who is or was a Debenture Issuer Indemnified
Person 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
Debenture Issuer would have the power to indemnify him against such liability
under the provisions of this Section 9.4(a).
(vii) For purposes of this Section 9.4(a), references to "the Trust"
shall include, in addition to the resulting or surviving entity, any constituent
entity (including any constituent of a constituent) absorbed in a consolidation
or merger, so that any Person who is or was a director, trustee, officer or
employee of such constituent entity, or is or was serving at the request of such
constituent entity as a director, trustee, officer, employee or agent of another
entity, shall stand in the same position under the provisions of this Section
9.4(a) with respect to the resulting or surviving entity as he would have with
respect to such constituent entity if its separate existence had continued.
(viii) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section 9.4(a) shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a Debenture
Issuer Indemnified Person and shall inure to the benefit of the heirs, executors
and administrators of such a person. The obligation to indemnify as set forth
in this Section 9.4(a) shall survive the satisfaction and discharge of this
Declaration.
(b) Pursuant to Section 1009 of the Indenture, the Debenture Issuer
agrees to indemnify the (i) Property Trustee, (ii) the Delaware Trustee, (iii)
an Affiliate of the
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<PAGE>
Property Trustee and the Delaware Trustee, and (iv) any officers, directors,
shareholders, members, partners, employees, representatives, custodians,
nominees or agents of the Property Trustee and the Delaware Trustee (each of the
Persons in (i) through (iv) being referred to as a "Fiduciary Indemnified
Person") for, and to hold each Fiduciary Indemnified Person harmless against,
any loss, liability or expense incurred without negligence or bad faith or
willful misconduct on its part, arising out of or in connection with the
acceptance or administration of the trust or trusts hereunder, including the
costs and expenses (including reasonable legal fees and expenses) of defending
itself against or investigating any claim or liability in connection with the
exercise or performance of any of its powers or duties hereunder. The
obligation to indemnify as set forth in this Section 9.4(b) shall survive the
satisfaction and discharge of this Declaration.
Section 9.5 Outside Businesses.
Any Covered Person, the Sponsor, the Delaware Trustee and the Property
Trustee (subject to Section 6.3(c)) may engage in or possess an interest in
other business ventures of any nature or description, independently or with
others, similar or dissimilar to the activities of the Trust, and the Trust and
the Holders shall have no rights by virtue of this Declaration in and to such
independent ventures or the income or profits derived therefrom, and the pursuit
of any such venture, even if competitive with the activities of the Trust, shall
not be deemed wrongful or improper. No Covered Person, the Sponsor, the
Delaware Trustee or the Property Trustee shall be obligated to present any
particular investment or other opportunity to the Trust even if such opportunity
is of a character that, if presented to the Trust, could be taken by the Trust,
and any Covered Person, the Sponsor, the Delaware Trustee and the Property
Trustee shall have the right to take for its own account (individually or as a
partner or fiduciary) or to recommend to others any such particular investment
or other opportunity. Any Covered Person, the Delaware Trustee and the Property
Trustee may engage or be interested in any financial or other transaction with
the Sponsor or any Affiliate of the Sponsor, or may act as depositary for,
trustee or agent for, or act on any committee or body of holders of, securities
or other obligations of the Sponsor or its Affiliates.
ARTICLE 10
ACCOUNTING
Section 10.1 Fiscal Year.
The fiscal year ("Fiscal Year") of the Trust shall be the calendar
year, or such other year as is required by the Code.
Section 10.2 Certain Accounting and Tax Matters.
(a) At all times during the existence of the Trust, the Regular
Trustees shall keep, or cause to be kept, full books of accounts, records and
supporting documents which
54
<PAGE>
shall reflect in reasonable detail each transaction of the Trust. The books of
account shall be maintained on the accrual method of accounting, in accordance
with generally accepted accounting principles, consistently applied. The books
of account and the records of the Trust shall be examined by and reported upon
as of the end of each Fiscal Year of the Trust by a firm of independent
certified public accountants selected by the Regular Trustees.
(b) The Regular Trustees shall cause to be duly prepared and
delivered to each of the Holders, an annual United States federal income tax
information statement, required by the Code, containing such information with
regard to the Securities held by each Holder as is required by the Code and the
Treasury Regulations. Notwithstanding any right under the Code to deliver any
such statement at a later date, the Regular Trustees shall endeavor to deliver
all such statements within 30 days after the end of each Fiscal Year of the
Trust.
(c) The Regular Trustees shall cause to be duly prepared and filed
with the appropriate taxing authority, an annual United States federal income
tax return, on a Form 1041 or such other form required by United States federal
income tax law, and any other annual income tax returns required to be filed by
the Regular Trustees on behalf of the Trust with any state or local taxing
authority.
Section 10.3 Banking.
The Trust shall maintain one or more bank accounts in the name and for
the sole benefit of the Trust; provided, however, that all payments of funds in
respect of the Debentures held by the Property Trustee shall be made directly to
the Property Account and no other funds of the Trust shall be deposited in the
Property Account. The sole signatories for such accounts shall be designated by
the Regular Trustees; provided, however, that the Property Trustee shall
designate the signatories for the Property Account.
Section 10.4 Withholding.
The Trust and the Regular Trustees shall comply with all withholding
requirements under United States federal, state and local law. The Trust shall
request, and the Holders shall provide to the Trust, such forms or certificates
as are necessary to establish an exemption from withholding with respect to each
Holder, and any representations and forms as shall reasonably be requested by
the Trust to assist it in determining the extent of, and in fulfilling, its
withholding obligations. The Regular Trustees shall file required forms with
applicable jurisdictions and, unless an exemption from withholding is properly
established by a Holder, shall remit amounts withheld with respect to the Holder
to applicable jurisdictions. To the extent that the Trust is required to
withhold and pay over any amounts to any authority with respect to distributions
or allocations to any Holder, the amount withheld shall be deemed to be a
distribution in the amount of the withholding to the Holder. In the event of
any claimed over withholding, Holders shall be limited to an action against the
applicable jurisdiction. If the amount required to be withheld was not withheld
from actual Distributions made, the Trust may reduce subsequent Distributions by
the amount of such withholding.
55
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ARTICLE 11
AMENDMENTS AND MEETINGS
Section 11.1 Amendments.
(a) Except as otherwise provided in this Declaration, this
Declaration may only be amended by a written instrument approved and executed by
(i) the Regular Trustees (or, if there are more than two Regular Trustees, a
majority of the Regular Trustees) and (ii) by the Property Trustee if the
amendment affects the rights, powers, duties, obligations or immunities of the
Property Trustee; and (iii) by the Delaware Trustee if the amendment affects the
rights, powers, duties, obligations or immunities of the Delaware Trustee.
(b) No amendment shall be made, and any such purported amendment
shall be void and ineffective:
(i) unless, in the case of any proposed amendment, the
Property Trustee shall have first received an Officers'
Certificate from each of the Trust and the Sponsor that
such amendment is permitted by, and conforms to, the
terms of this Declaration;
(ii) unless, in the case of any proposed amendment which
affects the rights, powers, duties, obligations or
immunities of the Property Trustee, the Property
Trustee shall have first received:
a. an Officers' Certificate from each of the Trust and the
Sponsor that such amendment is permitted by, and
conforms to, the terms of this Declaration (including
the terms of the Securities); and
b. an opinion of counsel (who may be counsel to the
Sponsor or the Trust) that such amendment is permitted
by, and conforms to, the terms of this Declaration
(including the terms of the Securities); and
(iii) to the extent the result of such amendment would be to:
a. cause the Trust to be classified other than as a
grantor trust for United States federal income tax
purposes;
b. reduce or otherwise adversely affect the powers of the
Property Trustee in contravention of the Trust
Indenture Act; or
56
<PAGE>
c. cause the Trust to be deemed to be an Investment
Company required to be registered under the Investment
Company Act.
(c) Except as provided in Section 11.1(d) hereof, any provision of
this Declaration may be amended by the Trustees and the Sponsor with (i) the
consent of the Holders representing not less than a Majority in Liquidation
Amount of the Securities outstanding 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 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.
(d) In addition to and not withstanding any other provision in this
Declaration, without the consent of each affected Holder, this Declaration may
not be amended to (i) change the amount or timing of any Distribution on the
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Securities as of a specified date or (ii) restrict
the right of a Holder to institute suit for the enforcement of any such payment
on or after such date.
(e) This Section 11.1 shall not be amended without the consent of all
of the Holders.
(f) Article 4 shall not be amended without the consent of the Holders
of a Majority in Liquidation Amount of the Common Securities.
(g) The rights of the Holders of the Common Securities under Article
5 to increase or decrease the number of, and appoint and remove Trustees shall
not be amended without the consent of the Holders of a Majority in Liquidation
Amount of the Common Securities.
(h) Notwithstanding Sections 11.1(c) and 11.1(d), this Declaration
may be amended without the consent of the Holders of the Securities to:
(i) cure any ambiguity;
(ii) correct or supplement any provision in this Declaration
that may be defective or inconsistent with any other
provision of this Declaration or to make any other
provisions with respect to matters or questions arising
under this Declaration that shall not be inconsistent
with the other provisions of this Declaration;
(iii) add to the covenants, restrictions or obligations of
the Sponsor; and
(iv) to modify, eliminate and add to any provision of this
Declaration, to such extent as shall be necessary to
ensure that
57
<PAGE>
the Trust will be classified as a grantor
trust for United States federal income tax purposes at
all times that any Securities are outstanding or to
ensure that the Trust will not be required to register
as an Investment Company, provided that in each such
case such modification, elimination or addition would
not adversely affect in any material respect the
rights, privileges or preferences of the Holders.
(i) The issuance of a Trustees' Authorization Certificate by the
Regular Trustees for purposes of establishing the terms and form of the
Securities as contemplated by Section 8.1 shall not be deemed an amendment of
this Declaration subject to the provisions of this Section 11.1.
Section 11.2 Meetings of the Holders; Action by Written Consent.
(a) Meetings of the Holders of any class of Securities may be called
at any time by the Regular Trustees (or as provided in the terms of the
Securities) to consider and act on any matter on which Holders of such class of
Securities are entitled to act under the terms of this Declaration or the rules
of any stock exchange on which the Capital Securities are listed or admitted for
trading. The Regular Trustees shall call a meeting of the Holders of such class
if directed to do so by the Holders of at least 10% in Liquidation Amount of
such class of Securities. Such direction shall be given by delivering to the
Regular Trustees one or more calls in a writing stating that the signing Holders
wish to call a meeting and indicating the general or specific purpose for which
the meeting is to be called. Any Holders calling a meeting shall specify in
writing the Certificates held by the Holders exercising the right to call a
meeting and only those Securities specified shall be counted for purposes of
determining whether the required percentage set forth in the second sentence of
this paragraph has been met.
(b) The following provisions shall apply to meetings of Holders:
(i) notice of any such meeting shall be given to all the
Holders having a right to vote thereat at least seven
days and not more than 60 days before the date of such
meeting. Whenever a vote, consent or approval of the
Holders is permitted or required under this Declaration
or the rules of any stock exchange on which the Capital
Securities are listed or admitted for trading, such
vote, consent or approval may be given at a meeting of
the Holders. Any action that may be taken at a meeting
of the Holders may be taken without a meeting if a
consent in writing setting forth the action so taken is
signed by the Holders owning not less than the minimum
amount of Securities in liquidation amount that would
be necessary to authorize or take such action at a
meeting at which all Holders having a right to vote
thereon were present and voting. Prompt notice of the
taking of action without a meeting shall be given to
the Holders entitled to vote who have
58
<PAGE>
not consented in writing. The Regular Trustees may
specify that any written ballot submitted to the
Holders for the purpose of taking any action without a
meeting shall be returned to the Trust within the time
specified by the Regular Trustees;
(ii) each Holder may authorize any Person to act for it by
proxy on all matters in which a Holder is entitled to
participate, including waiving notice of any meeting,
or voting or participating at a meeting. No proxy
shall be valid after the expiration of 11 months from
the date thereof unless otherwise provided in the
proxy. Every proxy shall be revocable at the pleasure
of the Holder executing such proxy. Except as
otherwise provided herein, all matters relating to the
giving, voting or validity of proxies shall be governed
by the General Corporation Law of the State of Delaware
relating to proxies, and judicial interpretations
thereunder, as if the Trust were a Delaware corporation
and the Holders were stockholders of a Delaware
corporation;
(iii) each meeting of the Holders shall be conducted by the
Regular Trustees or by such other Person that the
Regular Trustees may designate; and
(iv) unless the Business Trust Act, this Declaration, the
Trust Indenture Act or the listing rules of any stock
exchange on which the Capital Securities are then
listed for trading, otherwise provides, the Regular
Trustees, in their sole discretion, shall establish all
other provisions relating to meetings of Holders,
including notice of the time, place or purpose of any
meeting at which any matter is to be voted on by any
Holders, waiver of any such notice, action by consent
without a meeting, the establishment of a record date,
quorum requirements, voting in person or by proxy or
any other matter with respect to the exercise of any
such right to vote.
ARTICLE 12
REPRESENTATIONS OF PROPERTY TRUSTEE
AND DELAWARE TRUSTEE
Section 12.1 Representations and Warranties of the Property Trustee.
The Trustee that acts as initial Property Trustee represents and
warrants to the Trust and to the Sponsor at the date of this Declaration, and
each Successor Property Trustee represents and warrants to the Trust and the
Sponsor at the time of the Successor Property Trustee's acceptance of its
appointment as Property Trustee that:
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(a) the Property Trustee is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization, with trust power and authority to execute and
deliver, and to carry out and perform its obligations under the terms of, this
Declaration;
(b) the Property Trustee satisfies the requirements set forth in
Section 6.3(a);
(c) the execution, delivery and performance by the Property Trustee
of this Declaration has been duly authorized by all necessary corporate action
on the part of the Property Trustee. This Declaration has been duly executed
and delivered by the Property Trustee, and it constitutes a legal, valid and
binding obligation of the Property Trustee, enforceable against it in accordance
with its terms, subject to applicable bankruptcy, reorganization, moratorium,
insolvency and other similar laws affecting creditors' rights generally and to
general principles of equity and the discretion of the court (regardless of
whether the enforcement of such remedies is considered in a proceeding in equity
or at law);
(d) the execution, delivery and performance of this Declaration by
the Property Trustee does not conflict with or constitute a breach of the
articles of association or incorporation, as the case may be, or the by-laws (or
other similar organizational documents) of the Property Trustee; and
(e) no consent, approval or authorization of, or registration with or
notice to, any State or Federal banking authority is required for the execution,
delivery or performance by the Property Trustee of this Declaration.
Section 12.2 Representations and Warranties of the Delaware Trustee.
The Trustee that acts as initial Delaware Trustee represents and
warrants to the Trust and to the Sponsor at the date of this Declaration, and
each Successor Delaware Trustee represents and warrants to the Trust and the
Sponsor at the time of the Successor Delaware Trustee's acceptance of its
appointment as Delaware Trustee that:
(a) the Delaware Trustee satisfies the requirements set forth in
Section 6.2 and has the power and authority to execute and deliver, and to carry
out and perform its obligations under the terms of, this Declaration and, if it
is not a natural person, is duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization;
(b) the Delaware Trustee has been authorized to perform its
obligations under the Certificate of Trust and this Declaration. This
Declaration under Delaware law constitutes a legal, valid and binding obligation
of the Delaware Trustee, enforceable against it in accordance with its terms,
subject to applicable bankruptcy, reorganization, moratorium, insolvency and
other similar laws affecting creditors' rights generally and to general
principles of equity and the discretion of the court (regardless of whether the
enforcement of such remedies is considered in a proceeding in equity or at law);
and
60
<PAGE>
(c) no consent, approval or authorization of, or registration with or
notice to, any State or Federal banking authority is require for the execution,
delivery or performance by the Delaware Trustee of this Declaration.
ARTICLE 13
MISCELLANEOUS
Section 13.1 Notices.
All notices provided for in this Declaration shall be in writing, duly
signed by the party giving such notice, and shall be delivered, telecopied or
mailed by registered or certified mail, as follows:
(a) if given to the Trust, in care of the Regular Trustees at the
Trust's mailing address set forth below (or such other address as the Trust may
give notice of to the Property Trustee, the Delaware Trustee and the Holders of
the Securities):
Ocwen Financial Corporation
1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401
Att: President
(b) if given to the Delaware Trustee, at the mailing address set
forth below (or such other address as the Delaware Trustee may give notice of to
the Regular Trustees, the Property Trustee and the Holders of the Securities):
Chase Manhattan Bank Delaware
1201 Market Street, 9th Floor
Wilmington, Delaware 19801
(c) if given to the Property Trustee, at its Corporate Trust Office
(or such other address as the Property Trustee may give notice of to the Regular
Trustees, the Delaware Trustee and the Holders of the Securities).
(d) if given to the Holder of the Common Securities, at the mailing
address of the Sponsor set forth below (or such other address as the Holder of
the Common Securities may give notice of to the Property Trustee, the Delaware
Trustee and the Trust):
Ocwen Financial Corporation
1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401
Att: President
61
<PAGE>
(e) if given to any other Holder, at the address set forth on the
books and records of the Trust.
All such notices shall be deemed to have been given when received in person,
telecopied with receipt confirmed or mailed by first class mail, postage prepaid
except that if a notice or other document is refused delivery or cannot be
delivered because of a changed address of which no notice was given, such notice
or other document shall be deemed to have been delivered on the date of such
refusal or inability to deliver.
Section 13.2 Governing Law.
This Declaration and the rights of the parties hereunder shall be
governed by and interpreted in accordance with the laws of the State of
Delaware, without regard to conflict of laws principles.
Section 13.3 Intention of the Parties.
It is the intention of the parties hereto that the Trust be classified
for United States federal income tax purposes as a grantor trust. The
provisions of this Declaration shall be interpreted in a manner consistent with
such classification.
Section 13.4 Headings.
Headings contained in this Declaration are inserted for convenience of
reference only and do not affect the interpretation of this Declaration or any
provision hereof.
Section 13.5 Successors and Assigns.
Whenever in this Declaration any of the parties hereto is named or
referred to, the successors and assigns of such party shall be deemed to be
included, and all covenants and agreements in this Declaration by the Sponsor
and the Trustees shall bind and inure to the benefit of their respective
successors and assigns, whether so expressed.
Section 13.6 Partial Enforceability.
If any provision of this Declaration, or the application of such
provision to any Person or circumstance, shall be held invalid, the remainder of
this Declaration, or the application of such provision to Persons or
circumstances other than those to which it is held invalid, shall not be
affected thereby.
Section 13.7 Counterparts.
This Declaration may contain more than one counterpart of the
signature page and this Declaration may be executed by the affixing of the
signature of each of the Trustees to one of such counterpart signature pages.
All of such counterpart signature pages shall be
62
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read as though one, and they shall have the same force and effect as though
all of the signers had signed a single signature page.
63
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
OCWEN FINANCIAL CORPORATION,
as Sponsor and Debenture Issuer
By:__________________________________
Name:
Title:
THE CHASE MANHATTAN BANK,
as Property Trustee
By:__________________________________
Name:
Title:
CHASE MANHATTAN BANK
DELAWARE,
as Delaware Trustee
By:__________________________________
Name:
Title:
_____________________________________
William C. Erbey, as Regular Trustee
_____________________________________
John R. Erbey, as Regular Trustee
______________________________________
Christine A. Reich, as Regular Trustee
64
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EXHIBIT A
This Capital Security is a Global Certificate within the meaning of
the Declaration hereinafter referred to and is registered in the name of The
Depository Trust Company, a New York corporation (the "Depository"), or a
nominee of the Depository. This Capital Security is exchangeable for Capital
Securities registered in the name of a person other than the Depository or its
nominee only in the limited circumstances described in the Declaration and no
transfer of this Capital Security (other than a transfer of this Capital
Security as a whole by the Depository to a nominee of the Depository or by a
nominee of the Depository to the Depository or another nominee of the
Depository) may be registered except in limited circumstances.
Unless this Capital Security Certificate is presented by an authorized
representative of the Depository to Ocwen Capital Trust I or its agent for
registration of transfer, exchange or payment, and any Capital Security
Certificate issued is registered in the name of Cede & Co. or such other name as
registered by an authorized representative of the Depository (and any payment
hereon is made to Cede & Co. or to such other entity as is requested by an
authorized representative of the Depository), ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the
registered owner hereof, Cede & Co., has an interest herein.
Certificate No. 1 Number of Capital Securities: 125,000
CUSIP No._____
Certificate Evidencing Capital Securities
of
Ocwen Capital Trust I
____% Capital Securities
(liquidation amount $1,000 per Capital Security)
Ocwen Capital Trust I, a statutory business trust created under the
laws of the State of Delaware (the "Trust"), hereby certifies that Cede & Co.
(the "Holder") is the registered owner of 125,000 capital securities of the
Trust representing undivided beneficial ownership interests in the assets of the
Trust designated the ____% Capital Securities (liquidation amount $1000 per
Capital Security) (the "Capital Securities"). The Capital Securities are
transferable on the books and records of the Trust, in person or by a duly
authorized attorney, upon surrender of this certificate duly endorsed and in
proper form for transfer as provided in the Declaration (as defined below). The
designation, rights, privileges, restrictions, preferences and other terms and
provisions of the Capital Securities represented hereby are issued and shall in
all respects be subject to the provisions of the Amended and Restated
Declaration of Trust of the Trust, dated as of August __, 1997 (as the same may
be amended from time to time, the "Declaration"), among Ocwen Financial
Corporation, as Sponsor, William C. Erbey, John R. Erbey and Christine A. Reich,
as Regular Trustees, The Chase Manhattan Bank, as Property Trustee, Chase
Manhattan Bank Delaware, as Delaware Trustee and the holders, from time to time,
of undivided beneficial interests in the assets of the Trust. Capitalized terms
used herein but not defined shall have the meaning given them in the
Declaration. The Holder is entitled to the benefits of the Guarantee to the
extent
<PAGE>
described therein. The Sponsor will provide a copy of the Declaration, the
Guarantee and the Indenture to a Holder without charge upon written request
to the Sponsor at its principal place of business.
Upon receipt of this certificate, the Holder is bound by the
Declaration and is entitled to the benefits thereunder.
By acceptance, the Holder agrees to treat the Debentures as
indebtedness of the Sponsor for all United States tax purposes, and the Capital
Securities as evidence of undivided beneficial ownership interests in the
Debentures.
IN WITNESS WHEREOF, the Trust has executed this certificate this
___day of ___________, ____.
Ocwen Capital Trust I
By:_____________________________________
Name:
Title: Regular Trustee
This is one of the Securities referred to in the within mentioned
Trust Agreement.
Date of Authentication:
________ __, ____
_________________, as
Property Trustee
By: __________________________
Name:
Title:
3
<PAGE>
EXHIBIT B
THIS CERTIFICATE IS NOT TRANSFERABLE
Certificate No. 1 Number of Common Securities: 3,866
Certificate Evidencing Common Securities
of
Ocwen Capital Trust I
Common Securities
(liquidation amount $1,000 per Common Security)
Ocwen Capital Trust I, a statutory business trust created under the
laws of the State of Delaware (the "Trust"), hereby certifies that Ocwen
Financial Corporation (the "Holder") is the registered owner of common
securities of the Trust representing an undivided beneficial ownership
interest in the assets of the Trust designated the ____% Common Securities
(liquidation amount $1000 per Common Security) (the "Common Securities").
The Common Securities are not transferable and any attempted transfer thereof
shall be void. The designation, rights, privileges, restrictions,
preferences and other terms and provisions of the Common Securities
represented hereby are issued and shall in all respects be subject to the
provisions of the Amended and Restated Declaration of Trust of the Trust,
dated as of August __, 1997 (as the same may be amended from time to time,
the "Declaration"), among Ocwen Financial Corporation, as Sponsor, William C.
Erbey, John R. Erbey and Christine A. Reich, as Regular Trustees, The Chase
Manhattan Bank, as Property Trustee Chase Manhattan Bank Delaware, as
Delaware Trustee and the holders, from time to time, of undivided beneficial
interests in the assets of the Trust. The Holder is entitled to the benefits
of the Guarantee to the extent described therein. Capitalized terms used
herein but not defined shall have the meaning given them in the Declaration.
The Sponsor will provide a copy of the Declaration, the Guarantee and the
Indenture to a Holder without charge upon written request to the Sponsor at
its principal place of business.
Upon receipt of this certificate, the Holder is bound by the
Declaration and is entitled to the benefits thereunder.
By acceptance, the Holder agrees to treat the Debentures as
indebtedness of the Sponsor for all United States tax purposes, and the Common
Securities as evidence of an undivided beneficial ownership interest in the
Debentures.
IN WITNESS WHEREOF, the Trust has executed this certificate this ____
day of _______, ____.
Ocwen Capital Trust I
By:____________________________
Name:
<PAGE>
Title: Regular Trustee
<PAGE>
OCWEN FINANCIAL CORPORATION
TO
THE CHASE MANHATTAN BANK, Trustee
INDENTURE
Dated as of August __, 1997
____% Junior Subordinated Securities
<PAGE>
Sections 310 through 318 of the
Trust Indenture Act of 1939:
Trust Indenture Indenture
Act Section Section
Section 310(a)(1) ...........................................................609
(a)(2) ..................................................................609
(a)(3) .......................................................Not Applicable
(a)(4) .......................................................Not Applicable
(b) ................................................................608, 610
Section 311(a) ..............................................................613
(b) .....................................................................613
Section 312(a) ..............................................................701
(b) .................................................................7021(b)
(c) ..................................................................702(c)
Section 313(a) ...........................................................703(a)
(a)(4) ............................................................101, 1004
(b) ..................................................................703(a)
(c) ..................................................................703(a)
(d) ..................................................................703(b)
Section 314(a) ..............................................................704
(b) ..........................................................Not Applicable
(c)(1) ..................................................................102
(c)(2) ..................................................................102
(c)(3) .......................................................Not Applicable
(d) ..........................................................Not Applicable
(e) .....................................................................102
Section 315(a) ..............................................................601
(b) .....................................................................602
(c) .....................................................................601
(d) .....................................................................601
(e) .....................................................................514
Section 316(a) ..............................................................101
(a)(1)(A) ...............................................................502
(a)(1)(B) ...............................................................513
(a)(2) .......................................................Not Applicable
(b) .....................................................................508
(c) ..................................................................104(c)
Section 317(a)(1) ...........................................................503
(a)(2) ..................................................................504
(b) ....................................................................1003
Section 318(a) ..............................................................107
<PAGE>
TABLE OF CONTENTS
Pages
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL
APPLICATION.................................................................. 1
SECTION 101. Definitions.................................................... 1
Act...................................................................... 2
Adjusted Treasury Rate................................................... 2
Affiliate................................................................ 2
Bank..................................................................... 2
Board of Directors....................................................... 2
Board Resolution......................................................... 2
Business Day............................................................. 2
Capital Lease Obligation................................................. 3
Capital Securities....................................................... 3
Capital Stock............................................................ 3
Change in 1940 Act Law................................................... 3
Change of Control Event.................................................. 3
Closing Date............................................................. 4
Commission............................................................... 4
Common Securities........................................................ 4
Company.................................................................. 4
Company Request.......................................................... 4
Company Order............................................................ 4
Comparable Treasury Issue................................................ 4
Comparable Treasury Price................................................ 5
Consolidated Net Income (Loss)........................................... 5
Consolidated Tangible Net Worth.......................................... 5
Corporate Trust Office................................................... 5
Covenant Defeasance...................................................... 5
Creditor................................................................. 6
Declaration.............................................................. 6
Defaulted Interest....................................................... 6
Depositary............................................................... 6
Disinterested Director................................................... 6
Disqualified Capital Stock............................................... 6
Event of Default......................................................... 6
Exchange Act............................................................. 6
Existing Principal Stockholders.......................................... 6
Extension Period......................................................... 6
Fair Market Value........................................................ 6
Federal Reserve.......................................................... 7
Funded Indebtedness...................................................... 7
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Pages
GAAP..................................................................... 7
Guarantee................................................................ 7
Guaranteed Indebtedness.................................................. 7
Global Security.......................................................... 7
Holder................................................................... 7
Indebtedness............................................................. 7
Indenture................................................................ 8
Interest Payment Date.................................................... 8
Investment Company Event................................................. 8
Investment Grade Status.................................................. 9
Legal Defeasance......................................................... 9
Lien..................................................................... 9
Maturity................................................................. 9
Officers' Certificate.................................................... 9
Opinion of Counsel....................................................... 9
OTS...................................................................... 9
Outstanding.............................................................. 10
Paying Agent............................................................. 10
Person................................................................... 10
Predecessor Security..................................................... 10
Preferred Stock.......................................................... 10
Property Trustee......................................................... 10
Quotation Agent.......................................................... 10
Redemption Date.......................................................... 10
Redemption Price......................................................... 10
Reference Treasury Dealer................................................ 11
Reference Treasury Dealer Quotations..................................... 11
Regular Record Date...................................................... 11
Regular Trustee.......................................................... 11
Regulatory Capital Event................................................. 11
Remaining Life........................................................... 11
Responsible Officer...................................................... 11
Securities............................................................... 11
Securities Act........................................................... 11
Securitization Entity.................................................... 12
Security Register........................................................ 12
Security Registrar....................................................... 12
Senior Indebtedness...................................................... 12
Significant Subsidiary................................................... 12
Special Event............................................................ 12
Special Record Date...................................................... 13
Stated Maturity.......................................................... 13
Subsidiary............................................................... 13
Tax Event................................................................ 13
Treasury Rate............................................................ 13
Trust.................................................................... 14
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Pages
Trustee.................................................................. 14
Trust Indenture Act...................................................... 14
U.S. Government Obligations.............................................. 14
Vice President........................................................... 14
Voting Stock............................................................. 14
Wholly-Owned Subsidiary.................................................. 14
SECTION 102. Compliance Certificates and Opinions........................... 14
SECTION 103. Form of Documents Delivered to Trustee......................... 15
SECTION 104. Acts of Holders; Record Dates.................................. 15
SECTION 105. Notices, Etc. to Trustee and the Company....................... 16
SECTION 106. Notice to Holders; Waiver...................................... 17
SECTION 107. Conflict With Trust Indenture Act.............................. 17
SECTION 108. Effect of Headings and Table of Contents....................... 17
SECTION 109. Separability Clause............................................ 17
SECTION 110. Benefits of Indenture.......................................... 18
SECTION 111. GOVERNING LAW.................................................. 18
SECTION 112. Legal Holidays................................................. 18
SECTION 113. Execution in Counterparts...................................... 18
SECTION 114. Successors..................................................... 18
ARTICLE TWO
SECURITY FORMS............................................................... 19
SECTION 201. Forms Generally................................................ 19
SECTION 202. Form of Face of Security....................................... 19
SECTION 203. Form of Reverse of Security.................................... 22
SECTION 204. Form of Trustee's Certificate of Authentication................ 25
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Pages
ARTICLE THREE
THE SECURITIES............................................................... 25
SECTION 301. Title and Terms................................................ 25
SECTION 302. Denominations.................................................. 27
SECTION 303. Execution, Authentication, Delivery and Dating................. 27
SECTION 304. Temporary Securities........................................... 28
SECTION 305. Registration; Registration of Transfer and Exchange............ 28
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities............... 29
SECTION 307. Payment of Interest; Interest Rights Preserved................. 30
SECTION 308. Persons Deemed Owners.......................................... 31
SECTION 309. Cancellation................................................... 31
SECTION 310. Computation of Interest........................................ 31
SECTION 311. Right of Set-off............................................... 32
SECTION 312. CUSIP Numbers.................................................. 32
SECTION 313. Global Securities.............................................. 32
ARTICLE FOUR
SATISFACTION AND DISCHARGE; DEFEASANCE....................................... 34
SECTION 401. Satisfaction and Discharge of Indenture........................ 34
SECTION 402. Legal Defeasance............................................... 35
SECTION 403. Covenant Defeasance............................................ 36
SECTION 404. Conditions to Legal Defeasance or Covenant Defeasance.......... 36
SECTION 405. Application of Trust Money..................................... 37
SECTION 406. Indemnity for U.S. Government Obligations...................... 37
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Pages
ARTICLE FIVE
REMEDIES..................................................................... 38
SECTION 501. Events of Default.............................................. 38
SECTION 502. Acceleration of Maturity; Rescission and Annulment............. 39
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
Trustee................................................................. 39
SECTION 504. Trustee may File Proofs of Claim............................... 40
SECTION 505. Trustee may Enforce Claims Without Possession
of Securities........................................................... 40
SECTION 506. Application of Money Collected................................. 41
SECTION 507. Limitation on Suits............................................ 41
SECTION 508. Unconditional Right of Holders to Receive Principal,
Premium and Interest; Capital Security Holders' Rights.................. 42
SECTION 509. Restoration of Rights and Remedies............................. 42
SECTION 510. Rights and Remedies Cumulative................................. 42
SECTION 511. Delay or Omission not Waiver................................... 43
SECTION 512. Control by Holders............................................. 43
SECTION 513. Waiver of Past Defaults........................................ 43
SECTION 514. Undertaking for Costs.......................................... 44
SECTION 515. Waiver of Stay or Extension Laws............................... 44
ARTICLE SIX
TRUSTEE...................................................................... 44
SECTION 601. Certain Duties and Responsibilities............................ 44
SECTION 602. Notice of Defaults............................................. 45
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Pages
SECTION 603. Certain Rights of Trustee...................................... 45
SECTION 604. Not Responsible for Recitals or Issuance of Securities......... 46
SECTION 605. Trustee and Other Agents may Hold Securities................... 46
SECTION 606. Money Held in Trust............................................ 46
SECTION 607. Compensation; Reimbursement; and Indemnity..................... 46
SECTION 608. Disqualification; Conflicting Interests........................ 47
SECTION 609. Corporate Trustee Required; Eligibility........................ 47
SECTION 610. Resignation and Removal; Appointment of Successor.............. 48
SECTION 611. Acceptance of Appointment by Successor......................... 49
SECTION 612. Merger, Conversion, Consolidation or Succession to Business.... 49
SECTION 613. Preferential Collection of Claims Against Company.............. 50
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY............................ 50
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders...... 50
SECTION 702. Preservation of Information; Communications to Holders......... 50
SECTION 703. Reports by Trustee............................................. 51
SECTION 704. Reports by Company............................................. 51
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE......................... 51
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms........... 51
SECTION 802. Successor Person Substituted................................... 52
ARTICLE NINE
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Pages
SUPPLEMENTAL INDENTURES...................................................... 53
SECTION 901. Supplemental Indentures Without Consent of Holders............. 53
SECTION 902. Supplemental Indentures With Consent of Holders................ 53
SECTION 903. Execution of Supplemental Indentures........................... 54
SECTION 904. Effect of Supplemental Indentures.............................. 54
SECTION 905. Conformity With Trust Indenture Act............................ 55
SECTION 906. Reference in Securities to Supplemental Indentures............. 55
ARTICLE TEN
COVENANTS; REPRESENTATIONS AND WARRANTIES.................................... 55
SECTION 1001. Payment of Principal, Premium and Interest.................... 55
SECTION 1002. Maintenance of Office or Agency............................... 55
SECTION 1003. Money for Security Payments to be Held in Trust............... 56
SECTION 1004. Statements by Officers as to Default.......................... 57
SECTION 1005. Existence..................................................... 57
SECTION 1006. Maintenance of Properties..................................... 57
SECTION 1007. Payment of Taxes and Other Claims............................. 57
SECTION 1008. Waiver of Certain Covenants................................... 58
SECTION 1009. Payment of the Trust's Costs and Expenses..................... 58
SECTION 1010. Limitations on Indebtedness. ................................ 58
SECTION 1011. Restrictions on Issuance and Sale or Disposition of Capital
Stock of the Bank....................................................... 59
SECTION 1012. Limitation on Restricted Payments............................. 59
SECTION 1013. Limitations on Dividends and Other Payment Restrictions
Affecting Subsidiaries.................................................. 60
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Pages
SECTION 1014. Limitation on Transactions with Affiliates.................... 61
SECTION 1015. Limitation on Senior Subordinated Indebtedness................ 62
SECTION 1016. Offer to Purchase upon a Change of Control.................... 62
SECTION 1017. Effectiveness of Covenants.................................... 63
ARTICLE ELEVEN
SUBORDINATION OF SECURITIES...................................................63
SECTION 1101. Securities Subordinate to Senior Indebtedness................. 63
SECTION 1102. Default on Senior Indebtedness................................ 63
SECTION 1103. Prior Payment of Senior Indebtedness Upon Acceleration of
Securities.............................................................. 64
SECTION 1104. Liquidation; Dissolution; Bankruptcy.......................... 64
SECTION 1105. Subrogation................................................... 66
SECTION 1106. Trustee to Effect Subordination............................... 67
SECTION 1107. Notice by the Company......................................... 67
SECTION 1108. Rights of the Trustee; Holders of Senior Indebtedness......... 68
SECTION 1109. Subordination may not be Impaired............................. 68
ARTICLE TWELVE
REDEMPTION OF SECURITIES..................................................... 69
SECTION 1201. Optional Redemption; Conditions to Optional Redemption........ 69
SECTION 1202. Applicability of Article...................................... 70
SECTION 1203. Election to Redeem; Notice to Trustee......................... 70
SECTION 1204. Selection by Trustee of Securities to be Redeemed............. 70
SECTION 1205. Notice of Redemption.......................................... 71
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Pages
SECTION 1206. Deposit of Redemption Price................................... 71
SECTION 1207. Securities Payable on Redemption Date......................... 71
SECTION 1208. Securities Redeemed in Part................................... 72
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This INDENTURE is dated as of August __, 1997, between Ocwen Financial
Corporation, a corporation duly organized and existing under the laws of the
State of Florida (herein called the "Company"), having its principal office at
The Forum, Suite 1000, 1675 Palm Beach Lakes Blvd., West Palm Beach, Florida
33401, and The Chase Manhattan Bank, a New York State banking association, as
Trustee (herein called the "Trustee").
RECITALS
WHEREAS, for its lawful corporate purposes, the Company has duly
authorized the execution and delivery of this Indenture to provide for the
issuance of its __% Junior Subordinated Debentures due 2027 (the "Securities");
and
WHEREAS, Ocwen Capital Trust I (the "Trust") has offered to the public
$125,000,000 aggregate liquidation amount of its __% Capital Securities (the
"Capital Securities") representing undivided beneficial ownership interests in
the assets of the Trust and proposes to invest the proceeds from such offering
and the proceeds from the issuance of its Common Securities in $128,866,000
aggregate principal amount of the Securities; and
WHEREAS, to provide the terms and conditions upon which the Securities
are to be authenticated, issued and delivered, the Company has duly authorized
the execution of this Indenture; and
WHEREAS, all things necessary to make this Indenture a valid agreement
of the Company, in accordance with its terms, have been done;
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holder thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Securities, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. Definitions
For all purposes of this Indenture, except as expressly provided or
unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
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(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles;
(4) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;
(5) a reference to any Person shall include its successor and
assigns;
(6) a reference to any agreement or instrument shall mean such
agreement or instrument as supplemented, modified, amended or amended and
restated and in effect from time to time;
(7) a reference to any statute, law, rule or regulation, shall
include any amendments thereto applicable to the relevant Person, and any
successor statute, law, rule or regulation; and
(8) a reference to any particular rating category shall be deemed to
include any corresponding successor category, or any corresponding rating
category issued by a successor or subsequent rating agency.
"Act", when used with respect to any Holder, has the meaning specified
in Section 104.
"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.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person and any legal or beneficial owner, directly
or indirectly, of 20% or more of the Voting Stock of such specified Person.
Notwithstanding the foregoing, no Securitization Entity shall be deemed an
Affiliate of the Company.
"Bank" means Ocwen Federal Bank, FSB.
"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of that board as the context requires.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means any day other than a Saturday or Sunday or a day
on which banking institutions in The City of New York are authorized or required
by law or
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executive order to remain closed or a day on which the Corporate Trust Office
of the Trustee, or the principal office of the Property Trustee, under the
Declaration, is closed for business.
"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 this Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
"Capital Securities" has the meaning specified in the Recitals to this
instrument.
"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 in 1940 Act Law" has the meaning set forth in the definition
of Investment Company Event.
"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 Securities
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act as in effect on the date of this 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" (as defined in
Rules 13d-3 and 13d-5 of the Exchange Act as in effect on the date of this
Indenture) of more than 40% of the total voting power of all Voting Stock of the
surviving or transferee corporation of such transaction or series of
transactions;
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(c) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Company's Board of Directors,
or whose nomination for election by the Company's shareholders was approved
by a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority of the directors then in office;
(d) (1) the Company sells, transfers or otherwise disposes of any
shares of Capital Stock of any Significant Subsidiary (other than to the
Company or a Wholly-Owned Subsidiary), or
(2) any Significant Subsidiary (i) issues, sells or otherwise
disposes of more than 20% of the outstanding shares of its Capital Stock
(or securities convertible into or exercisable for more than 20% 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 Section 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.
"Closing Date" means August __, 1997.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act, or, if at any time
after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties at such time.
"Common Securities" means the common securities issued by the Trust.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman of the Board, its Vice
Chairman of the Board, a President or a Vice President, and by its Treasurer, an
Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to
the Trustee.
"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
4
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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.
"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 Trustee
obtains fewer than three such Reference Treasury Dealer Quotations, the average
of all such Quotations.
"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
means 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.
"Corporate Trust Office" means the principal office of the Trustee in
the City of New York, at which at any particular time its corporate trust
business shall be administered and which at the date of this Indenture is
located at 450 West 33rd Street, New York, New York 10001-2697, Attention:
Global Trust Services.
"Covenant Defeasance" has the meaning specified in Section 403.
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"Creditor" shall have the meaning set forth in Section 1009.
"Declaration" means the Amended and Restated Declaration of Trust
among the Company, as Sponsor, the Regular Trustees, the Trustee, as initial
Property Trustee and Chase Manhattan Bank Delaware, as initial Delaware Trustee,
dated as of August __, 1997.
"Defaulted Interest" has the meaning specified in Section 307.
"Depositary" means, with respect to Securities issuable in whole or in
part in the form of one or more Global Securities, a clearing agency registered
under the Exchange Act that is designated to act as Depositary for such
Securities.
"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.
"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 is 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 Securities; provided that only the
amount of such Capital Stock that is redeemable prior to the Stated Maturity of
principal of the Securities shall be deemed to be Disqualified Capital Stock.
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor legislation.
"Existing Principal Stockholders" means, individually or collectively,
William C. Erbey, Barry N. Wish and Harold D. Price and their respective
estates, spouses, heirs, ancestors, lineal descendants and legatees and legal
representatives of any of the foregoing and the trustee of any bona fide trust
of which one or more of the foregoing are the trustees or the majority
beneficiaries, and any entity of which any of the foregoing, individually or
collectively, beneficially owns more than 50% of the Voting Stock thereof.
"Extension Period" has the meaning specified in Section 301.
"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.
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"Federal Reserve" means the Board of Governors of the Federal Reserve
System.
"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.
"Guarantee" means the Guarantee Agreement, dated as of August __,
1997, executed by the Company and the Trustee, as initial Guarantee Trustee, for
the benefit of the Holders (as defined therein).
"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.
"Global Security" means a Security that evidences all or part of the
Securities and is authenticated and delivered to, and registered in the name of,
the Depositary for such Securities or a nominee thereof.
"Holder" means a Person in whose name a Security is registered in the
Security Register.
"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
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Person (even if the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), but excluding trade payables arising in the ordinary course of
business, (iv) all obligations under interest rate agreements of such Person,
(v) all Capital Lease Obligations of such Person, (vi) all indebtedness
referred to in clauses (i) through (v) above of other Persons and all
dividends payable by other Persons, the payment of which is secured by (or
for which the holder of such indebtedness has an existing right, contingent
or otherwise, to be secured by) any Lien, upon or with respect to property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the
payment of such indebtedness (the amount of such obligations being deemed to
be the lesser of the value of such property or asset or the amount of the
obligations so secured), (vii) all guarantees by such Person of Guaranteed
Indebtedness, (viii) all Disqualified Capital Stock (valued at the greater of
book value and voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends) of such Person, and (ix) any amendment,
supplement, modification, deferral, renewal, extension, refunding or
refinancing or any liability of the types referred to in clauses (i) through
(viii) above. For purposes hereof, (x) the "maximum fixed repurchase price"
of any Disqualified Capital Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Disqualified
Capital Stock as if such Disqualified Capital Stock were purchased on any
date on which indebtedness shall be required to be determined pursuant to
this 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.
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this instrument and any such supplemental indenture,
respectively.
"Interest Payment Date", when used with respect to any installment of
interest on a Security, means the date specified in such Security as the fixed
date on which an installment of interest with respect to the Securities is due
and payable.
"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,
which Change in 1940 Act Law becomes effective on or after the date of original
issuance of the Securities.
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"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 of "BBB-" or higher from Standard & Poor's Ratings Group or a
rating of "Baa3" or higher from Moody's Investors Service, Inc.
"Legal Defeasance" has the meaning specified in Section 402.
"Lien" means any mortgage, charge, pledge, lien (statutory or
otherwise), security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable, now
owned or hereafter acquired.
"Maturity", when used with respect to any Security, means the date on
which the principal of such Security becomes due and payable as therein or
herein provided, whether at the Stated Maturity (which may be extended as
therein or herein provided) or by declaration of acceleration, call for
redemption or otherwise.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, a Vice Chairman of the Board, the President or a Vice President, and
by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant
Secretary, of the Company, and delivered to the Trustee. One of the officers
signing an Officers' Certificate given pursuant to Section 1004 shall be the
principal executive, financial or accounting officer of the Company. Any
Officers' Certificate delivered with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(a) a statement that each officer signing the Officers' Certificate
has read the covenant or condition and the definitions relating thereto;
(b) a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers'
Certificate;
(c) a statement that each such officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such
officer to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(d) a statement as to whether, in the opinion of each such officer,
such condition or covenant has been complied with.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company (and who may be an employee of the Company), and who
shall be reasonably acceptable to the Trustee. An opinion of counsel may rely
on certificates as to matters of fact.
"OTS" means the Office of Thrift Supervision or any successor thereto.
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"Outstanding", when used with respect to Securities, means, as of the
date of determination, all Securities authenticated and delivered under this
Indenture, except: (i) Securities cancelled by the Trustee or delivered to the
Trustee for cancellation; (ii) Securities for whose payment or redemption money
in the necessary amount has been deposited with the Trustee or any Paying Agent
(other than the Company) in trust or set aside and segregated in trust by the
Company (if the Company shall act as its own Paying Agent) for the Holder of
such Securities; provided that, if such Securities are to be redeemed, notice of
such redemption has been duly given pursuant to this Indenture or provision
therefor satisfactory to the Trustee has been made; and (iii) Securities which
have been paid pursuant to Section 306, or in exchange or for in lieu of which
other Securities have been authenticated and delivered pursuant to this
Indenture, other than any such Securities in respect of which there shall have
been presented to the Trustee proof satisfactory to it that such Securities are
held by a bona fide purchaser in whose hands such Securities are valid
obligations of the Company.
"Paying Agent" means any person authorized by the Company to pay the
principal of or interest on any Securities on behalf of the Company.
"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.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any security
authenticated and delivered under Section 306 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Security shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Security.
"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.
"Property Trustee" has the meaning set forth in the Declaration.
"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 "Reference Treasury
Dealer"), the Company shall substitute therefor another Reference Treasury
Dealer; and (ii) any other Reference Treasury Dealer selected by the Trustee
after consultation with the Company.
"Redemption Date", when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
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"Reference Treasury Dealer" has the meaning set forth in the
definition of Quotation Agent.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any prepayment date, the average, as determined by
the 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 Trustee by such Reference Treasury Dealer at 5:00 p.m. New York
City time, on the third business day preceding such prepayment date.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the 15th day of the month prior to the relevant Interest Payment
Date.
"Regular Trustee" has the meaning set forth in the Declaration.
"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 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 Federal Reserve, as then in effect);
provided, however, that the distribution of the Securities 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.
"Remaining Life" has the meaning specified in Section 1201.
"Responsible Officer", when used with respect to the Trustee, means
the chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the chairman
of the trust committee, the president, any vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer, any trust officer
or assistant trust officer, the controller or any assistant controller or any
other officer of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and also means, with respect
to a particular corporate trust matter, any other officer to whom such matter is
referred because of his knowledge of and familiarity with the particular
subject.
"Securities" has the meaning specified in the Recitals to this
instrument.
"Securities Act" means the Securities Act of 1933, as amended.
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"Securitization Entity" means any pooling arrangement or entity formed
or originated for the purpose for holding, and/or issuing securities
representing interests in, one or more pools or 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.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 305.
"Senior Indebtedness" means, with respect to the Company, whether
recourse is to all or a portion of the assets of the Company and whether or not
contingent, (i) every obligation of such person for money borrowed, (ii) every
obligation of the Company evidenced by bonds, debentures, notes or other similar
instruments, including obligations incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of the
Company with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of the Company, (iv) every obligation of the
Company 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 the Company,
(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) 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, directly or indirectly, as obligor or otherwise;
provided that "Senior Indebtedness" shall not include (i) any obligations which,
by their terms, are expressly stated to rank pari passu in right of payment
with, or to not be superior in right of payment to, the Securities, (ii) any
Senior 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 amended, was without recourse to the Company, (iii) any Senior Indebtedness
of the Company to any of its subsidiaries, (iv) Senior Indebtedness to any
employee of the Company or (v) any Senior 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 of such financing entity of securities that are
similar to the Capital Securities.
"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.
"Special Event" means an Investment Company Event, a Regulatory
Capital Event or a Tax Event.
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"Special Record Date" for the payment of any Defaulted Interest means
a date fixed by the Trustee pursuant to Section 307.
"Stated Maturity", when used with respect to any Security or any
installment of interest thereon, means the date specified in such Security as
the date on which the principal, together with any accrued and unpaid interest,
of such Security or such installment of interest is due and payable (whether the
initial such date or, if pursuant to Section 301 the Company elects to extend
the Stated Maturity, such later date as is chosen by the Company pursuant to
Section 301).
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the 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.
"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 such proposed change
pronouncement or decision is announced on or after the date of 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 Securities, (ii) interest payable by the Company on
the Securities 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.
"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.
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"Trust" means Ocwen Capital Trust I, a statutory business trust
declared and established pursuant to the Delaware Business Trust Act by the
Declaration.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force at the date as of which this instrument was executed; provided, however,
that in the event the Trust Indenture Act of 1939 is amended after such date,
"Trust Indenture Act" means, to the extent required by any such amendment, the
Trust Indenture Act of 1939 as so amended.
"U.S. Government Obligations" has the meaning specified in Section
404.
"Vice President", when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president."
"Voting Stock" means Capital Stock of the class or classes of which
the holders have (i) in respect of a corporation, the general voting power under
ordinary circumstances to elect at least a majority of the board of directors,
managers or trustees of such corporation (irrespective of whether or not at the
time Capital Stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency) or (ii) in respect of a
partnership, the general voting power under ordinary circumstances to elect the
board of directors or other governing board of such partnership or of the Person
which is a general partner of such partnership.
"Wholly-Owned Subsidiary" means a Subsidiary all of the Capital Stock
of which (other than directors' qualifying shares) is owned by the Company or
another Wholly-Owned Subsidiary.
SECTION 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee such certificates and opinions as may be required under the Trust
Indenture Act. Each such certificate or opinion shall be given in the form of
an Officers' Certificate, if to be given by an officer of the Company, or an
Opinion of Counsel, if to be given by counsel, and shall comply with the
requirements of the Trust Indenture Act and any other requirement set forth in
this Indenture.
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SECTION 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or opinion of counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 104. Acts of Holders; Record Dates.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent
duly appointed in writing; and, except as herein otherwise expressly
provided, such action shall become effective when such instrument or
instruments are delivered to the Trustee at the address specified in Section
105 and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or
of a writing appointing any such agent shall be sufficient for any purpose of
this Indenture and (subject to Section 601) conclusive in favor of the
Trustee and the Company, if made in the manner provided in this Section.
Without limiting the generality of the foregoing, a Holder, including
a Depositary that is a Holder of a Global Security, may make, give or take by
proxy or proxies, duly appointed in writing, any request, demand, authorization,
direction, notice, consent, waiver or other action provided or permitted in this
Indenture to be made, given or taken by Holders, and a Depositary that is a
Holder of a Global Security may provide its proxy or proxies to the beneficial
owners of interest in any such Global Security.
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(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual
signing such instrument or writing acknowledged to him the execution thereof.
Where such execution is by a signer acting in a capacity other than his
individual capacity, such certificate or affidavit shall also constitute
sufficient proof of his authority. The fact and date of the execution of any
such instrument or writing, or the authority of the Person executing the
same, may also be proved in any other manner which the Trustee deems
sufficient.
(c) The Company may, in the circumstances permitted by the Trust
Indenture Act, fix any day as the record date for the purpose of determining
the Holders entitled to give or take any request, demand, authorization,
direction, notice, consent, waiver or other action, or to vote on any action,
authorized or permitted to be given or taken by Holders. If not set by the
Company prior to the first solicitation of a Holder made by any Person in
respect of any such action, or, in the case of any such vote, prior to such
vote, the record date for any such action or vote shall be the 30th day (or,
if later, the date of the most recent list of Holders required to be provided
pursuant to Section 701) prior to such first solicitation or vote, as the
case may be.
With regard to any record date, only the Holders on such date (or
their duly designated proxies) shall be entitled to give or take, or vote on,
the relevant action, except as provided in paragraph (a) of this Section 104.
(d) The ownership of Securities shall be proved by the Security
Register.
(e) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Security shall bind every future
Holder of the same Security and the Holder of every Security issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof
in respect of anything done, omitted or suffered to be done by the Trustee or
the Company in reliance thereon, whether or not notation of such action is
made upon such Security.
SECTION 105. Notices, Etc. to Trustee and the Company.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with:
(1) the Trustee by any Holder or by the Company shall be sufficient
for every purpose hereunder if made, given, furnished or filed in writing to or
with the Trustee at its Corporate Trust Office, Attention: Global Trust
Services; or
(2) the Company by the Trustee or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided) if in
writing and mailed, first-class postage prepaid, to the Company addressed to it
at the address of its principal
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office specified in the first paragraph of this instrument or at any other
address previously furnished in writing to the Trustee by the Company,
Attention: Secretary.
SECTION 106. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to each Holder affected
by such event, at his address as it appears in the Security Register, not later
than the latest date (if any), and not earlier than the earliest date (if any),
prescribed for the giving of such notice. In any case where notice to Holders
is given by mail, neither the failure to mail such notice, nor any defect in any
notice so mailed, to any particular Holder shall affect the sufficiency of such
notice with respect to other Holders. Where this Indenture provides for notice
in any manner, such notice may be waived in writing by the Person entitled to
receive such notice, either before or after the event, and such waiver shall be
the equivalent of such notice. Waivers of notice by Holders shall be filed with
the Trustee, but such filing shall not be a condition precedent to the validity
of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
SECTION 107. Conflict With Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with a
provision of the Trust Indenture Act that is required under such Act to be a
part of and govern this Indenture, the provision of the Trust Indenture Act
shall control. If any provision of this Indenture modifies or excludes any
provision of the Trust Indenture Act that may be so modified or excluded, the
latter provision shall be deemed to apply to this Indenture as to modified or so
be excluded, as the case may be.
SECTION 108. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
SECTION 109. Separability Clause.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
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SECTION 110. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied,
shall give to any Person, other than the parties hereto and their successors
hereunder, the holders of Senior Indebtedness, the holders of Capital Securities
(to the extent provided herein) and the Holders, any benefit or any legal or
equitable right, remedy or claim under this Indenture.
SECTION 111. GOVERNING LAW.
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
CONFLICTS OF LAW PRINCIPLES THEREOF. THIS INDENTURE IS SUBJECT TO THE
PROVISIONS OF THE TRUST INDENTURE ACT THAT ARE REQUIRED TO BE PART OF THIS
INDENTURE AND SHALL, TO THE EXTENT APPLICABLE, BE GOVERNED BY SUCH PROVISIONS.
SECTION 112. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any Security shall not be a Business Day, then (notwithstanding any
other provision of this Indenture or of the Securities) payment of interest or
principal of the Securities need not be made on such date, but may be made on
the next succeeding Business Day (except that, if such Business Day is in the
next succeeding calendar year, such Interest Payment Date, Redemption Date or
Stated Maturity, as the case may be, shall be the immediately preceding Business
Day) with the same force and effect as if made on the Interest Payment Date or
Redemption Date, or at the Stated Maturity, provided that no interest shall
accrue for the period from and after such Interest Payment Date, Redemption Date
or Stated Maturity, as the case may be.
SECTION 113. Execution in Counterparts.
This Indenture may be executed in any number of counterparts, each of
which shall be an original, but such counterparts shall together constitute but
one and the same instrument.
SECTION 114. Successors.
All the covenants, stipulations, promises and agreements of the
Company in this Indenture shall be binding upon its successors and assigns.
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ARTICLE TWO
SECURITY FORMS
SECTION 201. Forms Generally.
The Securities and the Trustee's certificates of authentication shall
be in substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture, and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or as may,
consistent herewith, be determined by the officers executing such Securities, as
evidenced by their execution of the Securities.
The definitive Securities shall be printed, lithographed or engraved
or produced by any combination of these or other methods, all as determined by
the officers executing such Securities, as evidenced by their execution of such
Securities.
SECTION 202. Form of Face of Security.
Ocwen Financial Corporation
Junior Subordinated Security Due ________ __, 2027
$________
No.________
CUSIP No. ________
Ocwen Financial Corporation, a corporation duly organized and existing
under the laws of the State of Florida (herein called the "Company", which term
includes any successor corporation under the Indenture hereinafter referred to),
for value received, hereby promises to pay to ________________, or registered
assigns, the principal sum of ________ DOLLARS ($__________) on _________ __,
2027, and to pay interest on said principal sum from ________ __ , 1997 or from
the most recent interest payment date (each such date, an "Interest Payment
Date") to which interest has been paid or duly provided for, semi-annually
(subject to deferral as set forth herein) in arrears on __________ and
__________ of each year, commencing __________, 1997, at the rate of __% per
annum until the principal hereof shall have become due and payable, and on any
overdue principal and (without duplication and to the extent that payment of
such interest is enforceable under applicable law) on any overdue installment of
interest at the same rate per annum. The amount of interest payable for any
period will be computed on the basis of twelve 30-day months and a 360-day year.
The amount of interest payable for any period shorter than a full semi-annual
period for which interest is computed, will be computed on the basis of actual
number of days elapsed in such 180-day period. In the event that any date on
which interest is payable on this Security is not a Business Day, then a payment
of the interest payable on such date will be made on the next succeeding day
which is a Business Day (and without any interest or other
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payment in respect of any such delay), except that if such next succeeding
Business Day falls in the next calendar year, then such payment shall be made
on the immediately preceding Business Day, in each case with the some force
and effect as if made on the date the payment was originally payable. 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 Trustee, or the principal office of the
Property Trustee under the Declaration, is closed for business. The interest
installment so payable, and punctually paid or duly provided for, on any
Interest Payment Date will, as provided in the Indenture, be paid to the
Person in whose name the Securities (or one or more Predecessor Securities,
as defined in the Indenture) is registered at the close of business on the
Regular Record Date for such interest installment, which shall be the 15th
day of the month prior to which such Interest Payment Date occurs. Any such
interest installment not so punctually paid or duly provided for shall
forthwith cease to be payable to the Holder on such Regular Record Date and
may either be paid to the Person in whose name the Securities (or one or more
Predecessor Securities) is registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest to be fixed by the
Trustee, notice whereof shall be given to Holders not less than 10 days prior
to such Special Record Date, or be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Securities may be listed, and upon such notice as may be required
by such exchange, all as more fully provided in said Indenture.
So long as no Event of Default has occurred and is continuing, the
Company shall have the right at any time during the term of this Security, from
time to time, to defer payment of interest on such Security for up to 10
consecutive semi-annual periods (an "Extension Period"), provided that no
Extension Period may extend past the Stated Maturity of this Security. There
may be multiple Extension Periods of varying lengths during the term of this
Security. At the end of each Extension Period, if any, the Company shall pay
all interest then accrued and unpaid, together with interest thereon, compounded
semi-annually at the rate specified on this Security to the extent permitted by
applicable law. 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 in interest
to the Securities 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 Securities (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 stockholders' 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 (in each case
occurring in the absence of a payment or distribution of assets to
shareholders), (e) the purchase of fractional interests in the shares of the
Company's capital
20
<PAGE>
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 interest payment period, provided that no Extension Period
may exceed 10 consecutive semi-annual periods or extend beyond the Stated
Maturity of this Security. 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 shall give the Property
Trustee, the Regular Trustees and the Debenture Trustee notice of its
election of such Extension Period at least one Business Day prior to the
earlier of (i) the Interest Payment Date or (ii) the date the Regular
Trustees are required to give notice to any applicable self-regulatory
organization or to holders of the Capital Securities of the record date or
the date the related distributions are payable, but in any event not less
than one Business Day prior to such record date.
Payment of the principal of (and premium, if any) and interest on this
Security will be made at the office or agency of the Paying Agent maintained for
that purpose in the United States, in such coin or currency of the United States
of America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that at the option of the Company, payment of
interest may be made (i) by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register or (ii) by wire
transfer in immediately available funds at such place and to such account as may
be designated by the Person entitled thereto as specified in the Security
Register.
The indebtedness evidenced by this Security is, to the extent provided
in the Indenture, subordinate and subject in right of payment to the prior
payment in full of all Senior Indebtedness, and this Security is issued subject
to the provisions of the Indenture with respect thereto. Each Holder of this
Security, by accepting the same, (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on his behalf to take such
action as may be necessary or appropriate to acknowledge or effect the
subordination so provided and (c) appoints the Trustee his attorney-in-fact for
any and all such purposes. Each Holder hereof, by his acceptance hereof, waives
all notice of the acceptance of the subordination provisions contained herein
and in the Indenture by each holder of Senior Indebtedness, whether now
outstanding or hereafter incurred, and waives reliance by each such Holder upon
said provisions.
Reference is hereby made to the further provisions of the Indenture
summarized on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
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IN WITNESS WHEREOF, Ocwen Financial Corporation has caused this
instrument to be duly executed and delivered.
Dated: ________, 1997
OCWEN FINANCIAL CORPORATION
By:
-------------------------------------------
Name:
Title:
- ------------------------
SECTION 203. Form of Reverse of Security.
This Security is one of a duly authorized issue of Securities of Ocwen
Financial Corporation (the "Company"), designated as its __% Junior Subordinated
Securities due 2027 (herein called the "Securities"), limited in aggregate
principal amount to $128,866,000 issued under an Indenture, dated as of August
__, 1997 (herein called the "Indenture"), between the Company and The Chase
Manhattan Bank, a New York State banking association, as Trustee (herein called
the "Trustee," which term includes any successor trustee under the Indenture),
to which the Indenture and all indentures supplemental thereto reference is
hereby made for a statement of the respective rights, limitations of rights,
duties and immunities thereunder of the Trustee, the Company and the Holders,
and of the terms upon which the Securities are, and are to be, authenticated and
delivered.
All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
At any time on or after __________ __, 2007, the Securities are
redeemable at the option of the Company, subject to the last paragraph of
Section 1201 of the Indenture and to the receipt of any necessary prior
regulatory approval, in whole or in part at any time at the redemption prices
(expressed as percentage of principal amount) set forth below plus accrued and
unpaid interest, if any, to the Redemption Date, if redeemed during the
twelve-month period beginning on _______ of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
- ---- ----------
<S> <C>
2007................................................................... %
2008................................................................... %
2009................................................................... %
2010................................................................... %
2011................................................................... %
2012................................................................... %
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Year Percentage
- ---- ----------
<S> <C>
2013................................................................... %
2014................................................................... %
2015................................................................... %
2016................................................................... %
</TABLE>
On or after __________ __, 2017, the Redemption Price will be 100%,
plus accrued and unpaid interest, if any, to the Redemption Date.
If a Special Event shall occur and be continuing, the Company shall
have the right, within 90 days of the occurrence of such Special Event, subject
to the last paragraph of Section 1201 of the Indenture and to the receipt of any
necessary prior regulatory approval, to redeem, upon not less than 30 days nor
more than 60 days notice, the Securities in whole, but not in part, at a
Redemption Price equal to the greater of (i) 100% of the principal amount of
Securities then Outstanding or (ii) as determined by a Quotation Agent, the sum
of the present values of the principal amount and premium payable with respect
to an optional redemption of such Securities 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 30-day months) at the Adjusted Treasury Rate, plus, in each
case, accrued interest thereon to the date of prepayment.
If the Securities are only partially redeemed by the Company, the
Securities will be redeemed pro rata. If a partial redemption of the Capital
Securities resulting from a partial redemption of the Securities would result in
the delisting of the Capital Securities from the securities exchange or quoting
service on which the Capital Securities are then listed or quoted, the Company
may only redeem the Securities in whole. In the event of redemption of this
Security in part only, a new Security or Securities for the unredeemed portion
hereof will be issued in the name of the Holder hereof upon the cancellation
hereof.
If an Event of Default with respect to the Securities shall occur and
be continuing, the principal of the Securities may be declared due and payable
in the manner, with the effect and subject to the conditions provided in the
Indenture.
The Indenture contains provisions for satisfaction and discharge or
legal defeasance of the entire indebtedness of this Security and for the
defeasance of certain covenants under the Indenture at any time upon compliance
by the Company with certain conditions set forth in the Indenture.
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of Holders of not less than a majority in principal
amount of the Outstanding Securities affected, to execute supplemental
indentures, which modify the Indenture in a manner affecting the rights of the
Holders of the Securities; provided that no such supplemental indenture may,
without the consent of the Holder of each Outstanding Security affected thereby,
(i) except to the extent permitted and subject to the conditions set forth in
the Indenture with respect to the extension of the Stated Maturity of the
Security, change the maturity of, the principal of, or any installment of
interest on, the Security or reduce the
23
<PAGE>
principal amount thereof, or the rate of payment of interest thereon, or
change the place of payment where, or the coin or currency in which, this
Security or interest thereon is payable, or impair the right to institute
suit for the enforcement of such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the Redemption Date), or
modify the provisions of the Indenture with respect to the subordination of
the Securities in a manner adverse to the Holders, (ii) reduce the percentage
in principal amount of the Outstanding Securities, the consent of whose
Holders is required for any such supplemental Indenture or the consent of
whose Holders is required for any waiver (of compliance with certain
provisions of the Indenture or certain defaults hereunder and their
consequences) provided for in the Indenture, or (iii) modify any of the
provisions of Section 513, Section 902 or Section 1008 of the Indenture,
except to increase any such percentage or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent
of the Holder of each Outstanding Security affected thereby, provided that,
so long as any of the Capital Securities remains outstanding, no such
amendment shall be made that adversely affects the holders of the Capital
Securities in any material respect, and no termination of the Indenture shall
occur, and no waiver of an Event of Default or compliance with any covenant
under the Indenture shall be effective, without the prior consent of the
holders of at least a majority of the aggregate liquidation preference of the
outstanding Capital Securities unless and until the principal of and any
premium on the Securities and all accrued and unpaid interest thereon have
been paid in full.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of and interest on this
Security at the times, place and rate, and in the coin or currency, herein
prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in New York, New York, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities,
of authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees. No service charge shall be
made for any such registration of transfer or exchange, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Security is registered as the owner
hereof for all purposes, whether or not this Security be overdue, and neither
the Company, the Trustee nor any such agent shall be affected by notice to the
contrary.
The Securities are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Securities are
exchangeable for a like aggregate
24
<PAGE>
principal amount of Securities of a different authorized denomination, as
requested by the Holder surrendering the same.
THE SECURITIES AND THE INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF
LAWS PRINCIPLES THEREOF.
SECTION 204. Form of Trustee's Certificate of Authentication.
This is one of the Securities referred to in the within-mentioned
Indenture.
_________________________, as Trustee
By:________________________________________
Authorized Officer
ARTICLE THREE
THE SECURITIES
SECTION 301. Title and Terms.
The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is limited to $128,866,000,
except for Securities authenticated and delivered upon registration of transfer
of, or in exchange for, or in lieu of, other Securities pursuant to Sections
304, 305, 306, 906 or 1208.
The Securities shall be known and designated as the "__% Junior
Subordinated Securities Due 2027" of the Company. Their Stated Maturity shall
be , 2027.
The Securities shall bear interest at the rate of __% per annum, from
_______, 1997 or from the most recent Interest Payment Date to which interest
has been paid or duly provided for, as the case may be, payable semi-annually
(subject to deferral as set forth herein), in arrears, on __________ and
__________ of each year, commencing __________, 1997 until the principal
thereof is paid or made available for payment. Interest will compound
semi-annually and will accrue at the rate of __% per annum on any interest
installment in arrears for more than one semi-annual period or during an
extension of an interest payment period as set forth below in this Section 301.
In the event that any date on which interest is payable on the Securities is not
a Business Day, then a payment of the interest payable on such date will be made
on the next succeeding day which is a Business Day except that, if such Business
Day falls in the next succeeding calendar year, such Interest Payment Date shall
be the immediately preceding Business Day (and without any interest or other
payment in respect of any such delay).
25
<PAGE>
So long as no Event of Default has occurred and is continuing, the
Company shall have the right at any time during the term of this Security, from
time to time, to defer payment of interest on such Security for up to 10
consecutive semi-annual periods (an "Extension Period"), provided that no
Extension Period may extend past the Stated Maturity of this Security. There
may be multiple Extension Periods of varying lengths during the term of this
Security. At the end of each Extension Period, if any, the Company shall pay
all interest then accrued and unpaid, together with interest thereon, compounded
semi-annually at the rate specified on this Security to the extent permitted by
applicable law. 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 in interest
to the Securities 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 Securities (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 stockholders' 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 (in each case
occurring in the absence of a payment or distribution of assets to
shareholders), (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 interest payment period, provided that no
Extension Period may exceed 10 consecutive semi-annual periods or extend beyond
the Stated Maturity of the Securities. 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 shall give the Property Trustee, the
Regular Trustees and the Debenture Trustee notice of its election of such
Extension Period at least one Business Day prior to the earlier of (i) the
Interest Payment Date or (ii) the date the Regular Trustees are required to give
notice to any applicable self-regulatory organization or to holders of the
Capital Securities of the record date or the date the related distributions are
payable, but in any event not less than one Business Day prior to such record
date.
The Trustee shall promptly give notice of the Company's selection of
such Extension Period to the holders of the Capital Securities.
The principal of (and premium, if any) and interest on the Securities
shall be payable at the office or agency of the Paying Agent in the United
26
<PAGE>
States maintained for such purpose and at any other office or agency maintained
by the Company for such purpose in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that at the option of the Company payment of
interest may be made (i) by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register or (ii) by wire
transfer in immediately available funds at such place and to such account as may
be designated by the Person entitled thereto as specified in the Security
Register.
The Securities shall be subordinated in right of payment to Senior
Indebtedness as provided in Article Eleven.
The Securities shall be redeemable as provided in Article Twelve.
SECTION 302. Denominations.
The Securities shall be issuable only in registered form, without
coupons, and only in denominations of $1,000 and any integral multiple thereof.
SECTION 303. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by its
Chairman of the Board, its Vice Chairman of the Board, a President or one of its
Vice Presidents. The signature of any of these officers on the Securities may
be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Securities executed by the Company to
the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Securities; and the Trustee in accordance
with such Company Order shall authenticate and deliver such Securities as in
this Indenture provided and not otherwise.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any
Security shall be conclusive evidence, and the only evidence, that such Security
has been duly authenticated and delivered hereunder.
27
<PAGE>
SECTION 304. Temporary Securities.
Pending the preparation of definitive Securities, the Company may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the definitive Securities in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as evidenced by their
execution of such Securities.
If temporary Securities are issued, the Company will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at any office
or agency of the Company designated pursuant to Section 1002, without charge to
the Holder. Upon surrender for cancellation of any one or more temporary
Securities the Company shall execute and the Trustee shall authenticate and
deliver in exchange therefor a like principal amount of definitive Securities of
authorized denominations. Until so exchanged the temporary Securities shall in
all respects be entitled to the same benefits under this Indenture as definitive
Securities.
SECTION 305. Registration; Registration of Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of
the Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 1002 being herein sometimes
collectively referred to as the "Security Register") in which, subject to such
reasonable regulations as it may prescribe, the Company shall provide for the
registration of Securities and of transfers of Securities. The Trustee is hereby
appointed "Security Registrar" for the purpose of registering Securities and
transfers of Securities as herein provided.
Upon surrender for registration of transfer of any Security at an
office or agency of the Company designated pursuant to Section 1002 for such
purpose, the Company shall execute, and the Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Securities of any authorized denominations and of a like aggregate principal
amount.
At the option of the Holder, Securities may be exchanged for other
Securities of any authorized denominations and of a like aggregate principal
amount, upon surrender of the Securities to be exchanged at such office or
agency. Whenever any Securities are so surrendered for exchange, the Company
shall execute, and the Trustee shall authenticate and deliver, the Securities
which the Holder making the exchange is entitled to receive.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.
28
<PAGE>
Every Security presented or surrendered for registration of transfer
or for exchange shall (if so required by the Company or the Trustee) be duly
endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed, by the
Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Securities, other than
exchanges pursuant to Sections 304, 906 or 1208 not involving any transfer.
If the Securities are to be redeemed in part, the Company shall not be
required (i) to issue, register the transfer of or exchange any Securities
during a period beginning at the opening of business 15 days before the day of
the mailing of a notice of redemption of any such Securities selected for
redemption under Section 1204 and ending at the close of business on the day of
such mailing, or (ii) to register the transfer of or exchange any Security so
selected for redemption in whole or in part, except the unredeemed portion of
any Security being redeemed in part.
The transfer and exchange of beneficial interests in any Global
Security, which does not involve the issuance of a definitive Security or the
transfer of interests to another Global Security, shall be effected through the
Depositary (but not the Trustee) in accordance with this Indenture (including
the restrictions on transfer set forth herein) and the procedures of the
Depositary therefor. The Trustee (in its capacity as such) will not have any
responsibility for the transfer and exchange of beneficial interests in such
Global Security that does not involve the issuance of a definitive Security or
the transfer of interests to another Global Security.
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee, the Company
shall execute and the Trustee shall authenticate and deliver in exchange
therefor a new Security of like tenor and principal amount and bearing a number
not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any Security
and (ii) such security or indemnity as may be required by them to hold each of
them and any agent of either of them harmless, then, in the absence of notice to
the Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Security, a new Security
of like tenor and principal amount and bearing a number not contemporaneously
outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay such Security.
29
<PAGE>
Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 307. Payment of Interest; Interest Rights Preserved.
Interest on any Security which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest.
Any interest on any Security which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Holder on the
relevant Regular Record Date by virtue of having been such Holder, and such
Defaulted Interest may be paid by the Company, at its election in each case, as
provided in clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest
to the Persons in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest, which shall be fixed in the following
manner. The Company shall notify the Trustee in writing of the amount of
Defaulted Interest proposed to be paid on each Security and the date of the
proposed payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be paid in
respect of such Defaulted Interest or shall make arrangements satisfactory to
the Trustee for such deposit prior to the date of the proposed payment, such
money when deposited to be held in trust for the benefit of the Persons entitled
to such Defaulted Interest as in this clause provided. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted Interest,
which shall be not more than 15 days and not less than 10 days prior to the date
of the proposed payment and not less than 10 days after the receipt by the
Trustee of the notice of the proposed payment. The Trustee shall promptly notify
the Company of such Special Record Date and, in the name and at the expense of
the Company, shall cause notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor to be mailed, first-class postage
prepaid, to each Holder at his address as it appears in the Security Register,
not less than 10 days prior to such Special Record Date. Notice of the proposed
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<PAGE>
payment of such Defaulted Interest and the Special Record Date therefor having
been so mailed, such Defaulted Interest shall be paid to the Persons in whose
names the Securities (or their respective Predecessor Securities) are registered
at the close of business on such Special Record Date and shall no longer be
payable pursuant to the following clause (2).
(2) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any securities
exchange on which the Securities may be listed, and if so listed, upon such
notice as may be required by such exchange, if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this clause, such
manner of payment shall be deemed practicable by the Trustee. Subject to the
foregoing provisions of this Section, each Security delivered under this
Indenture upon registration of transfer of or in exchange for or in lieu of any
other Security shall carry the rights to interest accrued and unpaid, and to
accrue, which were carried by such other Security.
SECTION 308. Persons Deemed Owners.
Prior to due presentment of a Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee shall treat
the Person in whose name such Security is registered as the owner of such
Security for the purpose of receiving payment of principal of and (subject to
Section 307) interest on such Security and for all other purposes whatsoever,
whether or not such Security be overdue, and neither the Company, the Trustee
nor any agent of the Company or the Trustee shall be affected by notice to the
contrary.
SECTION 309. Cancellation.
All Securities surrendered for payment, redemption, registration of
transfer or exchange shall, if surrendered to any Person other than the Trustee,
be delivered to the Trustee and shall be promptly cancelled by it. The Company
may at any time deliver to the Trustee for cancellation any Securities
previously authenticated and delivered hereunder which the Company may have
acquired in any manner whatsoever, and all Securities so delivered shall be
promptly cancelled by the Trustee. No Securities shall be authenticated in lieu
of or in exchange for any Securities cancelled as provided in this Section,
except as expressly permitted by this Indenture. All cancelled Securities held
by the Trustee shall be disposed of as directed by a Company Order.
SECTION 310. Computation of Interest.
Interest on the Securities shall be computed on the basis of a 360-day
year of twelve 30-day months. The amount of interest payable for any period
shorter than a full semi-annual period for which interest is computed will be
computed on the basis of actual number of days elapsed in such 180-day period.
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SECTION 311. Right of Set-off.
Notwithstanding anything to the contrary in this Indenture, the
Company shall have the right to set-off any payment it is otherwise required to
make hereunder to the extent the Company has theretofore made, or is
concurrently on the date of such payment making, a payment under the Guarantee.
SECTION 312. CUSIP Numbers.
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption as a convenience to Holders; provided that any such notice may
state that no representation is made as to the correctness of such numbers
either as printed on the Securities or as contained in any notice of redemption
and that reliance may be placed only on the other identification numbers printed
on the Securities, and any such redemption shall not be affected by any defect
in or omission of such numbers.
SECTION 313. Global Securities.
If the Securities are distributed to the holders of Capital
Securities, Securities distributed in respect of Capital Securities that are
held in global form by a Depositary will initially be issued as a Global
Security, unless such transfer cannot be effected through book-entry settlement.
If the Company shall establish that the Securities are to be issued in the form
of one or more Global Securities, then the Company shall execute and the Trustee
shall, in accordance with Section 303 and a Company Order, authenticate and
deliver one or more Global Securities that (i) shall represent and shall be
denominated in an amount equal to the aggregate principal amount of all of the
Securities to be issued in the form of Global Securities and not yet cancelled,
(ii) shall be registered in the name of the Depositary for such Global Security
or Securities or the nominee of such Depositary, and (iii) shall be delivered by
the Trustee to such Depositary or pursuant to such Depositary's instructions.
Global Securities shall bear a legend substantially to the following effect:
"This Security is a Global Security within the meaning of the
Indenture hereinafter referred to and is registered in the name of a Depositary
or a nominee of a Depositary. Notwithstanding the provisions of Section 305 of
the Indenture, unless and until it is exchanged in whole or in part for
Securities in definitive registered form, a Global Security representing all or
a part of the Securities may not be transferred in the manner provided in
Section 305 except as a whole by the Depositary to a nominee of such Depositary
or by a nominee of such Depositary to such Depositary or another nominee of such
Depositary or by such Depositary or any such nominee to a successor Depositary
or a nominee of such successor Depositary. Every Security delivered upon
registration or transfer of, or in exchange for, or in lieu of, this Global
Security shall be a Global Security subject to the foregoing, except in the
limited circumstances described above. Unless this certificate is presented by
an authorized representative of The Depositary Trust Company, a New York
corporation ("DTC"), to the Company or its agent for registration of transfer,
exchange or payment, and any certificate issued is registered in the name of
Cede & Co. or in such other name as is requested by an authorized representative
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of DTC (and any payment is to be made to Cede & Co. or to such other entity as
is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch
as the registered owner hereof, Cede & Co., has an interest herein."
Definitive Securities issued in exchange for all or a part of a Global
Security pursuant to this Section 313 shall be registered in such names and in
such authorized denominations as the Depositary, pursuant to instructions from
its direct or indirect participants or otherwise, shall instruct the Trustee.
Upon execution and authentication, the Trustee shall deliver such definitive
Securities to the Persons in whose names such definitive Securities are so
registered.
At such time as all interests in Global Securities have been redeemed,
repurchased or canceled, such Global Securities shall be, upon receipt thereof,
canceled by the Trustee in accordance with standing procedures and instructions
existing between the Depositary and the Trustee. At any time prior to such
cancellation, if any interest in Global Securities is exchanged for definitive
Securities, redeemed, canceled or transferred to a transferee who receives
definitive Securities therefor or any definitive Security is exchanged or
transferred for part of Global Securities, the principal amount of such Global
Securities shall, in accordance with the standing procedures and instructions
existing between the Depositary and the Trustee, be reduced or increased, as the
case may be, and an endorsement shall be made on such Global Securities by the
Trustee to reflect such reduction or increase.
The Company and the Trustee may for all purposes, including the making
of payments due on the Securities, deal with the Depositary as the authorized
representative of the Holders for the purposes of exercising the rights of
Holders hereunder. The rights of the owner of any beneficial interest in a
Global Security shall be limited to those established by law and agreements
between such owners and depository participants; provided, that no such
agreement shall give any rights to any person against the Company or the Trustee
without the written consent of the parties so affected. Multiple requests and
directions from and votes of the Depositary as holder of Securities in global
form with respect to any particular matter shall not be deemed inconsistent to
the extent they do not represent an amount of Securities in excess of those held
in the name of the Depositary or its nominee.
If at any time the Depositary for any Securities represented by one or
more Global Securities notifies the Company that it is unwilling or unable to
continue as Depositary for such Securities or if at any time the Depositary for
such Securities shall no longer registered or in good standing under the
Exchange Act, the Company shall appoint a successor Depositary with respect to
such Securities. If a successor Depositary for such Securities is not appointed
by the Company within 90 days after the Company receives such notice or becomes
aware of such condition, the Company's election that such Securities be
represented by one or more Global Securities shall no longer be effective and
the Company shall execute, and the Trustee, upon receipt of a Company Order for
the authentication and delivery of definitive Securities, will authenticate and
deliver Securities in definitive registered form, in any authorized
denominations, in an aggregate principal amount equal to the principal amount of
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the Global Security or Securities representing such Securities, in exchange for
such Global Security or Securities.
The Company may at any time and in its sole discretion determine that
the Securities issued in the form of one or more Global Securities shall no
longer be represented by a Global Security or Securities. In such event the
Company shall execute, and the Trustee, upon receipt of a Company Order for the
authentication and delivery of definitive Securities, shall authenticate and
deliver, Securities in definitive registered form, in any authorized
denominations, in an aggregate principal amount equal to the principal amount of
the Global Security or Securities representing such Securities, in exchange for
such Global Security or Securities.
If specified by the Company with respect to Securities represented by
a Global Security, the Depositary for such Global Security may surrender such
Global Security in exchange in whole or in part for Securities in definitive
registered form on such terms as are acceptable to the Company and such
Depositary. Thereupon, the Company shall execute, and the Trustee shall
authenticate and deliver, without service charge, (i) to the Person specified by
such Depositary, the new Security or Securities, of any authorized denominations
as requested by such Person, in an aggregate principal amount equal to and in
exchange for such Person's beneficial interest in the Global Security; and (ii)
to such Depositary a new Global Security in a denomination equal to the
difference, if any, between the principal amount of the surrendered Global
Security and the aggregate principal amount of Securities authenticated and
delivered pursuant to clause (i) above. Upon the exchange of a Global Security
for Securities in definitive registered form in authorized denominations, such
Global Security shall be cancelled by the Trustee or an agent of the Company or
the Trustee. Securities in definitive registered form issued in exchange for a
Global Security pursuant to this Section 313 shall be registered in such names
and in such authorized denominations as the Depositary for such Global Security,
pursuant to instructions from its direct or indirect participants or otherwise,
shall instruct the Trustee or an agent of the Company or the Trustee. The
Trustee or such agent shall deliver at its office such Securities to or as
directed by the Persons in whose names such Securities are so registered.
ARTICLE FOUR
SATISFACTION AND DISCHARGE; DEFEASANCE
SECTION 401. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except as to any
surviving rights of registration of transfer or exchange of Securities herein
expressly provided for), and the Trustee, on written demand of and at the
expense of the Company, shall execute instruments supplied by the Company
acknowledging satisfaction and discharge of this Indenture, when (1) either (A)
all Securities theretofore authenticated and delivered (other than (i)
Securities which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 306 and (ii) Securities for whose
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payment money has theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or discharged from
such trust, as provided in Section 1003) have been delivered to the Trustee for
cancellation; or (B) all such Securities not theretofore delivered to the
Trustee for cancellation (i) have become due and payable, or (ii) will become
due and payable at their Maturity within one year, or (iii) if redeemable at the
option of the Company, are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name, and at the expense, of the Company and the Company,
in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited
with the Trustee as funds in trust for the purpose an amount sufficient to pay
and discharge the entire indebtedness in such Securities not theretofore
delivered to the Trustee for cancellation, for principal and interest to the
date of such deposit (in the case of Securities which have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may be; (2)
the Company has paid or caused to be paid all other sums payable hereunder by
the Company; and (3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of this
Indenture have been complied with. Notwithstanding the satisfaction and
discharge of this Indenture, the obligations of the Company to the Trustee under
Section 607 and, if money shall have been deposited with the Trustee pursuant to
subclause (B) of clause (1) of this Section, the obligations of the Trustee
under Section 402 and the last paragraph of Section 1003 shall survive.
SECTION 402. Legal Defeasance.
In addition to discharge of this Indenture pursuant to Section 401, in
the case of any Securities with respect to which the exact amount described in
subparagraph (a) of Section 404 can be determined at the time of making the
deposit referred to in such subparagraph (a), the Company shall be deemed to
have paid and discharged the entire indebtedness on all the Securities as
provided in this Section on and after the date the conditions set forth in
Section 404 are satisfied, and the provisions of this Indenture with respect to
the Securities shall no longer be in effect (except as to (i) rights of
registration of transfer and exchange of Securities, (ii) substitution of
mutilated, defaced, destroyed, lost or stolen Securities, (iii) rights of
Holders to receive, solely from the trust fund described in subparagraph (a) of
Section 404, payments of principal thereof and interest, if any, thereon upon
the original stated due dates therefor (but not upon acceleration), (iv) the
rights, obligations, duties and immunities of the Trustee hereunder, (v) this
Section 402 and (vi) the rights of the Holders of Securities as beneficiaries
hereof with respect to the property so deposited with the Trustee payable to all
or any of them) (hereinafter called "Legal Defeasance"), and the Trustee at the
cost and expense of the Company, shall execute proper instruments acknowledging
the same.
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SECTION 403. Covenant Defeasance.
In the case of any Securities with respect to which the exact amount
described in subparagraph (a) of Section 404 can be determined at the time of
making the deposit referred to in such subparagraph (a), (I) the Company shall
be released from its obligations under any covenants specified in or pursuant to
this Indenture (except as to (i) rights of registration of transfer and exchange
of Securities, (ii) substitution of mutilated, defaced, destroyed, lost or
stolen Securities, (iii) rights of Holders to receive, from the Company pursuant
to Section 1001, payments of principal thereof and interest, if any, thereon
upon the original stated due dates therefor (but not upon acceleration), (iv)
the rights, obligations, duties and immunities of the Trustee hereunder and (v)
the rights of the Holders as beneficiaries hereof with respect to the property
so deposited with the Trustee payable to all or any of them), and (II) the
occurrence of any event specified in Section 501(3) (with respect to any of the
covenants specified in or pursuant to this Indenture) shall be deemed not to be
or result in an Event of Default, in each case with respect to the Outstanding
Securities as provided in this Section on and after the date the conditions set
forth in Section 404 are satisfied) (hereinafter called "Covenant Defeasance"),
and the Trustee, at the cost and expense of the Company, shall execute proper
instruments acknowledging the same. For this purpose, such Covenant Defeasance
means that the Company may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such covenant (to
the extent so specified in the case of Section 501(3)), whether directly or
indirectly by reason of any reference elsewhere herein to any such covenant or
by reason of any reference in any such covenant to any other provision herein or
in any other document, but the remainder of this Indenture and the Securities
shall be unaffected thereby.
SECTION 404. Conditions to Legal Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either Section
402 or 403 to the Outstanding Securities:
(a) with reference to Section 402 or 403, the Company has irrevocably
deposited or caused to be irrevocably deposited with the Trustee as funds in
trust, specifically pledged as security for, and dedicated solely to, the
benefit of the Holders (i) cash, (ii) direct obligations of the United States of
America, backed by its full faith and credit ("U.S. Government Obligations"),
maturing as to principal and interest, if any, at such times and in such amounts
as will ensure the availability of cash, (iii) obligations of a Person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America the timely payment of which is unconditionally
guaranteed as a full faith and credit obligation by the United States of
America, or (iv) a combination thereof, in each case sufficient, in the opinion
of a nationally-recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay and discharge the
principal of and interest, if any, on all Securities on each date that such
principal or interest, if any, is due and payable;
(b) in the case of Legal Defeasance under Section 402, the Company has
delivered to the Trustee an Opinion of Counsel based on the fact that (x) the
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Company has received from, or there has been published by, the Internal Revenue
Service a ruling or (y), since the date hereof, there has been a change in the
applicable United States federal income tax law, in either case to the effect
that, and such opinion shall confirm that, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and Legal Defeasance and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such deposit and Legal Defeasance had not occurred;
(c) in the case of Covenant Defeasance under Section 403, the Company
has delivered to the Trustee an Opinion of Counsel to the effect that, and such
opinion shall confirm that, the Holders will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit and Covenant
Defeasance and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and Covenant Defeasance had not occurred;
(d) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under, any agreement or
instrument to which the Company is a party or by which it is bound; and
(e) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent contemplated by this provision have been complied with.
SECTION 405. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 1003, all
money and U.S. Government Obligations and obligations of certain Persons
deposited with the Trustee pursuant to Section 404 shall be held in trust and
such money and all money from such U.S. Government Obligations and obligations
of certain Persons shall be applied by it, in accordance with the provisions of
the Securities and this Indenture, to the payment, either directly or through
any Paying Agent (including the Company acting as its own Paying Agent) as the
Trustee may determine, to the Persons entitled thereto, of the principal and
interest for whose payment such money, U.S. Government Obligations and
obligations of certain Persons have been deposited with the Trustee.
SECTION 406. Indemnity for U.S. Government Obligations.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against either the U.S. Government
Obligations or the obligations of certain Persons deposited pursuant to Section
404 or the principal or interest received in respect of such obligations other
than any such tax, fee or other charge that by law is for the account of the
Holders of Outstanding Securities.
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ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default.
"Event of Default" wherever used herein, means any one of the
following events that has occurred and is continuing (whatever the reason for
such Event of Default and whether it shall be occasioned by the provisions of
Article Eleven or be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(1) failure for 30 days to pay any interest on the Securities when
due (subject to the deferral of any due date in the case of an Extension
Period); or
(2) failure to pay any principal or any premium on the Securities
when due, whether at Stated Maturity, upon redemption, by declaration of
acceleration or otherwise, provided, however, that an extension of the Stated
Maturity of the Securities in accordance with the terms of this Indenture shall
not constitute an Event of Default; or
(3) failure to observe or perform any other covenant herein that
continues for 90 days after written notice to the Company from the Trustee or
the holders of at least 25% in aggregate outstanding principal amount of
Outstanding Securities; or
(4) entry by a court having jurisdiction in the premises of (A) a
decree or order for relief in respect of the Company in an involuntary case or
proceeding under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or (B) a decree or order adjudging the
Company a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in respect
of the Company under any applicable federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of substantially all of the property of the
Company, or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order for relief or any such other decree or
order unstayed and in effect for a period of 90 consecutive days; or
(5) (A) the commencement by the Company of a voluntary case or
proceeding under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, (B) the consent by the Company to the entry
of a decree or order for relief in respect of itself in an involuntary case or
proceeding under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or to the commencement of any bankruptcy or
insolvency case or proceeding against the Company, (C) the filing by the Company
of a petition or answer or consent seeking reorganization or relief under any
applicable federal or state law, (D) the consent by the Company to the filing of
such petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other similar official
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of the Company or of all or substantially all of the property of the Company, or
(E) the making by the Company of an assignment for the benefit of creditors.
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default occurs and is continuing, then and in every
such case the Trustee or the Holders of not less than 25% in aggregate principal
amount of the Outstanding Securities shall have the right to declare the
principal of and the interest on all the Securities and any other amounts
payable hereunder to be due and payable immediately, provided, however, that if
upon an Event of Default the Trustee or the Holders of at least 25% in aggregate
principal amount of the outstanding Securities fail to declare the payment of
all amounts on the Securities to be immediately due and payable, the holders of
at least 25% in aggregate liquidation preference of Capital Securities then
outstanding shall have such right, by a notice in writing to the Company (and to
the Trustee if given by Holders or the holders of Capital Securities) and upon
any such declaration such principal and all accrued interest shall become
immediately due and payable.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter provided in this Article, the Holders of a majority
in aggregate principal amount of the Outstanding Securities, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if (1) the Company has paid or deposited with the Trustee a sum
sufficient to pay (A) all overdue interest on all Securities, (B) the principal
of (and premium, if any, on) any Securities which have become due otherwise than
by such declaration of acceleration and interest thereon at the rate borne by
the Securities, (C) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Securities, and (D) all
sums paid or advanced by the Trustee hereunder and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel; and
(2) all Events of Default, other than the non-payment of the principal of
Securities which have become due solely by such declaration of acceleration,
have been cured or waived as provided in Section 513. Should the Holders of
such Securities fail to annul such declaration and waive such default, the
holders of a majority in liquidation amount of the Capital Securities shall have
such right. No such rescission shall affect any subsequent default or impair
any right consequent thereon.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if
(1) default is made in the payment of any interest on any Security
when such interest becomes due and payable and such default continues for a
period of 30 days, or
(2) default is made in the payment of the principal of any Security
at the Maturity thereof,
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the Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities, the whole amount then due and payable on such
Securities for principal and interest, and, to the extent that payment thereof
shall be legally enforceable, interest on any overdue principal and on any
overdue interest, at the rate borne by the Securities, and, in addition thereto,
such further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. Trustee may File Proofs of Claim.
In case of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other similar judicial
proceeding relative to the Company (or any other obligor upon the Securities),
its property or its creditors, the Trustee shall be entitled and empowered, by
intervention in such proceeding or otherwise, to take any and all actions
authorized under the Trust Indenture Act in order to have claims of the Holders
and the Trustee allowed in any such proceeding. In particular, the Trustee
shall be authorized to collect and receive any moneys or other property payable
or deliverable on any such claims and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or other similar official
in any such judicial proceeding is hereby authorized by each Holder to make such
payments to the Trustee and, in the event that the Trustee shall consent to the
making of such payments directly to the Holders, to pay to the Trustee any
amount due it for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, and any other amounts due the
Trustee under Section 607. No provision of this Indenture shall be deemed to
authorize the Trustee to authorize or consent to or accept or adopt on behalf of
any Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Securities or the rights of any Holder thereof or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTION 505. Trustee may Enforce Claims Without Possession of Securities.
All rights of action and claims under this Indenture or the Securities
may be prosecuted and enforced by the Trustee without the possession of any of
the Securities or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Trustee shall be brought in its own name
as trustee of any express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Securities in respect of which such
judgment has been recovered.
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SECTION 506. Application of Money Collected.
Subject to Article Eleven, any money collected by the Trustee pursuant
to this Article shall be applied in the following order, at the date or dates
fixed by the Trustee and, in case of the distribution of such money on account
of principal or any premium or interest, upon presentation of the Securities and
the notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid;
FIRST: To the payment of all amounts due the Trustee under Section
607; and
SECOND: To the payment of the amounts then due and unpaid for
principal of and any premium and interest on the Securities in respect of which
or for the benefit of which such money has been collected, ratably, without
preference or priority of any kind, according to the amounts due and payable on
such Securities for principal and any premium and interest, respectively.
SECTION 507. Limitation on Suits.
No Holder of any Security shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of
a continuing Event of Default;
(2) the Holders of not less than 25% in principal amount of the
Outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority in
principal amount of the Outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
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Nothing contained in this Section 507 or any other provision of this
Indenture shall affect the rights of a holder of Capital Securities set forth in
Section 508 of this Indenture and Section 7.5(c) of the Declaration.
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and
Interest; Capital Security Holders' Rights.
Notwithstanding any other provision in this Indenture, the Holder of
any Security shall have the right, which is absolute and unconditional, to
receive payment of the principal of and any premium and (subject to Section 307)
interest on such Security on the Stated Maturity expressed in such Security (or,
in the case of redemption, on the Redemption Date) and to institute suit for the
enforcement of any such payment, and such rights shall not be impaired without
the consent of such Holder.
If an Event of Default constituting the failure to pay interest, any
premium or principal on the Securities on the date such interest, premium or
principal is otherwise payable has occurred and is continuing, then a holder of
Capital Securities may directly institute a proceeding for enforcement of
payment to such holder directly of the principal of and any premium or interest
on the Securities having a principal amount equal to the aggregate liquidation
amount of the Capital Securities held by such holder on or after the respective
due date specified in the Securities.
SECTION 509. Restoration of Rights and Remedies.
If the Trustee, any holder of Capital Securities or any Holder has
instituted any proceeding to enforce any right or remedy under this Indenture
and such proceeding has been discontinued or abandoned for any reason, or has
been determined adversely to the Trustee, to such holder of Capital Securities
or to such Holder, then and in every such case, subject to any determination in
such proceeding, the Company, the Trustee, the holders of Capital Securities and
the Holders shall be restored severally and respectively to their former
positions hereunder and thereafter all rights and remedies of the Trustee, the
holders of Capital Securities and the Holders shall continue as though no such
proceeding had been instituted.
SECTION 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities in the last paragraph
of Section 306, no right or remedy herein conferred upon or reserved to the
Trustee, to the holders of Capital Securities or to the Holders is intended to
be exclusive of any other right or remedy, and every right and remedy shall, to
the extent permitted by law, be cumulative and in addition to every other right
and remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
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SECTION 511. Delay or Omission not Waiver.
No delay or omission of the Trustee, of any holder of Capital
Securities or of any Holder of any Security to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article or by law to the Trustee, to the
holders of Capital Securities or to the Holders may be exercised from time to
time, and as often as may be deemed expedient, by the Trustee, by the holders of
Capital Securities or by the Holders, as the case may be.
SECTION 512. Control by Holders.
The Holders of a majority in principal amount of the Outstanding
Securities shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee, provided that
(1) such direction shall not be in conflict with any rule of law or
with this Indenture (including without limitation the second paragraph of
Section 508 hereof); and
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
SECTION 513. Waiver of Past Defaults.
Subject to Sections 902 and 1008 hereof, the Holders of not less than
a majority in principal amount of the Outstanding Securities may on behalf of
the Holders of all the Securities waive any past default hereunder and its
consequences, except a default
(1) in the payment of the principal of or any premium or interest on
any Security (unless such default has been cured and a sum sufficient to pay all
matured installments of interest and principal and any premium due otherwise
than by acceleration has been deposited with the Trustee); or
(2) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of each
Outstanding Security affected;
provided, however, that such waiver or modification to such waiver shall not be
effective until the holders of a majority in liquidation preference of Capital
Securities shall have consented to such waiver or modification to such waiver;
and provided further, that if the consent of the Holder of each of the
Outstanding Securities is required, such waiver shall not be effective until
each holder of the Capital Securities shall have consented to such waiver.
Upon any such waiver, such default shall cease to exist, effective as
of the date specified in such waiver (and effective retroactively to the date of
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default, if so specified) and any Event of Default arising therefrom shall be
deemed to have been cured, for every purpose of this Indenture; but no such
waiver shall extend to any subsequent or other default or impair any right
consequent thereon.
For the purpose of this Section, the term "default" means any event
which is, or after notice or lapse of time or both would become, an Event of
Default.
SECTION 514. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture, or in any suit against the Trustee for any action taken, suffered or
omitted by it as Trustee, a court may require any party litigant in such suit to
file an undertaking to pay the costs of such suit, and may assess costs against
any such party litigant, in the manner and to the extent provided in the Trust
Indenture Act; provided, that neither this Section nor the Trust Indenture Act
shall be deemed to authorize any court to require such an undertaking or to make
such an assessment in any suit instituted by the Company or the Trustee or in
any suit for the enforcement of the right to receive the principal of and any
premium and interest on any Security.
SECTION 515. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE SIX
TRUSTEE
SECTION 601. Certain Duties and Responsibilities.
The duties and responsibilities of the Trustee shall be as provided by
the Trust Indenture Act. Notwithstanding the foregoing, no provision of this
Indenture shall require the Trustee to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it. Whether or not therein
expressly so provided, every provision of this Indenture relating to the conduct
or affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section.
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SECTION 602. Notice of Defaults.
The Trustee shall give the Holders and the Property Trustee notice of
any default hereunder as and to the extent provided by the Trust Indenture Act;
provided, however, that except in the case of a default in the payment of the
principal of and any premium or interest on any Security, the Trustee shall be
protected in withholding such notice if and so long as the board of directors,
the executive committee or a trust committee of directors and/or Responsible
Officers of the Trustee in good faith determine that the withholding of such
notice is in the interests of the Holders; and provided, further, that in the
case of any default of the character specified in Section 501(3), no such notice
to Holders shall be given until at least 30 days after the occurrence thereof.
For the purpose of this Section, (i) the term "default" means any event which
is, or after notice or lapse of time or both would become, an Event of Default
and (ii), the Trustee shall not be deemed to have knowledge of a default unless
the Trustee has actual knowledge of such default or has received written notice
of such default in the manner contemplated by Section 105.
SECTION 603. Certain Rights of Trustee.
Subject to the provisions of Section 601:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document believed by it
to be genuine and to have been signed or presented by the proper party or
parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any resolution
of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel of its choice and the
written advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken, suffered
or omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders pursuant to this Indenture, unless such Holders shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction;
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(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document, but the
Trustee, in its discretion, may make such further inquiry or investigation into
such facts or matters as it may see fit, and, if the Trustee shall determine to
make such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or attorney;
and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder.
SECTION 604. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the
Trustee's certificates of authentication, shall be taken as the statements of
the Company, and the Trustee assumes no responsibility for their correctness.
The Trustee makes no representations as to the validity or sufficiency of this
Indenture or of the Securities, and the Trustee shall not be accountable for the
use or application by the Company of Securities or the proceeds thereof.
SECTION 605. Trustee and Other Agents may Hold Securities.
The Trustee, any Paying Agent, any Security Registrar or any other
agent of the Company, in its individual or any other capacity, may become the
owner or pledgee of Securities and, subject to Sections 608 and 613, may
otherwise deal with the Company with the same rights it would have if it were
not Trustee, Paying Agent, Security Registrar or such other agent. Money held
by the Trustee in trust hereunder shall not be invested by the Trustee pending
distribution thereof to the Holders.
SECTION 606. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except as
otherwise agreed in writing with the Company.
SECTION 607. Compensation; Reimbursement; and Indemnity.
The Company, in its capacity as the borrower, agrees
(1) to pay to the Trustee from time to time such reasonable
compensation as the Company and the Trustee shall from time to time agree in
writing for all services rendered by it hereunder (which compensation shall not
be limited by any provision of law in regard to the compensation of a trustee of
an express trust);
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(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and advances
incurred or made by the Trustee in accordance with any provision of this
Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its negligence or bad faith; and
(3) to indemnify each of the Trustee and any predecessor Trustee for,
and to hold it harmless against, any and all loss, damage, claim, liability or
expense, including taxes (other than taxes based on the income, revenues or
gross receipts of the Trustee) incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or administration of
this trust or the trusts hereunder, including the costs and expenses of
defending itself against any claim or liability in connection with the exercise
or performance of any of its powers or duties hereunder.
The obligations of the Company under this Section to compensate the
Trustee, to pay or reimburse the Trustee for expenses, disbursements and
advances and to indemnify and hold harmless the Trustee shall constitute
additional indebtedness hereunder and shall survive the satisfaction and
discharge of this Indenture. As security for the performance of such
obligations of the Company, the Trustee shall have a claim prior to the
Securities upon all property and money held or collected by the Trustee as such,
except funds held in trust for the payment of principal of (and premium, if any,
on) or interest on particular Securities.
SECTION 608. Disqualification; Conflicting Interests.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and this Indenture.
SECTION 609. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a
Person that is eligible pursuant to the Trust Indenture Act to act as such and
has a combined capital and surplus of at least $50,000,000 and has its Corporate
Trust Office in New York, New York. If such Person publishes reports of
condition at least annually, pursuant to law or to the requirements of a
supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such Person shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. If at any time the Trustee shall cease to be eligible in accordance
with the provisions of this Section, it shall resign immediately in the manner
and with the effect hereinafter specified in this Article.
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SECTION 610. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 611.
(b) The Trustee may resign at any time by giving written notice
thereof to the Company. If an instrument of acceptance by a successor Trustee
shall not have been delivered to the Trustee within 30 days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the Outstanding Securities, delivered to the
Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 608 after
written request therefor by the Company or by any Holder who has been a bona
fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 609 and
shall fail to resign after written request therefor by the Company or by any
such Holder, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property
shall be appointed or any public officer shall take charge or control of the
Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee, or (ii) subject to Section 514, any Holder who has been a bona fide
Holder of a Security for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Trustee. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Securities
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment, become the
successor Trustee and supersede the successor Trustee appointed by the Company.
If no successor Trustee shall have been so appointed by the Company or the
Holders and accepted appointment in the manner hereinafter provided, any Holder
who has been a bona fide Holder of a Security for at least six months may, on
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behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee to all Holders in the
manner provided in Section 106. Each notice shall include the name of the
successor Trustee and the address of its Corporate Trust Office.
SECTION 611. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, trusts
and duties of the retiring Trustee; provided that, on request of the Company or
the successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder. Upon request of any such successor Trustee,
the Company shall execute any and all instruments for more fully and certainly
vesting in and confirming to such successor Trustee all such rights, powers and
trusts.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article.
SECTION 612. Merger, Conversion, Consolidation or Succession to Business.
Any Person into which the Trustee may be merged or converted or with
which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any Person
succeeding to all or substantially all the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder, provided such Person
shall be otherwise qualified and eligible under this Article, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto. In case any Securities shall have been authenticated, but not
delivered, by the Trustee then in office, any successor by merger, conversion or
consolidation to such authenticating Trustee may adopt such authentication and
deliver the Securities so authenticated with the same effect as if such
successor Trustee had itself authenticated such Securities.
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SECTION 613. Preferential Collection of Claims Against Company.
If and when the Trustee shall be or become a creditor of the Company
(or any other obligor upon the Securities), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims against
the Company (or any such other obligor).
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee (a)
semiannually, not later than ___________ and _________ in each year, a list, in
such form as the Trustee may reasonably require, of the names and addresses of
the Holders to the extent the Company has knowledge thereof as of a date not
more than 15 days prior to the delivery thereof, and (b) at such other times as
the Trustee may request in writing, within 30 days after the receipt by the
Company of any such request, a list of similar form and content as of a date not
more than 15 days prior to the time such list is furnished, excluding from any
such list names and addresses received by the Trustee in its capacity as
Security Registrar, provided that the Company shall not be obligated to provide
such list at any time such list does not differ from the most recent list
furnished or caused to be furnished to the Trustee by the Company.
SECTION 702. Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 701, and the names and
addresses of Holders received by the Trustee in its capacity as Security
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 701 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Securities, and the
corresponding rights and duties of the Trustee, shall be provided by the Trust
Indenture Act.
(c) Every Holder of Securities, by receiving and holding the same,
agrees with the Company and the Trustee that neither the Company nor the Trustee
nor any agent of either of them shall be held accountable by reason of any
disclosure of information as to names and addresses of Holders made pursuant to
the Trust Indenture Act.
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SECTION 703. Reports by Trustee.
(a) The Trustee shall transmit to Holders such reports concerning the
Trustee and its actions under this Indenture as may be required pursuant to the
Trust Indenture Act at the times and in the manner provided pursuant thereto.
(b) A copy of each such report shall, at the time of such transmission
to Holders, be filed by the Trustee with any stock exchange upon which the
Securities are listed, with the Commission and with the Company. The Company
will notify the Trustee when the Securities are listed on any stock exchange.
SECTION 704. Reports by Company.
The Company shall file with the Trustee and the Commission, and
transmit to Holders, such information, documents and other reports, and such
summaries thereof, as may be required pursuant to the Trust Indenture Act at the
times and in the manner provided pursuant to such Act; provided that any such
information, documents or reports required to be filed with the Commission
pursuant to Sections 13(a) or 15(d) of the Exchange Act shall be filed with the
Trustee within 15 days after the same is so required to be filed with the
Commission.
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.
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:
(1) the Person formed by such consolidation or into which the Company
is merged or the Person that acquires by conveyance or transfer, or which
leases, the properties and assets of the Company substantially as an entirety
shall be a corporation, partnership or trust, shall be organized and existing
under the laws of the United States of America or any State or the District of
Columbia, and shall expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form satisfactory to the Trustee, the
due and punctual payment of the principal of (and premium, if any) and interest
(including any additional interest) on all the Securities and the performance of
every covenant of this Indenture on the part of the Company to be performed or
observed;
(2) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time, or both, would
become an Event of Default, shall have happened and be continuing;
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(3) for so long as Capital Securities are outstanding, such
consolidation, merger, conveyance, transfer or lease is permitted under the
Declaration and the Guarantee and does not give rise to any breach or violation
of the Declaration or the Guarantee;
(4) any such lease shall provide that it will remain in effect so
long as any Securities are Outstanding; and
(5) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel each stating that such consolidation, merger,
conveyance, transfer or lease and any such supplemental indenture complies with
this Article and that all conditions precedent herein provided for relating to
such transaction have been complied with; and the Trustee, subject to Section
601, may rely upon such Officers' Certificate and Opinion of Counsel as
conclusive evidence that such transaction complies with this Section 801.
SECTION 802. Successor Person Substituted.
Upon any consolidation or merger by the Company with or into any other
Person, or any conveyance, transfer or lease by the Company of its properties
and assets substantially as an entirety to any Person in accordance with Section
801, the successor Person formed by such consolidation or into which the Company
is merged or to which such conveyance, transfer or lease is made shall succeed
to, and be substituted for, and may exercise every right and power of, the
Company under this Indenture with the same effect as if such successor Person
had been named as the Company herein; and in the event of any
such conveyance, transfer or lease the Company shall be discharged from all
obligations and covenants under this Indenture and the Securities and may be
dissolved and liquidated.
Such successor Person may cause to be signed, and may issue either in
its own name or in the name of the Company, any or all of the Securities
issuable hereunder which theretofore shall not have been signed by the Company
and delivered to the Trustee; and, upon the order of such successor Person
instead of the Company and subject to all the terms, conditions and limitations
in this Indenture prescribed, the Trustee shall authenticate and shall deliver
any Securities which previously shall have been signed and delivered by the
officers of the Company to the Trustee for authentication pursuant to such
provisions and any Securities which such successor Person thereafter shall cause
to be signed and delivered to the Trustee on its behalf for the purpose pursuant
to such provisions. All the Securities so issued shall in all respects have the
same legal rank and benefit under this Indenture as the Securities theretofore
or thereafter issued in accordance with the terms of this Indenture as though
all of such Securities had been issued at the date of the execution hereof.
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ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a
Board Resolution, and the Trustee, at any time and from time to time, may enter
into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(1) to evidence the succession of another Person to the Company and
the assumption by any such successor of the covenants of the Company herein and
in the Securities; or
(2) to add to the covenants of the Company for the benefit of the
Holders, or to surrender any right or power herein conferred upon the Company;
or
(3) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, or to make any
other provisions with respect to matters or questions arising under this
Indenture which shall not be inconsistent with the provisions of this Indenture,
provided that such action pursuant to this clause (3) shall not materially
adversely affect the interests of the Holders or, so long as any of the Capital
Securities shall remain outstanding, the holders of the Capital Securities; or
(4) to comply with the requirements of the Commission in order to
effect or maintain the qualification of this Indenture under the Trust Indenture
Act.
SECTION 902. Supplemental Indentures With Consent of Holders.
With the consent of the Holders of not less than a majority in
principal amount of the Outstanding Securities, by Act of said Holders delivered
to the Company and the Trustee, the Company, when authorized by a Board
Resolution, and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of
modifying in any manner the rights of the Holders under this Indenture;
provided, however, that no such supplemental indenture shall, without the
consent of the Holder of each Outstanding Security affected thereby,
(1) except to the extent permitted and subject to the conditions set
forth in Section 301 with respect to the extension of the Stated Maturity of the
Securities, change the Stated Maturity of, the principal of, or any installment
of interest on, any Security, or reduce the principal amount thereof or the rate
of interest thereon, or change the place of payment where, or the coin or
currency in which, any Security or interest thereon is payable, or impair the
right to institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof (or, in the case of redemption, on or after the
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Redemption Date), or modify the provisions of this Indenture with respect to the
subordination of the Securities in a manner adverse to the Holders,
(2) reduce the percentage in principal amount of the Outstanding
Securities, the consent of whose Holders is required for any such supplemental
indenture, or the consent of whose Holders is required for any waiver (of
compliance with certain provisions of this Indenture or certain defaults
hereunder and their consequences) provided for in this Indenture, or
(3) modify any of the provisions of this Section, Section 513 or
Section 1008, except to increase any such percentage or to provide that certain
other provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each Outstanding Security affected thereby;
provided, that, so long as any of the Capital Securities remains outstanding, no
such amendment shall be made that adversely affects the holders of the Capital
Securities in any material respect, and no termination of this Indenture shall
occur, and no waiver of any Event of Default or compliance with any covenant
under this Indenture shall be effective, without the prior consent of the
holders of at least a majority of the aggregate liquidation preference of the
outstanding Capital Securities unless and until the principal of and any premium
on the Securities and all accrued and unpaid interest thereon have been paid in
full.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trust created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 601) shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of such supplemental indenture is
authorized and permitted by this Indenture. The Trustee may, but shall not be
obligated to, enter into such supplemental indenture which affects the Trustee's
own rights, duties or immunities under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby.
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SECTION 905. Conformity With Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act.
SECTION 906. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Securities so modified as to conform, in the opinion of the Trustee and the
Company, to any such supplemental indenture may be prepared and executed by the
Company and authenticated and delivered by the Trustee in exchange for
Outstanding Securities.
ARTICLE TEN
COVENANTS; REPRESENTATIONS AND WARRANTIES
SECTION 1001. Payment of Principal, Premium and Interest.
The Company will duly and punctually pay the principal of (and
premium, if any, on) and interest on the Securities in accordance with the terms
of the Securities and this Indenture.
SECTION 1002. Maintenance of Office or Agency.
The Company will maintain in The City of New York an office or agency
where Securities may be presented or surrendered for registration of transfer or
exchange, where Securities may be surrendered for conversion and where notices
and demands to or upon the Company in respect of the Securities and this
Indenture may be served. The Company will give prompt written notice to the
Trustee of the location, and any change in location, of such office or agency.
If at any time the Company shall fail to maintain any such required office or
agency or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee as its agent to receive all such presentations, surrenders, notices and
demands.
The Company may also from time to time designate one or more other
offices or agencies (in the United States) where the Securities may be presented
or surrendered for any or all such purposes and may from time to time rescind
such designations; provided, however, that no such designation or rescission
shall in any manner relieve the Company of its obligation to maintain an office
or agency in The City of New York for such purposes. The Company will give
prompt written notice to the Trustee of any such designation or rescission and
of any change in the location of any such other office or agency.
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SECTION 1003. Money for Security Payments to be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of or any premium or interest on any
of the Securities, segregate and hold in trust for the benefit of the Persons
entitled thereto a sum sufficient to pay the principal and any premium and
interest so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided and will promptly notify the Trustee of
its action or failure so to act. In such case the Company shall not invest the
amount so segregated and held in trust pending the distribution thereof.
Whenever the Company shall have one or more Paying Agents, it will, on
or prior to each due date of the principal of or any premium or interest on any
Securities, deposit with a Paying Agent a sum sufficient to pay such amount,
such sum to be held as provided by the Trust Indenture Act, and (unless such
Paying Agent is the Trustee) the Company will promptly notify the Trustee of its
action or failure so to act; provided, however, that any such deposit on a due
date shall be initiated prior to 1:00 p.m. (New York time) in same-day funds.
The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will (i) comply with the provisions of the Trust Indenture Act
applicable to it as a Paying Agent and (ii) during the continuance of any
default by the Company (or any other obligor upon the Securities) in the making
of any payment in respect of the Securities, upon the written request of the
Trustee, forthwith pay to the Trustee all sums held in trust by such Paying
Agent as such.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of or any premium or
interest on any security and remaining unclaimed for two years after such
principal of, premium or interest has become due and payable shall be paid to
the Company on Company Request, or (if then held by the Company) shall be
discharged from such trust; and the Holder of such Security shall thereafter, as
an unsecured general creditor, look only to the Company for payment thereof, and
all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereupon
cease.
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SECTION 1004. Statements by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after the end
of each fiscal year of the Company ending after the date hereof, an Officers'
Certificate, stating whether or not to the best knowledge of the signers thereof
the Company is in default in the performance and observance of any of the
material terms, provisions and conditions of this Indenture (without regard to
any period of grace or requirement of notice provided hereunder) and, if the
Company shall be in default, specifying all such defaults and the nature and
status thereof of which they may have knowledge.
SECTION 1005. Existence.
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its existence,
rights (charter and statutory) and franchises; provided, however, that the
Company shall not be required to preserve any such right or franchise if the
Board of Directors shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company and that the loss
thereof is not disadvantageous in any material respect to the Holders and, while
any Capital Securities are outstanding, the holders of the Capital Securities.
SECTION 1006. Maintenance of Properties.
The Company will cause all properties used or useful in the conduct of
its business or the business of any Subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that
nothing in this Section shall prevent the Company from discontinuing the
operation or maintenance of any such properties if such discontinuance is, in
the judgment of the Company, desirable in the conduct of its business or the
business of any Subsidiary and not disadvantageous in any material respect to
the Holders, and while any Capital Securities are outstanding, the holders of
Capital Securities.
SECTION 1007. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all taxes, assessments and
governmental charges levied or imposed upon the Company or any Subsidiary or
upon the income, profits or property of the Company or any Subsidiary, and (2)
all lawful claims for labor, materials and supplies which, if unpaid, might by
law become a lien upon the property of the Company or any Subsidiary that
comprises more than 10% of the assets of the Company and its Subsidiaries taken
as a whole; provided, however, that the Company shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings.
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SECTION 1008. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any
term, provision or condition set forth in Sections 1005 to 1007, inclusive,
Sections 1010 to 1016, inclusive and any covenant provided pursuant to Section
901(2) for the benefit of the Holders if before the time for such compliance the
Holders of at least a majority in principal amount of the Outstanding Securities
and at least a majority in aggregated liquidation preference of Capital
Securities shall, either waive such compliance in such instance or generally
waive compliance with such term, provision or condition, but no waiver shall
extend to or affect such term, provision or condition except to the extent so
expressly waived, and, until such waiver shall become effective, the obligations
of the Company and the duties of the Trustee in respect of any such term,
provision or condition shall remain in full force and effect.
SECTION 1009. Payment of the Trust's Costs and Expenses.
Because the Trust is being formed solely to facilitate an investment
in the Securities, the Company, in its capacity as the borrower, hereby
covenants to pay all debts and obligations (other than with respect to the
Capital Securities and the Common Securities) and all costs and expenses of the
Trust (including, but not limited to, all costs and expenses relating to the
organization of the Trust, the fees and expenses of the Trustees and all costs
and expenses relating to the operation of the Trust) and to pay any and all
taxes, duties, assessments or governmental charges of whatever nature (other
than withholding taxes) imposed on the Trust by the United States, or any other
taxing authority, so that the net amounts received and retained by the Trust and
the Property Trustee after paying such expenses will be equal to the amounts the
Trust and the Property Trustee would have received had no such costs or expenses
been incurred by or imposed on the Trust. The foregoing obligations of the
Company are for the benefit of, and shall be enforceable by, any person to whom
any such debts, obligations, costs, expenses and taxes are owed (each, 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 irrevocably waives 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 shall execute such additional
agreements as may be necessary or desirable to give full effect to the
foregoing.
SECTION 1010. Limitations on Indebtedness.
(a) 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 the principal amount of total Funded Indebtedness of the Company
(which includes the Securities) would not exceed 150% of the Company's
Consolidated Tangible Net Worth.
(b) 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
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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.
SECTION 1011. Restrictions on Issuance and Sale or Disposition of Capital Stock
of the Bank.
The Company will 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 of Section 1010,
and except that the Company may sell the shares of the Bank's Series A
Non-Cumulative Preferred Stock that it owns as of _____________, 1997) unless in
either case the Bank remains a Wholly-Owned Subsidiary of the Company. In
addition, the Company shall not permit the Bank to merge or consolidate with any
Person (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.
SECTION 1012. Limitation on Restricted Payments.
The Company 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 Securities 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 Securities (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
stockholders' 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 (in each case occurring in the
absence of a payment or distribution of assets to shareholders), (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 Event of Default and (II) in respect of which the Company shall
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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 this Indenture and shall not have rescinded such notice, or such
Extension Period, or any extension thereof, shall be continuing.
SECTION 1013. 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;
(c) make loans or advances to the Company or any Subsidiary or to
guarantee Indebtedness of the Company or any 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 this 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
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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 this Indenture as
permitted by Section 1010, 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 Securities due 2005
(whether or not such issue remains outstanding) were issued; and
(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 Section 1010 that limits 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.
SECTION 1014. 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 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
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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 this 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 Section 1012, or (vi) any transaction or series of transactions
in which the total amount involved does not exceed $250,000.
SECTION 1015. 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
Securities or (b) subordinate in right of payment to the Securities.
SECTION 1016. Offer to Purchase upon a Change of Control.
If a Change of Control Event shall occur at any time, then each holder
of Capital Securities will have the right to require the Trust to distribute to
such holder such holder's pro rata share of the Securities held by the Trust in
exchange for such holder's Capital Securities. Such holder of Capital
Securities will then have a right to require the Company to repurchase such
Securities or any securities distributed as a result of the liquidation of the
Trust at a purchase price in cash equal to 101% of the principal amount of such
Securities, plus accrued and unpaid interest, if any, to the date of repurchase.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Securities and the 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 this Indenture, the Company will
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comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations described in this Indenture by virtue
thereof.
SECTION 1017. Effectiveness of Covenants.
The covenants described under Sections 1010, 1011, 1012, 1013, 1014,
1015 and 1016 will no longer be in effect upon the Company reaching Investment
Grade Status.
ARTICLE ELEVEN
SUBORDINATION OF SECURITIES
SECTION 1101. Securities Subordinate to Senior Indebtedness.
The Company covenants and agrees, and each Holder of a Security, by
his acceptance thereof, likewise covenants and agrees, that, to the extent and
in the manner hereinafter set forth in this Article, the payment of the
principal of, premium, if any, and interest on each and all of the Securities
are hereby expressly made subordinate and subject in right of payment to the
prior payment in full in cash of all Senior Indebtedness, whether outstanding at
the date of this Indenture or thereafter incurred.
This Article Eleven shall constitute a continuing offer to all Persons
who become holders of, or continue to hold, Senior Indebtedness, and such
provisions are made for the benefit of the holders of Senior Indebtedness and
such holders are made beneficiaries hereunder and any one or more of them may
enforce such provisions. Holders of Senior Indebtedness need not prove reliance
on the subordination provisions hereof.
SECTION 1102. Default on Senior Indebtedness.
In the event and during the continuation of any default in the payment
of principal, premium, interest or any other payment due on any Senior
Indebtedness, or in the event that any event of default with respect to any
Senior Indebtedness shall have occurred and be continuing and shall have
resulted in such Senior Indebtedness becoming or being declared due and payable
prior to the date on which it would otherwise have become due and payable
(unless and until such event of default shall have been cured or waived or shall
have ceased to exist and such acceleration shall have been rescinded or
annulled) or in the event any judicial proceeding shall be pending with respect
to any such default in payment or such event of default, then no payment shall
be made by the Company with respect to the principal (including redemption
payments) of (or premium, if any), or interest on, the Securities.
In the event that, notwithstanding the foregoing, any payment shall be
received by the Trustee or any Holder when such payment is prohibited by the
preceding paragraph of this Section 1102, such payment shall be held in trust
for the benefit of, and shall be paid over or delivered to, the holders of
Senior Indebtedness or their respective representatives, or to the trustee or
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trustees under any indenture pursuant to which any of such Senior Indebtedness
may have been issued, as their respective interests may appear, but only to the
extent that the holders of the Senior Indebtedness (or their representative or
representatives or a trustee) notify the Trustee within 90 days of such payment
of the amounts then due and owing on the Senior Indebtedness and only the
amounts specified in such notice to the Trustee shall be paid to the holders of
Senior Indebtedness.
SECTION 1103. Prior Payment of Senior Indebtedness Upon Acceleration of
Securities.
In the event that the Securities are declared due and payable before
their Stated Maturity, then and in such event the holders of the Senior
Indebtedness outstanding at the time such Securities so become due and payable
shall be entitled to receive payment in full of all amounts then due on or in
respect of such Senior Indebtedness (including any amounts due upon
acceleration), or provision shall be made for such payment in cash or cash
equivalents or otherwise in a manner satisfactory to the holders of Senior
Indebtedness, before the Holders are entitled to receive any payment or
distribution of any kind or character, whether in cash, properties or
securities, by the Company on account of the principal of or any premium or
interest on the Securities or on account of the purchase or other acquisition of
Securities by the Company or any Subsidiary; 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 that, notwithstanding the foregoing, any payment shall be
received by the Trustee or any Holder when such payment is prohibited by the
preceding paragraph of this Section 1103, such payment shall be held in trust
for the benefit of, and shall be paid over or delivered to, the holders of
Senior Indebtedness or their respective representatives, or to the trustee or
trustees under any indenture pursuant to which any of such Senior Indebtedness
may have been issued, as their respective interests may appear, but only to the
extent that the holders of the Senior Indebtedness (or their representative or
representatives or a trustee) notify the Trustee within 90 days of such payment
of the amounts then due and owing on the Senior Indebtedness and only the
amounts specified in such notice to the Trustee shall be paid to the holders of
Senior Indebtedness.
SECTION 1104. Liquidation; Dissolution; Bankruptcy.
Upon any payment by the Company, or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any dissolution or winding-up or liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all principal of, and premium, if any, and
interest due or to become due upon all Senior Indebtedness (including interest
after the commencement of any bankruptcy, insolvency, receivership or other
proceedings at the rate specified in the applicable Senior Indebtedness, whether
or not such interest is an allowable claim in any such proceeding) shall first
be paid in full, or payment thereof provided for in money in accordance with its
terms, before any payment is made on account of the principal, premium, if any,
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or interest on the Securities; and upon any such dissolution or winding-up or
liquidation or reorganization any payment by the Company, or distribution of
substantially all of the assets of the Company of any kind or character, whether
in cash, property or securities, to which the Holders or the Trustee would be
entitled, except for the provisions of this Article Eleven, shall be paid by the
Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or
other Person making such payment or distribution, or by the Holders or by the
Trustee under this Indenture if received by them or it, directly to the holders
of Senior Indebtedness (pro rata to such holders on the basis of the respective
amounts of Senior Indebtedness held by such holders, as calculated by the
Company) or their representative or representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments evidencing any
Senior Indebtedness may have been issued, as their respective interests may
appear, to the extent necessary to pay all Senior Indebtedness in full
(including interest after the commencement of any bankruptcy, insolvency,
receivership or other proceedings at the rate specified in the applicable Senior
Indebtedness, whether or not such interest is an allowable claim in any such
proceeding) or to provide for such payment in money in accordance with its
terms, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Indebtedness, before any payment or distribution is made
to the Holders or to the Trustee; provided, however, that such 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 that, notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, prohibited by the foregoing, shall be received by the
Trustee or the Holders before all Senior Indebtedness is paid in full (including
interest after commencement of any bankruptcy, insolvency, receivership or other
proceedings at the rate specified in the applicable Senior Indebtedness, whether
or not such interest is an allowable claim in any such proceeding), or provision
is made for such payment in money in accordance with its terms, such payment or
distribution shall be held in trust for the benefit of and shall be paid over or
delivered to the holders of Senior Indebtedness or their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any Senior Indebtedness may have been issued,
as their respective interests may appear, as calculated by the Company, for
application to the payment of all Senior Indebtedness remaining unpaid to the
extent necessary to pay all Senior Indebtedness in full in money in accordance
with its terms, after giving effect to any concurrent payment or distribution to
or for the holders of such Senior Indebtedness.
Any holder of Senior Indebtedness may file any proof of claim or
similar instrument on behalf of the Trustee and the Holders if such instrument
has not been filed by the date which is 30 days prior to the date specified for
filing thereof.
For purposes of this Article Eleven, the words "cash, property or
securities" shall not be deemed to include shares of stock of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, the payment of which
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is subordinated at least to the extent provided in this Article Eleven with
respect to the Securities to the payment of all Senior Indebtedness that may at
the time be outstanding, provided, however, that (i) the Senior Indebtedness is
assumed by the new corporation, if any, resulting from any such reorganization
or readjustment, and (ii) the rights of the holders of the Senior Indebtedness
are not, without the consent of such holders, altered by such reorganization or
readjustment. The consolidation of the Company with, or merger of the Company
into, another corporation or the liquidation or dissolution of the Company
following the conveyance or transfer of its property as an entirety, or
substantially as an entirety, to another corporation upon the terms and
conditions provided for in Article Eight hereof shall not be deemed a
dissolution, winding-up, liquidation or reorganization for the purposes of this
Section 1104 if such other corporation shall, as a part of such consolidation,
merger, conveyance or transfer, comply with the conditions stated in Article
Eight hereof. Nothing in Section 1103 or in this Section 1104 shall apply to
claims of, or payments to, the Trustee under or pursuant to Section 607.
SECTION 1105. Subrogation.
Subject to the payment of all Senior Indebtedness to the extent
provided in Sections 1103 and 1104 of this Indenture, the rights of the Holders
of the Securities shall be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions of cash, property or
securities of the Company applicable or distributions of cash, property or
securities of the Company applicable to the Senior Indebtedness until the
principal of (and premium, if any) and interest on the Securities shall be paid
in full; and, for the purposes of such subrogation, no payments or distributions
to the holders of the Senior Indebtedness of any cash, property or securities to
which the Holders of the Securities or the Trustee would be entitled except for
the provisions of this Article Eleven, to or for the benefit of the holders of
Senior Indebtedness by Holders of the Securities or the Trustee, shall, as
between the Company, its creditors other than holders of Senior Indebtedness,
and the Holders of the Securities, be deemed to be a payment by the Company to
or on account of the Senior Indebtedness. It is understood that the provisions
of this Article Eleven are and are intended solely for the purposes of defining
the relative rights of the Holders of the Securities, on the one hand, and the
holders of the Senior Indebtedness on the other hand.
Nothing contained in this Article Eleven or elsewhere in this
Indenture or in the Securities is intended to or shall impair, as between the
Company, its creditors other than the holders of Senior Indebtedness, and the
Holders of the Securities, the obligation of the Company, which is absolute and
unconditional, to pay to the Holders, the principal of (and premium, if any) and
interest on the Securities as and when the same shall become due and payable in
accordance with their terms, or is intended to or shall affect the relative
rights of the Holders and creditors of the Company other than the holders of the
Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or
any Holder from exercising all remedies otherwise permitted by applicable law
upon default under this Indenture, subject to the rights, if any, under this
Article Eleven of the holders of Senior Indebtedness in respect of cash,
property or securities of the Company received upon the exercise of any such
remedy.
66
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Upon any payment or distribution of assets of the Company referred to
in this Article Eleven, the Trustee, subject to the provisions of Section 601,
and the Holders, shall be entitled to rely upon any order or decree made by any
court of competent jurisdiction in which such dissolution, winding-up,
liquidation or reorganization proceedings are pending, or a certificate of the
receiver, trustee in bankruptcy, liquidation trustee, agent or other Person
making such payment or distribution, delivered to the Trustee or to the Holders,
for the purposes of ascertaining the Persons entitled to participate in such
distribution, the holders of the Senior Indebtedness and other indebtedness of
the Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Article
Eleven.
SECTION 1106. Trustee to Effect Subordination.
Each Holder of a Security by acceptance thereof authorizes and directs
the Trustee on such Holder's behalf to take such action as may be necessary or
appropriate to effect the subordination provided in this Article Eleven and
appoints the Trustee such Holder's attorney-in-fact for any and all such
purposes.
SECTION 1107. Notice by the Company.
The Company shall give prompt written notice to a Responsible Officer
of the Trustee of any fact known to the Company that would prohibit the making
of any payment of monies to or by the Trustee in respect of the Securities
pursuant to the provisions of this Article Eleven. Notwithstanding the
provisions of this Article Eleven or any other provision of this Indenture, the
Trustee shall not be charged with knowledge of the existence of any facts that
would prohibit the making of any payment of monies to or by the Trustee in
respect of the Securities pursuant to the provisions of this Article Eleven,
unless and until a Responsible Officer of the Trustee shall have received
written notice thereof at the Corporate Trust Office of the Trustee from the
Company or a holder or holders of Senior Indebtedness or from any trustee
therefor; and before the receipt of any such written notice, the Trustee,
subject to the provisions of Section 601, shall be entitled in all respects to
assume that no such facts exist; provided, however, that if the Trustee shall
not have received the notice provided for in this Section 1107 at least two
Business Days prior to the date upon which by the terms hereof any money may
become payable for any purpose (including, without limitation, the payment of
the principal of (or premium, if any) or interest on any Security), then,
anything herein contained to the contrary notwithstanding, the Trustee shall
have full power and authority to receive such money and to apply the same to the
purposes for which they were received, and shall not be affected by any notice
to the contrary that may be received by it within two Business Days prior to
such date.
The Trustee, subject to the provisions of Section 601, shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Indebtedness (or a trustee on
behalf of such holder) to establish that such notice has been given by a holder
of Senior Indebtedness or a trustee on behalf of any such holder or holders. In
the event that the Trustee determines in good faith that further evidence is
required with respect to the right of any Person as a holder of Senior
67
<PAGE>
Indebtedness to participate in any payment or distribution pursuant to this
Article Eleven, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness
held by such Person, the extent to which such Person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
such Person under this Article Eleven, and if such evidence is not furnished the
Trustee may defer any payment to such Person pending judicial determination as
to the right of such Person to receive such payment.
SECTION 1108. Rights of the Trustee; Holders of Senior Indebtedness.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article Eleven in respect of any Senior Indebtedness at
any time held by it, to the same extent as any other holder of Senior
Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of
its rights as such holder.
With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform or to observe only such of its covenants and obligations
as are specifically set forth in this Article Eleven, and no implied covenants
or obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to owe
any fiduciary duty to the holders of Senior Indebtedness and, subject to the
provisions of Section 601, the Trustee shall not be liable to any holder of
Senior Indebtedness if it shall pay over or deliver to holders of Securities,
the Company or any other Person money or assets to which any holder of Senior
Indebtedness shall be entitled by virtue of this Article Eleven or otherwise.
SECTION 1109. Subordination may not be Impaired.
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof that any such holder may have or
otherwise be charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Trustee or the Holders, without
incurring responsibility to the Holders and without impairing or releasing the
subordination provided in this Article or the obligations hereunder of the
Holders to the holders of Senior Indebtedness, do any one or more of the
following: (i) change the manner, place or terms of payment or extend the time
of payment of, or renew or alter, Senior Indebtedness or otherwise amend or
supplement in any manner Senior Indebtedness or any instrument evidencing the
same or any agreement under which Senior Indebtedness is outstanding; (ii) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Indebtedness; (iii) release any Person liable in any
manner for the collection of Senior Indebtedness; and (iv) exercise or refrain
from exercising any rights against the Company and any other Person.
68
<PAGE>
Nothing in this Article Eleven shall apply to claims of or payments to
the Trustee under or pursuant to Section 607.
ARTICLE TWELVE
REDEMPTION OF SECURITIES
SECTION 1201. Optional Redemption; Conditions to Optional Redemption.
At any time on or after __________ __, 2007, the Securities are
redeemable at the option of the Company, subject to the last paragraph of this
Section 1201 and to the receipt of any necessary prior regulatory approval, in
whole or in part at any time at the redemption prices (expressed as percentage
of principal amount) set forth below plus accrued and unpaid interest, if any,
to the Redemption Date, if redeemed during the twelve-month period beginning on
_______ of the years indicated below:
Year Percentage
- ---- ----------
2007....................................................................... %
2008....................................................................... %
2009....................................................................... %
2010....................................................................... %
2011....................................................................... %
2012....................................................................... %
2013....................................................................... %
2014....................................................................... %
2015....................................................................... %
2016....................................................................... %
On or after __________ __, 2017, the Redemption Price will be 100%,
plus accrued and unpaid interest, if any, to the Redemption Date.
If a Special Event shall occur and be continuing, the Company shall
have the right, within 90 days of the occurrence of such Special Event, subject
to the last paragraph of this Section 1201 and to the receipt of any necessary
prior regulatory approval, to redeem, upon not less than 30 days nor more than
60 days notice, the Securities in whole, but not in part, at a Redemption Price
equal to the greater of (i) 100% of the principal amount of Securities then
Outstanding or (ii) as determined by a Quotation Agent, the sum of the present
values of the principal amount and premium payable with respect to an optional
redemption on such Securities 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.
69
<PAGE>
For so long as the Trust is the Holder of all Securities Outstanding,
the proceeds of any redemption described in this Section 1201 shall be used by
the Trust to redeem Capital Securities and Common Securities in accordance with
their terms. The Company shall not redeem the Securities in part unless all
accrued and unpaid interest has been paid in full on all Securities outstanding
for all semi-annual interest periods terminating on or prior to the Redemption
Date.
SECTION 1202. Applicability of Article.
Redemption of Securities at the election of the Company, as permitted
by Section 1201, shall be made in accordance with such provision and this
Article.
SECTION 1203. Election to Redeem; Notice to Trustee.
The election of the Company to redeem Securities pursuant to Section
1201 shall be evidenced by a Board Resolution. In case of any redemption at the
election of the Company, the Company shall, at least 30 days and no more than 60
days prior to the Redemption Date fixed by the Company, notify the Trustee of
such Redemption Date and of the principal amount of Securities to be redeemed
and provide a copy of the notice of redemption given to Holders to be redeemed
pursuant to Section 1205.
SECTION 1204. Selection by Trustee of Securities to be Redeemed.
If less than all the Securities are to be redeemed, the particular
Securities to be redeemed shall be selected by lot, at the Trustee's discretion
(or such other method of selection as the Trustee may customarily employ) not
more than 60 days prior to the Redemption Date by the Trustee, from the
Outstanding Securities not previously called for redemption.
The Trustee shall promptly notify the Company in writing of the
Securities selected for redemption as aforesaid and, in case of any Securities
selected for partial redemption as aforesaid, the principal amount thereof to be
redeemed.
The provisions of the two preceding paragraphs shall not apply with
respect to any redemption affecting only a single Security, whether such
Security is to be redeemed in whole or in part. In the case of any such
redemption in part, the unredeemed portion of the principal amount of the
Security shall be in an authorized denomination (which shall not be less than
the minimum authorized denomination) for such Security.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amount of such Securities which has been or is to be
redeemed.
70
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SECTION 1205. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 days nor more than 60 days prior to the
Redemption Date, to each Holder of Securities to be redeemed, at his address
appearing in the Security Register.
All notices of redemption shall identify the Securities to be redeemed
(including CUSIP number) and shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) that on the Redemption Date the Redemption Price will become due
and payable upon each such Security to be redeemed and that
interest thereon will cease to accrue on and after said date, and
(4) the place or places where such Securities are to be surrendered
for payment of the Redemption Price.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
SECTION 1206. Deposit of Redemption Price.
On or prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price of, and (except if the Redemption
Date shall be an Interest Payment Date) accrued interest on, all the Securities
which are to be redeemed on that date; provided, however, that any such deposit
on a Redemption Date shall be initiated prior to 1:00 p.m. (New York time) in
same-day funds.
SECTION 1207. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cease to bear interest. Upon surrender of any
such Security for redemption in accordance with said notice, such Security shall
be paid by the Company at the Redemption Price, together with accrued interest
to the Redemption Date; provided, however, that installments of interest whose
Stated Maturity is on or prior to the Redemption Date shall be payable to the
Holders of such Securities, or one or more Predecessor Securities, registered as
such at the close of business on the relevant Record Dates according to their
terms and the provisions of Section 307.
71
<PAGE>
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal shall, until paid, bear interest
from the Redemption Date at the rate borne by the Security.
SECTION 1208. Securities Redeemed in Part.
Any Security which is to be redeemed only in part shall be surrendered
at a place of payment therefor (with, if the Company or the Trustee so requires,
due endorsement by, or a written instrument of transfer in form satisfactory to
the Company and the Trustee duly executed by, the Holder therefor or his
attorney duly authorized in writing), and the Company shall execute, and the
Trustee shall authenticate and deliver to the Holder of such Security without
service charge, a new Security or Securities, of any authorized denomination as
requested by such Holder, in aggregate principal amount equal to and in exchange
for the unredeemed portion of the principal of the Security so surrendered.
72
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed and delivered, all as of the day and year first above written.
OCWEN FINANCIAL CORPORATION
By:__________________________________
Name:
Title:
THE CHASE MANHATTAN BANK, as Trustee
By:___________________________________
Name:
Title:
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- --------------------------------------------------------------------------------
GUARANTEE AGREEMENT
OCWEN CAPITAL TRUST I
Dated as of August __, 1997
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE TABLE*
Section of Trust Section of
Indenture Act of Guarantee
1939, as amended Agreement
310(a)....................................................................4.1(a)
310(b)....................................................................4.1(c)
310(c)..............................................................Inapplicable
311(a)....................................................................2.2(b)
311(b)....................................................................2.2(b)
311(c)..............................................................Inapplicable
312(a)....................................................................2.2(a)
312(b)....................................................................2.2(b)
312(c).......................................................................2.9
313(a).......................................................................2.3
313(b).......................................................................2.3
313(c).......................................................................2.3
313(d).......................................................................2.3
314(a).......................................................................2.4
314(b)..............................................................Inapplicable
314(c).......................................................................2.5
314(d)..............................................................Inapplicable
314(e).......................................................................2.5
314(f)..............................................................Inapplicable
315(a)............................................................3.1(d); 3.2(a)
315(b)....................................................................2.7(a)
315(c)....................................................................3.1(c)
315(d)....................................................................3.1(d)
316(a)...............................................................2.6; 5.4(a)
317(a).................................................................2.10; 5.4
318(a)....................................................................2.1(b)
- -------------
* This Cross-Reference Table does not constitute part of the Guarantee
Agreement and shall not have any bearing upon the interpretation of any of
its terms or provisions.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
INTERPRETATION AND DEFINITIONS............................ 1
SECTION 1.1 Interpretation and Definitions................................ 1
ARTICLE 2
TRUST INDENTURE ACT................................ 4
SECTION 2.1 Trust Indenture Act; Application.............................. 4
SECTION 2.2 Lists of Holders.............................................. 5
SECTION 2.3 Reports by Guarantee Trustee.................................. 5
SECTION 2.4 Periodic Reports to Guarantee Trustee......................... 5
SECTION 2.5 Evidence of Compliance with Conditions Precedent.............. 5
SECTION 2.6 Guarantee Event of Default; Waiver............................ 5
SECTION 2.7 Guarantee Event of Default; Notice............................ 6
SECTION 2.8 Conflicting Interests......................................... 6
SECTION 2.9 Disclosure of Information..................................... 6
SECTION 2.10 Guarantee Trustee May File Proofs of Claim................... 6
ARTICLE 3
POWERS, DUTIES AND RIGHTS OF
GUARANTEE TRUSTEE.................................... 6
SECTION 3.1 Powers and Duties of Guarantee Trustee........................ 6
SECTION 3.2 Certain Rights of Guarantee Trustee........................... 8
SECTION 3.3 Not Responsible for Recitals or Issuance of Guarantee......... 10
ARTICLE 4
GUARANTEE TRUSTEE................................. 10
SECTION 4.1 Guarantee Trustee; Eligibility................................ 10
SECTION 4.2 Appointment, Removal and Resignation of Guarantee Trustee..... 11
ARTICLE 5
GUARANTEE...................................... 12
SECTION 5.1 Guarantee..................................................... 12
SECTION 5.2 Waiver of Notice and Demand................................... 12
SECTION 5.3 Obligations Not Affected...................................... 12
SECTION 5.4 Rights of Holders............................................. 13
SECTION 5.5 Guarantee of Payment.......................................... 14
SECTION 5.6 Subrogation................................................... 14
SECTION 5.7 Independent Obligations....................................... 14
-i-
<PAGE>
Page
ARTICLE 6
LIMITATION OF TRANSACTIONS; SUBORDINATION..................... 14
SECTION 6.1 Limitation of Transactions.................................... 14
SECTION 6.2 Ranking....................................................... 15
ARTICLE 7
TERMINATION..................................... 15
SECTION 7.1 Termination................................................... 15
ARTICLE 8
INDEMNIFICATION................................... 15
SECTION 8.1 Exculpation................................................... 15
SECTION 8.2 Indemnification............................................... 16
ARTICLE 9
MISCELLANEOUS.................................... 16
SECTION 9.1 Successors and Assigns........................................ 16
SECTION 9.2 Amendments.................................................... 16
SECTION 9.3 Notices....................................................... 17
SECTION 9.4 Benefit....................................................... 17
SECTION 9.5 Governing Law................................................. 18
-ii-
<PAGE>
GUARANTEE AGREEMENT
This GUARANTEE AGREEMENT (the "Guarantee"), dated as of August __,
1997, is executed and delivered by Ocwen Financial Corporation, a Florida
corporation (the "Guarantor"), and The Chase Manhattan Bank, as trustee (the
"Guarantee Trustee"), for the benefit of the Holders (as defined herein) of
the Securities (as defined herein) of Ocwen Capital Trust I, a Delaware
statutory business trust (the "Trust").
W I T N E S S E T H :
WHEREAS, pursuant to the Declaration (as defined herein), the Trust
is issuing on the date hereof $125,000,000 aggregate principal amount of
capital securities, having an aggregate liquidation amount of $1,000,
designated the ___% Capital Securities (the "Capital Securities") and
$3,866,000 aggregate principal amount of common securities, having an
aggregate liquidation amount of $1,000, designated the ___% Common Securities
(the "Common Securities"; together with the Capital Securities, the
"Securities");
WHEREAS, as incentive for the Holders to purchase the Securities,
the Guarantor desires irrevocably and unconditionally to agree, to the extent
set forth in this Guarantee, to pay to the Holders of the Securities the
Guarantee Payments (as defined herein) and to make certain other payments on
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the purchase by each Holder,
which purchase the Guarantor hereby agrees shall benefit the Guarantor, the
Guarantor executes and delivers this Guarantee for the benefit of the Holders.
ARTICLE 1
INTERPRETATION AND DEFINITIONS
SECTION 1.1 Interpretation and Definitions. In this Guarantee,
unless the context otherwise requires:
(a) capitalized terms used in this Guarantee but not defined in the
preamble above have the respective meanings assigned to them in this
Section 1.1;
(b) a term defined anywhere in this Guarantee has the same meaning
throughout;
(c) all references to "the Guarantee" or "this Guarantee" are to this
Guarantee as modified, supplemented or amended from time to time;
<PAGE>
(d) all references in this Guarantee to Articles and Sections are to
Articles and Sections of this Guarantee, unless otherwise specified;
(e) a term defined in the Trust Indenture Act has the same meaning
when used in this Guarantee, unless otherwise defined in this Guarantee or
unless the context otherwise requires; and
(f) a reference to the singular includes the plural and vice versa.
"Affiliate" has the same meaning as given to that term in Rule 405 of
the Securities Act of 1933, as amended, or any successor rule thereunder.
"Business Day" has the meaning given to such term in the Indenture.
"Corporate Trust Office" means the office of the Guarantee Trustee at
which the corporate trust business of the Guarantee Trustee shall at any
particular time be principally administered, which office at the date of
execution of this Guarantee is located at 450 West 33rd Street, 15th Floor, New
York, New York 10001-2697, Attention: Global Trust Services; telecopy no. (212)
946-8154.
"Covered Person" means any Holder or beneficial owner of the
Securities.
"Debentures" means the series of subordinated deferrable interest
debentures to be issued by the Guarantor, designated the ____% Junior
Subordinated Debentures due 2027 and to be held by the Property Trustee (as
defined in the Declaration) of the Trust.
"Declaration" means the Amended and Restated Declaration of Trust,
dated as of August __, 1997, as amended, modified or supplemented from time to
time, among the trustees of the Trust named therein, the Guarantor, as sponsor,
and the Holders from time to time of undivided beneficial ownership interests in
the assets of the Trust.
"Guarantee Event of Default" means a default by the Guarantor on any
of its payment or other obligations under this Guarantee.
"Guarantee Trustee" means The Chase Manhattan Bank, until a successor
Guarantee Trustee has been appointed and has accepted such appointment pursuant
to the terms of this Guarantee and thereafter means each such Successor
Guarantee Trustee.
"Guarantee Payments" means the following payments or distributions,
without duplication, with respect to the Securities, to the extent not paid
or made by the Trust: (i) any accumulated and unpaid Distributions (as
defined in the Declaration) that are required to be paid on such Securities
to the extent the Trust shall have sufficient funds available therefor at the
time, (ii) the redemption price, including all accrued and unpaid
Distributions to the date of redemption, with respect to any Securities
called for redemption by the Trust to the extent the Trust shall have
sufficient funds available therefor at the time, and (iii) upon a voluntary
or involuntary dissolution, winding-up or termination of the Trust (other
than in connection
<PAGE>
with the distribution of Debentures to the Holders in exchange for Securities
as provided in the Declaration), the lesser of (a) the aggregate of the
liquidation amount and all accrued and unpaid Distributions on the Securities
to the date of payment, to the extent the Trust has funds on hand legally
available therefor, and (b) the amount of assets of the Trust remaining
available for distribution to Holders in liquidation of the Trust (in either
case, the "Liquidation Distribution"). If a Trust Enforcement Event (as
defined in the Declaration) has occurred and is continuing, the rights of
Holders of the Common Securities to receive Guarantee Payments under this
Guarantee are subordinated to the rights of Holders of the Capital Securities
to receive payments hereunder.
"Holder" shall mean any holder of the Securities, as registered on the
books and records of the Trust; provided, however, that, in determining whether
the holders of the requisite percentage of Capital Securities have given any
request, notice, consent or waiver hereunder, "Holder" shall not include the
Guarantor or any Affiliate of the Guarantor or any other obligor on the Capital
Securities; and provided further, that in determining whether the holders of the
requisite liquidation amount of Capital Securities have voted on any matter
provided for in this Guarantee, then for the purpose of such determination only
(and not for any other purpose hereunder), if the Capital Securities remain in
the form of one or more Global Certificates (as defined in the Declaration), the
term "Holders" shall mean the holder of the Global Certificate acting at the
direction of the Capital Security Beneficial Owners (as defined in the
Declaration).
"Indemnified Person" means the Guarantee Trustee, any Affiliate of the
Guarantee Trustee, or any officers, directors, shareholders, members, partners,
employees, representatives, nominees, custodians or agents of the Guarantee
Trustee.
"Indenture" means the Indenture dated as of August __, 1997, among the
Guarantor and The Chase Manhattan Bank, as trustee (the "Debenture Trustee"),
and any indenture supplemental thereto pursuant to which the Debentures are to
be issued to the Property Trustee (as defined in the Declaration) of the Trust.
"Majority in Liquidation Amount of the Securities" means, except as
provided in the terms of the Securities or by the Trust Indenture Act, Holder(s)
of outstanding Securities, voting as a single class, who are the Holders of more
than 50% of the aggregate liquidation amount (including the stated amount that
would be paid on redemption, liquidation or otherwise, plus accrued and unpaid
Distributions to the date upon which the voting percentages are determined) of
all outstanding Securities. In determining whether the Holders of the requisite
amount of Securities have voted, Securities which are owned by the Guarantor or
any Affiliate of the Guarantor or any other obligor on the Securities shall be
disregarded for the purpose of any such determination.
"Officers' Certificate" means, with respect to any Person, a
certificate signed by two Authorized Officers (as defined in the Declaration) of
such Person. Any Officers' Certificate delivered with respect to compliance
with a condition or covenant provided for in this Guarantee shall include:
<PAGE>
(a) a statement that each officer signing the Officers' Certificate
has read the covenant or condition and the definitions relating thereto;
(b) a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers'
Certificate;
(c) a statement that each such officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such
officer to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(d) a statement as to whether, in the opinion of each such officer,
such condition or covenant has been complied with.
"Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, trust, unincorporated association, or government or any
agency or political subdivision thereof, or any other entity of whatever nature.
"Responsible Officer" means, with respect to the Guarantee Trustee,
any officer within the Corporate Trust Office of the Guarantee Trustee,
including any vice president, any assistant vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer or other officer of
the Corporate Trust Office of the Guarantee Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of that officer's knowledge of
and familiarity with the particular subject.
"Successor Guarantee Trustee" means a successor Guarantee Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.1.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended from time to time, or any successor legislation.
ARTICLE 2
TRUST INDENTURE ACT
SECTION 2.1 Trust Indenture Act; Application. (a) This Guarantee is
subject to the provisions of the Trust Indenture Act that are required to be
part of this Guarantee and shall, to the extent applicable, be governed by such
provisions.
(b) If and to the extent that any provision of this Guarantee limits,
qualifies or conflicts with the duties imposed by Sections 310 to 317,
inclusive, of the Trust Indenture Act, such imposed duties shall control.
<PAGE>
SECTION 2.2 Lists of Holders. (a) The Guarantor shall provide or
shall cause the Trust to provide the Guarantee Trustee with a list, in such form
as the Guarantee Trustee may reasonably require, of the names and addresses of
the Holders of the Securities ("List of Holders"), (i) semi-annually, not later
than _________ and ________ of each year and current as of such date, and (ii)
at such other times as the Guarantee Trustee may request in writing, within 30
days of receipt by the Guarantor of a written request from the Guarantee Trustee
for a List of Holders as of a date no more than 15 days before such List of
Holders is given to the Guarantee Trustee, excluding from any such list names
and addresses received by the Guarantee Trustee in its capacity as Security
Registrar (as defined in the Indenture), provided that the Guarantor shall not
be obligated to provide such List of Holders at any time the List of Holders
does not differ from the most recent List of Holders given to the Guarantee
Trustee by the Guarantor. The Guarantee Trustee shall preserve, in as current a
form as is reasonably practicable, all information contained in Lists of Holders
given to it, provided that it may destroy any List of Holders previously given
to it on receipt of a new List of Holders.
(b) The Guarantee Trustee shall comply with its obligations under
Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act.
SECTION 2.3 Reports by Guarantee Trustee. Within 60 days after May
15 of each year (commencing with the year of the first anniversary of the
issuance of the Securities), the Guarantee Trustee shall provide to the Holders
of the Securities such reports as are required by Section 313 of the Trust
Indenture Act, if any, in the form and in the manner provided by Section 313 of
the Trust Indenture Act. The Guarantee Trustee shall also comply with the
requirements of Section 313(d) of the Trust Indenture Act.
SECTION 2.4 Periodic Reports to Guarantee Trustee. The Guarantor
shall provide to the Guarantee Trustee such documents, reports and information,
if any, as required by Section 314 of the Trust Indenture Act and the compliance
certificate required by Section 314 of the Trust Indenture Act in the form, in
the manner and at the times required by Section 314 of the Trust Indenture Act,
provided that such compliance certificate shall be delivered on or before 120
days after the end of each calendar year of the Guarantor.
SECTION 2.5 Evidence of Compliance with Conditions Precedent. The
Guarantor shall provide to the Guarantee Trustee such evidence of compliance
with any conditions precedent, if any, provided for in this Guarantee that
relate to any of the matters set forth in Section 314(c) of the Trust Indenture
Act. Any certificate or opinion required to be given by an officer pursuant to
Section 314(c)(1) may be given in the form of an Officers' Certificate.
SECTION 2.6 Guarantee Event of Default; Waiver. The Holders of a
Majority in Liquidation Amount of the Securities may, by vote, on behalf of the
Holders of all of the Securities, waive any past Guarantee Event of Default and
its consequences. Upon such waiver, any such Guarantee Event of Default shall
cease to exist, and any Guarantee Event of Default arising therefrom shall be
deemed to have been cured, for every purpose of this Guarantee, but no such
waiver shall extend to any subsequent or other default or Guarantee Event of
Default or impair any right consequent thereon.
<PAGE>
SECTION 2.7 Guarantee Event of Default; Notice. (a) The Guarantee
Trustee shall, within 90 days after the occurrence of a Guarantee Event of
Default, transmit by mail, first class postage prepaid, to the Holders, notices
of all Guarantee Events of Default actually known to a Responsible Officer of
the Guarantee Trustee, unless such defaults have been cured before the giving of
such notice; provided, that the Guarantee Trustee shall be protected in
withholding such notice if and so long as a Responsible Officer of the Guarantee
Trustee in good faith determines that the withholding of such notice is in the
interests of the Holders.
(b) The Guarantee Trustee shall not be deemed to have knowledge of any
Guarantee Event of Default unless the Guarantee Trustee shall have received
written notice thereof or a Responsible Officer of the Guarantee Trustee charged
with the administration of the Declaration shall have obtained actual knowledge
thereof.
SECTION 2.8 Conflicting Interests. The Declaration shall be deemed
to be specifically described in this Guarantee for the purposes of clause (i) of
the first provision contained in Section 310(b) of the Trust Indenture Act.
SECTION 2.9 Disclosure of Information. The disclosure of information
as to the names and addresses of the Holders of the Securities in accordance
with Section 312 of the Trust Indenture Act, regardless of the source from which
such information was derived, shall not be deemed to be a violation of any
existing law, or any law hereafter enacted which does not specifically refer to
Section 312 of the Trust Indenture Act, nor shall the Guarantee Trustee be held
accountable by reason of mailing any material pursuant to a request made under
Section 312(b) of the Trust Indenture Act.
SECTION 2.10 Guarantee Trustee May File Proofs of Claim. Upon the
occurrence of a Guarantee Event of Default, the Guarantee Trustee is hereby
authorized to (a) recover judgment, in its own name and as trustee of an express
trust, against the Guarantor for the whole amount of any Guarantee Payments
remaining unpaid and (b) file such proofs of claim and other papers or documents
as may be necessary or advisable in order to have its claims and those of the
Holders of the Securities allowed in any judicial proceedings relative to the
Guarantor, its creditors or its property.
ARTICLE 3
POWERS, DUTIES AND RIGHTS OF
GUARANTEE TRUSTEE
SECTION 3.1 Powers and Duties of Guarantee Trustee.
(a) This Guarantee shall be held by the Guarantee Trustee on behalf
of the Trust for the benefit of the Holders, and the Guarantee Trustee shall
not transfer this Guarantee to any Person except a Holders exercising his or
her rights pursuant to Section 5.4(b) or to a Successor Guarantee Trustee on
acceptance by such Successor Guarantee
<PAGE>
Trustee of its appointment to act in such
capacity. The right, title and interest of the Guarantee Trustee in and to this
Guarantee shall automatically vest in any Successor Guarantee Trustee, and such
vesting and succession of title shall be effective whether or not conveyancing
documents have been executed and delivered pursuant to the appointment of such
Successor Guarantee Trustee.
(b) If a Guarantee Event of Default actually known to a Responsible
Officer of the Guarantee Trustee has occurred and is continuing, the Guarantee
Trustee shall enforce this Guarantee for the benefit of the Holders.
(c) The Guarantee Trustee, before the occurrence of any Guarantee
Event of Default and after the curing of all Guarantee Events of Default that
may have occurred, shall undertake to perform only such duties as are
specifically set forth in this Guarantee, and no implied covenants shall be read
into this Guarantee against the Guarantee Trustee. In case a Guarantee Event of
Default has occurred (that has not been cured or waived pursuant to Section 2.6)
and is actually known to a Responsible Officer of the Guarantee Trustee, the
Guarantee Trustee shall exercise such of the rights and powers vested in it by
this Guarantee, and use the same degree of care and skill in its exercise
thereof, as a prudent person would exercise or use under the circumstances in
the conduct of his or her own affairs.
(d) No provision of this Guarantee shall be construed to relieve the
Guarantee Trustee from liability for its own negligent action, its own negligent
failure to act, or its own willful misconduct, except that:
(i) prior to the occurrence of any Guarantee Event of
Default and after the curing or waiving of all such Guarantee Events
of Default that may have occurred:
(A) the duties and obligations of the Guarantee Trustee
shall be determined solely by the express provisions of this
Guarantee, and the Guarantee Trustee shall not be liable except
for the performance of such duties and obligations as are
specifically set forth in this Guarantee, and no implied
covenants or obligations shall be read into this Guarantee
against the Guarantee Trustee; and
(B) in the absence of bad faith on the part of the
Guarantee Trustee, the Guarantee Trustee may conclusively rely,
as to the truth of the statements and the correctness of the
opinions expressed therein, upon any certificates or opinions
furnished to the Guarantee Trustee and conforming to the
requirements of this Guarantee; but in the case of any such
certificates or opinions that by any provision hereof are
specifically required to be furnished to the Guarantee Trustee,
the Guarantee Trustee shall be under a duty to examine the same
to determine whether or not they conform to the requirements of
this Guarantee;
<PAGE>
(ii) the Guarantee Trustee shall not be liable for any error
of judgment made in good faith by a Responsible Officer of the
Guarantee Trustee, unless it shall be proved that the Guarantee
Trustee was negligent in ascertaining the pertinent facts upon which
such judgment was made;
(iii) the Guarantee Trustee shall not be liable with respect
to any action taken or omitted to be taken by it in good faith in
accordance with the direction of the Holders of not less than a
Majority in Liquidation Amount of the Securities relating to the time,
method and place of conducting any proceeding for any remedy available
to the Guarantee Trustee, or exercising any trust or power conferred
upon the Guarantee Trustee under this Guarantee; and
(iv) no provision of this Guarantee shall require the
Guarantee Trustee to expend or risk its own funds or otherwise incur
personal financial liability in the performance of any of its duties
or in the exercise of any of its rights or powers, if the Guarantee
Trustee shall have reasonable grounds for believing that the repayment
of such funds or liability is not reasonably assured to it under the
terms of this Guarantee or indemnity, reasonably satisfactory to the
Guarantee Trustee, against such risk or liability is not reasonably
assured to it.
SECTION 3.2 Certain Rights of Guarantee Trustee. (a) Subject to the
provisions of Section 3.1:
(i) The Guarantee Trustee may conclusively rely, and shall
be fully protected in acting or refraining from acting upon, any
resolution, certificate, statement, instrument, opinion, report,
notice, request, direction, consent, order, bond, debenture, note,
other evidence of indebtedness or other paper or document believed by
it to be genuine and to have been signed, sent or presented by the
proper party or parties.
(ii) Any direction or act of the Guarantor contemplated by
this Guarantee shall be sufficiently evidenced by an Officers'
Certificate.
(iii) Whenever, in the administration of this Guarantee, the
Guarantee Trustee shall deem it desirable that a matter be proved or
established before taking, suffering or omitting any action hereunder,
the Guarantee Trustee (unless other evidence is herein specifically
prescribed) may, in the absence of bad faith on its part, request and
conclusively rely upon an Officers' Certificate which, upon receipt of
such request, shall be promptly delivered by the Guarantor.
(iv) The Guarantee Trustee shall have no duty to see to any
recording, filing or registration or any instrument (or any
rerecording, refiling or registration thereof).
<PAGE>
(v) The Guarantee Trustee may consult with counsel, and the
written advice or opinion of such counsel with respect to legal
matters shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted by it hereunder in
good faith and in accordance with such advice or opinion. Such
counsel may be counsel to the Guarantor or any of its Affiliates and
may include any of its employees. The Guarantee Trustee shall have
the right at any time to seek instructions concerning the
administration of this Guarantee from any court of competent
jurisdiction.
(vi) The Guarantee Trustee shall be under no obligation to
exercise any of the rights or powers vested in it by this Guarantee at
the request or direction of any Holder, unless such Holder shall have
provided to the Guarantee Trustee such security and indemnity,
reasonably satisfactory to the Guarantee Trustee, against the costs,
expenses (including attorneys, fees and expenses and the expenses of
the Guarantee Trustee's agents, nominees or custodians) and
liabilities that might be incurred by it in complying with such
request or direction, including such reasonable advances as may be
requested by the Guarantee Trustee; provided, that nothing contained
in this Section 3.2(a)(vi) shall be taken to relieve the Guarantee
Trustee, upon the occurrence of a Guarantee Event of Default, of its
obligation to exercise the rights and powers vested in it by this
Guarantee.
(vii) The Guarantee Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document, but the Guarantee Trustee, in
its discretion, may make such further inquiry or investigation into
such facts or matters as it may see fit.
(viii) The Guarantee Trustee may execute any of the trusts or
powers hereunder or perform any duties hereunder either directly or by
or through agents, nominees, custodians or attorneys, and the
Guarantee Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due
care by it hereunder.
(ix) Any action taken by the Guarantee Trustee or its agents
hereunder shall bind the Holders of the Securities, and the signature
of the Guarantee Trustee or its agents alone shall be sufficient and
effective to perform any such action. No third party shall be
required to inquire as to the authority of the Guarantee Trustee to so
act or as to its compliance with any of the terms and provisions of
this Guarantee, both of which shall be conclusively evidenced by the
Guarantee Trustee's or its agent's taking such action.
(x) Whenever in the administration of this Guarantee the
Guarantee Trustee shall deem it desirable to receive instructions with
respect to enforcing any remedy or right or taking any other action
hereunder, the Guarantee
<PAGE>
Trustee (i) may request instructions from the Holders of a Majority
in Liquidation Amount of the Securities, (ii) may refrain from
enforcing such remedy or right or taking such other action until
such instructions are received, and (iii) shall be protected in
conclusively relying on or acting in accordance with such
instructions.
(b) No provision of this Guarantee shall be deemed to impose any duty
or obligation on the Guarantee Trustee to perform any act or acts or exercise
any right, power, duty or obligation conferred or imposed on it in any
jurisdiction in which it shall be illegal, or in which the Guarantee Trustee
shall be unqualified or incompetent in accordance with applicable law, to
perform any such act or acts or to exercise any such right, power, duty or
obligation. No permissive power or authority available to the Guarantee Trustee
shall be construed to be a duty.
SECTION 3.3 Not Responsible for Recitals or Issuance of Guarantee.
The recitals contained in this Guarantee shall be taken as the statements of the
Guarantor, and the Guarantee Trustee does not assume any responsibility for
their correctness. The Guarantee Trustee makes no representations as to the
validity or sufficiency of this Guarantee.
ARTICLE 4
GUARANTEE TRUSTEE
SECTION 4.1 Guarantee Trustee; Eligibility.
(a) There shall be at all times a Guarantee Trustee which shall:
(i) not be an Affiliate of the Guarantor; and
(ii) be a corporation organized and doing business under the
laws of the United States of America or any State or Territory thereof
or of the District of Columbia, or a corporation or Person permitted
by the Securities and Exchange Commission to act as an institutional
trustee under the Trust Indenture Act, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus
of at least 50 million U.S. dollars ($50,000,000), and subject to
supervision or examination by Federal, State, Territorial or District
of Columbia authority. If such corporation publishes reports of
condition at least annually, pursuant to law or to the requirements of
the supervising or examining authority referred to above, then, for
the purposes of this Section 4.1(a)(ii), the combined capital and
surplus of such corporation shall be deemed to be its combined capital
and surplus as set forth in its most recent report of condition so
published.
<PAGE>
(b) If at any time the Guarantee Trustee shall cease to be eligible
to so act under Section 4.1(a), the Guarantee Trustee shall immediately resign
in the manner and with the effect set out in Section 4.2(c).
(c) If the Guarantee Trustee has or shall acquire any "conflicting
interest" within the meaning of Section 310(b) of the Trust Indenture Act, the
Guarantee Trustee and Guarantor shall in all respects comply with the provisions
of Section 310(b) of the Trust Indenture Act.
SECTION 4.2 Appointment, Removal and Resignation of Guarantee
Trustee.
(a) Subject to Section 4.2(b), the Guarantee Trustee may be appointed
or removed without cause at any time by the Guarantor.
(b) The Guarantee Trustee shall not be removed in accordance with
Section 4.2(a) until a Successor Guarantee Trustee has been appointed and has
accepted such appointment by written instrument executed by such Successor
Guarantee Trustee and delivered to the Guarantor.
(c) The Guarantee Trustee appointed to office shall hold such office
until a Successor Guarantee Trustee shall have been appointed. The Guarantee
Trustee may resign from office (without need for prior or subsequent accounting)
by an instrument in writing executed by the Guarantee Trustee and delivered to
the Guarantor, which resignation shall not take effect until a Successor
Guarantee Trustee has been appointed and has accepted such appointment by
instrument in writing executed by such Successor Guarantee Trustee and delivered
to the Guarantor and the resigning Guarantee Trustee.
(d) If no Successor Guarantee Trustee shall have been appointed and
accepted appointment as provided in this Section 4.2 within 60 days after
delivery to the Guarantor of an instrument of resignation, the resigning
Guarantee Trustee may petition any court of competent jurisdiction for
appointment of a Successor Guarantee Trustee. Such court may thereupon, after
prescribing such notice, if any, as it may deem proper, appoint a Successor
Guarantee Trustee.
(e) No Guarantee Trustee shall be liable for the acts or omissions to
act of any Successor Guarantee Trustee.
(f) Upon termination of this Guarantee or removal or resignation of
the Guarantee Trustee pursuant to this Section 4.2, the Guarantor shall pay to
the Guarantee Trustee all amounts owing to the Guarantee Trustee for fees and
reimbursement of expenses which have accrued to the date of such termination,
removal or resignation.
<PAGE>
ARTICLE 5
GUARANTEE
SECTION 5.1 Guarantee.
The Guarantor irrevocably and unconditionally agrees to pay in full to
the Holders the Guarantee Payments (without duplication of amounts theretofore
paid by the Trust), as and when due, regardless of any defense, right of set-off
or counterclaim that the Trust may have or assert. The Guarantor's obligation
to make a Guarantee Payment may be satisfied by direct payment of the required
amounts by the Guarantor to the Holders or by causing the Trust to pay such
amounts to the Holders.
SECTION 5.2 Waiver of Notice and Demand.
The Guarantor hereby waives notice of acceptance of this Guarantee and
of any liability to which it applies or may apply, presentment, demand for
payment, any right to require a proceeding first against the Trust or any other
Person before proceeding against the Guarantor, protest, notice of nonpayment,
notice of dishonor, notice of redemption and all other notices and demands.
SECTION 5.3 Obligations Not Affected.
The obligations, covenants, agreements and duties of the Guarantor
under this Guarantee shall be absolute and unconditional and shall remain in
full force and effect until the entire liquidation amount of all outstanding
Securities shall have been paid and such obligation shall in no way be affected
or impaired by reason of the happening from time to time of any event, including
without limitation, the following, whether or not with notice to, or the consent
of, the Guarantor:
(a) The release or waiver, by operation of law or otherwise, of the
performance or observance by the Trust of any express or implied agreement,
covenant, term or condition relating to the Securities to be performed or
observed by the Trust;
(b) The extension of time for the payment by the Trust of all or any
portion of the Distributions, Redemption Price (as defined in the
Indenture), Liquidation Distribution or any other sums payable under the
terms of the Securities or the extension of time for the performance of any
other obligation under, arising out of, or in connection with the
Securities (other than an extension of time for payment of Distributions,
Redemption Price, Liquidation Distribution or other sum payable that
results from the extension of any interest payment period on the Debentures
or any change to the maturity date of the Debentures permitted by the
Indenture);
(c) Any failure, omission, delay or lack of diligence on the part of
the Property Trustee or the Holders to enforce, assert or exercise any
right, privilege,
<PAGE>
power or remedy conferred on the Property Trustee or the Holders pursuant
to the terms of the Securities, or any action on the part of the Trust
granting indulgence or extension of any kind;
(d) The voluntary or involuntary liquidation, dissolution, sale of
any collateral, receivership, insolvency, bankruptcy, assignment for the
benefit of creditors, reorganization, arrangement, composition or
readjustment of debt of, or other similar proceedings affecting, the Trust
or any of the assets of the Trust;
(e) Any invalidity of, or defect or deficiency in, the Securities;
(f) The settlement or compromise of any obligation guaranteed hereby
or hereby incurred; or
(g) Any other circumstance whatsoever that might otherwise constitute
a legal or equitable discharge or defense of a guarantor, it being the
intent of this Section 5.3 that the obligations of the Guarantor hereunder
shall be absolute and unconditional under any and all circumstances.
There shall be no obligation of the Guarantee Trustee or the Holders
to give notice to, or obtain consent of the Guarantor or any other Person with
respect to the happening of any of the foregoing.
No setoff, counterclaim, reduction or diminution of any obligation, or
any defense of any kind or nature that the Guarantor has or may have against any
Holder shall be available hereunder to the Guarantor against such Holder to
reduce the payments to it under this Guarantee.
SECTION 5.4 Rights of Holders.
(a) The Holders of a Majority in Liquidation Amount of the
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 this
Guarantee or exercising any trust or power conferred upon the Guarantee Trustee
under this Guarantee.
(b) If the Guarantee Trustee fails to enforce this Guarantee, then
any Holder may, subject to the subordination provisions of Section 6.2,
institute a legal proceeding directly against the Guarantor to enforce the
Guarantee Trustee's rights under this Guarantee without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other person
or entity. Notwithstanding the foregoing, if the Guarantor has failed to
make a Guarantee Payment, a Holder may, subject to the subordination
provisions of Section 6.2, directly institute a proceeding against the
Guarantor for enforcement of the Guarantee for such payment to the Holder of
the principal of or interest on the Debentures on or after the respective due
dates specified in the Debentures, and the amount of the payment will be
based on the Holder's pro rata share of the amount due and owing on all of
the Securities. The Guarantor hereby waives any right or remedy to require
that any action on this Guarantee be
<PAGE>
brought first against the Trust or any other person or entity before
proceeding directly against the Guarantor.
SECTION 5.5 Guarantee of Payment.
This Guarantee creates a guarantee of payment and not of collection.
SECTION 5.6 Subrogation.
The Guarantor shall be subrogated to all (if any) rights of the
Holders against the Trust in respect of any amounts paid to such Holders by the
Guarantor under this Guarantee; provided, however, that the Guarantor shall not
(except to the extent required by mandatory provisions of law) be entitled to
enforce or exercise any right that it may acquire by way of subrogation or any
indemnity, reimbursement or other agreement, in all cases as a result of payment
under this Guarantee, if at the time of any such payment any amounts are due and
unpaid under this Guarantee. If any amount shall be paid to the Guarantor in
violation of the preceding sentence, the Guarantor agrees to hold such amount in
trust for the Holders and to pay over such amount to the Guarantee Trustee for
the benefit of the Holders.
SECTION 5.7 Independent Obligations.
The Guarantor acknowledges that its obligations hereunder are
independent of the obligations of the Trust with respect to the Securities, and
that the Guarantor shall be liable as principal and as debtor hereunder to make
Guarantee Payments pursuant to the terms of this Guarantee notwithstanding the
occurrence of any event referred to in subsections 5.3(a) through 5.3(g),
inclusive, hereof.
ARTICLE 6
LIMITATION OF TRANSACTIONS; SUBORDINATION
SECTION 6.1 Limitation of Transactions.
So long as any Securities remain outstanding, if there shall have
occurred a Guarantee Event of Default or a Trust Enforcement Event, then the
Guarantor shall not, and shall not permit any subsidiary of the Guarantor, to
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, the Guarantor's
capital stock, (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 Debentures or (iii) make any guarantee payments
with respect to any guarantee by the Guarantor of the debt securities of any
subsidiary of the Guarantor if such guarantee ranks pari passu with or junior
to the Debentures (other than (a) dividends or distributions in common stock
of the Guarantor, (b) payments under this Guarantee, (c) any declaration of a
dividend in connection with the implementation of a stockholders' rights
plan, or the issuance of stock under any such plan in the future, or the
redemption or repurchase of any such rights
<PAGE>
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 (in each case occurring in the absence of a payment or distribution of
assets to shareholders), (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 exchanges
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).
SECTION 6.2 Ranking.
This Guarantee will constitute an unsecured obligation of the
Guarantor and will rank subordinate and junior in right of payment to all other
liabilities of the Guarantor, except those liabilities of the Guarantor made
pari passu or subordinate by their terms.
If a Trust Enforcement Event has occurred and is continuing under the
Declaration, the rights of the Holders of the Common Securities to receive
Guarantee Payments hereunder shall be subordinated to the rights of the Holders
of the Securities to receive payment of all amounts due and owing hereunder.
ARTICLE 7
TERMINATION
SECTION 7.1 Termination.
This Guarantee shall terminate upon (i) full payment of the Redemption
Price of all Securities, (ii) upon the distribution of the Debentures to the
Holders or (iii) upon full payment of the amounts payable in accordance with the
Declaration upon liquidation of the Trust. Notwithstanding the foregoing, this
Guarantee will continue to be effective or will be reinstated, as the case may
be, if at any time any Holder must restore payment of any sums paid under the
Securities or under this Guarantee.
ARTICLE 8
INDEMNIFICATION
SECTION 8.1 Exculpation.
(a) No Indemnified Person shall be liable, responsible or
accountable in damages or otherwise to the Guarantor or any Covered Person
for any loss, damage or claim incurred by reason of any act or omission
performed or omitted by such Indemnified Person in good faith in accordance
with this Guarantee and in a manner that such Indemnified Person
<PAGE>
reasonably believed to be within the scope of the authority conferred on such
Indemnified Person by this Guarantee or by law, except that an Indemnified
Person shall be liable for any such loss, damage or claim incurred by reason
of such Indemnified Person's negligence or willful misconduct with respect to
such acts or omissions.
(b) An Indemnified Person shall be fully protected in relying in good
faith upon the records of the Guarantor and upon such information, opinions,
reports or statements presented to the Guarantor by any Person as to matters the
Indemnified Person reasonably believes are within such other Person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the Guarantor, including information, opinions, reports or
statements as to the value and amount of the assets, liabilities, profits,
losses, or any other facts pertinent to the existence and amount of assets from
which Distributions to Holders might properly be paid.
SECTION 8.2 Indemnification.
The Guarantor agrees to indemnify each Indemnified Person for, and to
hold each Indemnified Person harmless against, any loss, 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 trust or trusts
hereunder, including the costs and expenses (including reasonable legal fees and
expenses) of defending itself against, or investigating, any claim or liability
in connection with the exercise or performance of any of its powers or duties
hereunder. The obligation to indemnify as set forth in this Section 8.2 shall
survive the termination of this Guarantee.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 Successors and Assigns.
All guarantees and agreements contained in this Guarantee shall bind
the successors, assigns, receivers, trustees and representatives of the
Guarantor and shall inure to the benefit of the Holders of the Securities then
outstanding. Except in connection with a consolidation, merger or sale
involving the Guarantor that is permitted under Article Eight of the Indenture
and pursuant to which the successor or assignee agrees in writing to perform the
Guarantor's obligations hereunder, the Guarantor shall not assign its
obligations hereunder.
SECTION 9.2 Amendments.
Except with respect to any changes that do not adversely affect the
rights of the Holders (in which case no consent of the Holders will be
required), this Guarantee may only be amended with the prior approval of the
Holders of at least a Majority in Liquidation Amount of the Securities. The
provisions of Section 11.2 of the Declaration with respect to
<PAGE>
meetings of, and action by written consent of the Holders of the Securities
apply to the giving of such approval.
SECTION 9.3 Notices.
All notices provided for in this Guarantee shall be in writing, duly
signed by the party giving such notice, and shall be delivered, telecopied or
mailed by registered or certified mail, as follows:
(a) If given to the Guarantee Trustee, at the Guarantee Trustee's
mailing address set forth below (or such other address as the Guarantee
Trustee may give notice of to the Guarantor and the Holders):
The Chase Manhattan Bank
Global Trust Services
450 West 33rd Street, 15th Floor
New York, New York 10001-2697
(212) 946-3040
(b) If given to the Guarantor, at the Guarantor's mailing addresses
set forth below (or such other address as the Guarantor may give notice of
to the Guarantee Trustee and the Holders):
Ocwen Financial Corporation
The Forum, Suite 1000
1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401
(561) 681-8000
Att: President
(c) If given to any Holder, at the address set forth on the books and
records of the Trust.
All such notices shall be deemed to have been given when received in
person, telecopied with receipt confirmed, or mailed by first class mail,
postage prepaid, except that if a notice or other document is refused delivery
or cannot be delivered because of a changed address of which no notice was
given, such notice or other document shall be deemed to have been delivered on
the date of such refusal or inability to deliver.
SECTION 9.4 Benefit.
This Guarantee is solely for the benefit of the Holders of the
Securities and, subject to Section 3.1(a), is not separately transferable from
the Securities.
<PAGE>
SECTION 9.5 Governing Law.
THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, this Guarantee is executed as of the day and year
first above written.
OCWEN FINANCIAL CORPORATION,
as Guarantor
By: _________________________________________
Name:
Title:
THE CHASE MANHATTAN BANK,
as Guarantee Trustee
By: _________________________________________
Name:
Title:
<PAGE>
EXHIBIT 5.0
Law Offices
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
12th Floor
734 15th Street, N.W.
Washington, D.C. 20005
Telephone (202) 347-0300
August 5, 1997
Board of Directors
Ocwen Financial Corporation
The Forum, Suite 1000
1675 West Palm Beach Boulevard
West Palm Beach, Florida 33401
Re: Registration Statement on Form S-1;
File Nos. 333-28889 and 333-28889-01
Ladies and Gentlemen:
We have acted as special counsel to Ocwen Financial Corporation (the
"Company"), in connection with the preparation and filing with the Securities
and Exchange Commission of a Registration Statement on Form S-1 (Nos.
333-28889 and 333-28889-01) (the "Registration Statement") relating to the
registration under the Securities Act of 1933, as amended (the "Act"), of
$125,000,000 aggregate principal amount of Junior Subordinated Debentures
(the "Debt Securities") of the Company, $125,000,000 aggregate liquidation
amount of Capital Securities (the "Capital Securities") of Ocwen Capital
Trust I, a business trust created under the laws of the State of Delaware
(the "Issuer"), and the Guarantee with respect to the Capital Securities (the
"Guarantee") to be executed and delivered by the Company for the benefit of
the holders from time to time of the Capital Securities. Capitalized terms
defined in the Registration Statement and not otherwise defined herein are
used herein with the meanings as so defined.
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Registration Statement and
such corporate records, agreements, documents and other instruments,
including the form of Underwriting Agreement and such certificates or
comparable documents of public officials, of officers and representatives of
the Company as we have deemed relevant or necessary as a basis for the
opinions hereinafter se forth.
In such examination, we have assumed without independent verification the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals, the conformity to original documents of documents submitted
to us as certified or
<PAGE>
Board of Directors
August 5, 1997
Page 2
photostatic copies and the authenticity of the originals of such latter
documents. As to all questions of fact material to this opinion that have
not been independently established, we have relied upon certificates or
comparable documents of officers of the Company, and we have examined the
representations and warranties of the Company contained in the Underwriting
Agreement and have relied upon the accuracy and completeness of the relevant
facts stated therein without independent verification.
Based on the foregoing, and subject to the qualifications stated herein,
we are of the opinion that, when:
(i) the Registration Statement has become effective under the Act;
(ii) the Guarantee Agreement relating to the Guarantee with respect
to the Capital Securities of the Issuer has been duly executed and
delivered;
(iii) the Debt Securities have been duly executed and
authenticated in accordance with the Indenture and issued and delivered as
contemplated in the Registration Statement; and
(iv) the Capital Securities have been duly executed in accordance
with the Amended and Restated Declaration of Trust of the Issuer and
issued and delivered as contemplated in the Registration Statement,
the Debt Securities and the Guarantee relating to the Capital Securities of
the Issuer will constitute valid and legally binding obligations of the
Company, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating
to or affecting creditors' rights and to general equity principles.
We understand that you have received an opinion regarding the Capital
Securities from Richard, Layton & Finger, special Delaware counsel for the
Company and the Issuer. We are expressing no opinion with respect to the
matters contained in such opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to us under the heading "Legal
Matters" in the Prospectus.
<PAGE>
Board of Directors
August 5, 1997
Page 3
In giving such consent, we do not thereby admit that we are in the category
of persons whose consent is required under Section 7 of the Act.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK L.L.P
By: /s/ Gerard L. Hawkins
---------------------------------
Gerard L. Hawkins, a Partner
<PAGE>
Exhibit 5.1
[Letterhead of Richards, Layton & Finger]
August 5, 1997
Ocwen Capital Trust I
The Forum, Suite 1000
1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401
Re: Ocwen Capital Trust I
Ladies and Gentlemen:
We have acted as special Delaware counsel for Ocwen Financial Corporation,
a Florida corporation (the "Company"), and Ocwen Capital Trust I, a Delaware
business trust (the "Trust"), in connection with the matters set forth herein.
At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our examination
of documents has been limited to the examination of originals or copies of the
following:
(a) The Certificate of Trust of the Trust, dated as of June 6, 1997, as
filed in the office of the Secretary of State of the State of Delaware (the
"Secretary of State") on June 6, 1997;
(b) The Declaration of Trust of the Trust, dated as of June 6, 1997, among
the Company and the trustees of the Trust named therein;
(c) The Removal and Appointment of Trustees of the Trust, dated as of July
31, 1997;
<PAGE>
Ocwen Capital Trust I
August 5, 1997
Page 2
(d) The Restated Certificate of Trust of the Trust, dated as of July 31,
1997 (the "Certificate"), as filed in the office of the Secretary of State on
August 4, 1997;
(e) Amendment No. 2 to the Registration Statement (the "Registration
Statement") on Form S-1, including a preliminary prospectus (the "Prospectus"),
relating to the Capital Securities of the Trust representing preferred undivided
beneficial interests in the assets of the Trust (each, a "Capital Security" and
collectively, the "Capital Securities"), as proposed to be filed by the Company
and the Trust with the Securities and Exchange Commission on or about August 5,
1997;
(f) A form of Amended and Restated Declaration of Trust of the Trust, to
be entered into among the Company, as sponsor, the trustees of the Trust named
therein, and the holders, from time to time, of undivided beneficial interests
in the assets of the Trust (including Exhibits A and B thereto) (the
"Declaration"), attached as an exhibit to the Registration Statement; and
(g) A Certificate of Good Standing for the Trust, dated August 5, 1997,
obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are used
as defined in the Declaration.
For purposes of this opinion, we have not reviewed any documents other than
the documents listed in paragraphs (a) through (g) above. In particular, we
have not reviewed any document (other than the documents listed in paragraphs
(a) through (g) above) that is referred to in or incorporated by reference into
the documents reviewed by us. We have assumed that there exists no provision in
any document that we have not reviewed that is inconsistent with the opinions
stated herein. We have conducted no independent factual investigation of our
own but rather have relied solely upon the foregoing documents, the statements
and information set forth therein and the additional matters recited or assumed
herein, all of which we have assumed to be true, complete and accurate in all
material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originaluineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Declaration and
the Certificate are in full force and effect and have not been amended, (ii)
except to the
<PAGE>
Ocwen Capital Trust I
August 5, 1997
Page 3
extent provided in paragraph 1 below, the due creation or due organization or
due formation, as the case may be, and valid existence in good standing of
each party to the documents examined by us under the laws of the jurisdiction
governing its creation, organization or formation, (iii) the legal capacity
of natural persons who are parties to the documents examined by us, (iv) that
each of the parties to the documents examined by us has the power and
authority to execute and deliver, and to perform its obligations under, such
documents, (v) the due authorization, execution and delivery by all parties
thereto of all documents examined by us, (vi) the receipt by each Person to
whom a Capital Security is to be issued by the Trust (collectively, the
"Capital Security Holders") of a Capital Security Certificate for such
Capital Security and the payment for the Capital Security acquired by it, in
accordance with the Declaration and the Registration Statement, and (vii)
that the Capital Securities are issued and sold to the Capital Security
Holders in accordance with the Declaration and the Registration Statement.
We have not participated in the preparation of the Registration Statement and
assume no responsibility for its contents.
This opinion is limited to the laws of the State of Delaware (excluding the
securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules, regulations and orders thereunder which are
currently in effect.
Based upon the foregoing, and upon our examination of such questions of law
and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to ions and exceptions set forth herein, we are of the
opinion that:
1. The Trust has been duly created and is validly existing in good
standing as a business trust under the Business Trust Act.
2. The Capital Securities will represent valid and, subject to the
qualifications set forth in paragraph 3 below, fully paid and nonassessable
undivided beneficial interests in the assets of the Trust.
3. The Capital Security Holders, as beneficial owners of the Trust, will
be entitled to the same limitation of personal liability extended to
stockholders of private corporations for profit organized under the General
Corporation Law of the State of Delaware. We note that the Capital Security
Holders may be obligated to make payments as set forth in the Declaration.
<PAGE>
Ocwen Capital Trust I
August 5, 1997
Page 4
We consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement. In addition, we hereby
consent to the use of our name under the heading "Legal Matters" in the
Prospectus. In giving the foregoing consents, we do not thereby admit that we
come within the category of Persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder. Except as stated above, without
our prior written consent, this opinion may not be furnished or quoted to, or
relied upon by, any other Person for any purpose.
Very truly yours,
/s/ Richards, Layton & Finger
<PAGE>
EXHIBIT 8
Law Offices
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
12th Floor
734 15th Street, N.W.
Washington, D.C. 20005
Telephone (202) 347-0300
August 5, 1997
Board of Directors
Ocwen Financial Corporation
The Forum, Suite 1000
1675 West Palm Beach Boulevard
West Palm Beach, Florida 33401
Re: Registration Statement on Form S-1;
File Nos. 333-28889 and 333-28889-01
Ladies and Gentlemen:
As special federal tax counsel to Ocwen Capital Trust I (the
"Issuer") and Ocwen Financial Corporation in connection with the
issuance by the Issuer of up to $125,000,000 of its Capital
Securities pursuant to the prospectus (the "Prospectus") contained
in the above-captioned Registration Statement filed with the
Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act"), and assuming the operative documents
described in the Prospectus will be performed in accordance with
the terms described therein, we hereby confirm to you our opinion
as set forth under the heading "Certain United States Federal
Income Tax Consequences" in the Prospectus, subject to the
limitations set forth therein.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the references to us under the
heading "Certain United States Federal Income Tax Consequences" in
the Prospectus. In giving such consent, we do not thereby admit
that we are in the category of persons whose consent is required
under Section 7 of the Act.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK L.L.P
By: /s/Gerard L. Hawkins
-----------------------------------
Gerard L. Hawkins, a Partner
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
Pre-Effective Amendment No. 2 to 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
August 1, 1997
<PAGE>
___________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
___________________________________________
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
________________________________________
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
New York 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 Park Avenue
New York, New York 10017
(Address of principal executive offices) (Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
_____________________________________________
OCWEN FINANCIAL CORPORATION
(Exact name of obligor as specified in its charter)
Florida 65-0039856
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
The Forum, Suite 1000
1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401
(Address of principal executive offices) (Zip Code)
_____________________________________________
Junior Subordinated Deferrable Interest Debentures
(Title of the indenture securities)
_____________________________________________
<PAGE>
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising
authority to which it is subject.
New York State Banking Department, State House,
Albany, New York 12110.
Board of Governors of the Federal Reserve System,
Washington, D.C., 20551
Federal Reserve Bank of New York, District No. 2,
33 Liberty Street, New York, N.Y.
Federal Deposit Insurance Corporation, Washington,
D.C., 20429.
(b) Whether it is authorized to exercise corporate
trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe
each such affiliation.
None.
<PAGE>
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of
Amendment dated February 17, 1969, August 31, 1977, December 31, 1980,
September 9, 1982, February 28, 1985, December 2, 1991 and July 10, 1996 (see
Exhibit 1 to Form T-1 filed in connection with Registration Statement No.
333-06249, which is incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14,
1996, in connection with the merger of Chemical Bank and The Chase Manhattan
Bank (National Association), Chemical Bank, the surviving corporation, was
renamed The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act
(see Exhibit 6 to Form T-1 filed in connection with Registration Statement
No. 33-50010, which is incorporated by reference. On July 14, 1996, in
connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York and State of New York, on the 30th
day of July, 1997.
THE CHASE MANHATTAN BANK
By /S/ Joanne Adamis
-----------------
Joanne Adamis
Second Vice President
<PAGE>
Exhibit 7 to Form T-1
Bank Call Notice
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,
at the close of business March 31, 1997, in
accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
IN MILLIONS
---------------
<S> <C>
ASSETS
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin.............................................. $ 11,721
Interest-bearing balances....................................................................... 3,473
Securities:.......................................................................................
Held to maturity securities....................................................................... 2,965
Available for sale securities..................................................................... 35,903
Federal Funds sold and securities purchased under agreements to resell............................ 24,025
Loans and lease financing receivables:
Loans and leases, net of unearned income............................... $ 123,957
Less: Allowance for loan and lease losses.............................. 2,853
Less: Allocated transfer risk reserve.................................. 13
---------------
Loans and leases, net of unearned income, allowance, and reserve.................................. 121,091
Trading Assets.................................................................................... 54,340
Premises and fixed assets (including capitalized leases).......................................... 2,875
Other real estate owned........................................................................... 302
Investments in unconsolidated subsidiaries and associated companies............................... 139
Customers' liability to this bank on acceptances outstanding...................................... 2,270
Intangible assets................................................................................. 1,535
Other assets...................................................................................... 10,283
---------------
TOTAL ASSETS...................................................................................... $ 270,922
---------------
---------------
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
LIABILITIES
Deposits
In domestic offices............................................................................. $ 84,776
Noninterest-bearing.................................................... $ 32,492
Interest-bearing....................................................... 52,284
In foreign offices, Edge and Agreement subsidiaries, and IBF's.................................. 69,171
Noninterest-bearing.................................................... $ 4,181
Interest-bearing......................................................... 64,990
Federal funds purchased and securities sold under agreements to repurchase....................... 32,885
Demand notes issued to the U.S. Treasury.......................................................... 1,000
Trading liabilities............................................................................... 42,538
Other Borrowed money (includes mortgage indebtedness and obligations under calitalized leases):
With a remaining maturity of one year or less................................................... 4,431
With a remaining maturity of more than one year................................................. 466
Bank's liability on acceptances executed and outstanding.......................................... 2,270
Subordinated notes and debentures................................................................. 5,911
Other liabilities................................................................................. 11,575
TOTAL LIABILITIES................................................................................. 255,023
---------------
EQUITY CAPITAL
Perpetual Preferred stock and related surplus..................................................... 0
Common stock...................................................................................... 1,211
Surplus (exclude all surplus related to preferred stock).......................................... 10,283
Undivided profits and capital reserves............................................................ 4,941
Net unrealized holding gains (Losses) on available-for-sale securities............................ (552)
Cumulative foreign currency translation adjustments............................................... 16
TOTAL EQUITY CAPITAL.............................................................................. 15,899
---------------
TOTAL LIABILITIES, LIMITED-LIFE PREFERRED STOCK AND EQUITY CAPITAL................................ $ 270,922
---------------
---------------
</TABLE>
I, Joseph L. Sclafani, E.V.P. & Controller of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
WALTER V. SHIPLEY )
THOMAS G. LABRECQUE ) DIRECTORS
WILLIAM B. HARRISON, JR. )
5
<PAGE>
___________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
___________________________________________
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
________________________________________
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
New York 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 Park Avenue
New York, New York 10017
(Address of principal executive offices) (Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
________________________________________
OCWEN CAPITAL TRUST I
(Exact name of obligor as specified in its charter)
Florida 65-0039856
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
The Forum, Suite 1000
1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401
(Address of principal executive offices) (Zip Code)
________________________________________
Capital Securities
(Title of the indenture securities)
________________________________________
<PAGE>
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
New York State Banking Department, State House, Albany, New York
12110.
Board of Governors of the Federal Reserve System, Washington, D.C.,
20551
Federal Reserve Bank of New York, District No. 2, 33 Liberty Street,
New York, N.Y.
Federal Deposit Insurance Corporation, Washington, D.C., 20429.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
<PAGE>
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of
Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of
Amendment dated February 17, 1969, August 31, 1977, December 31, 1980,
September 9, 1982, February 28, 1985, December 2, 1991 and July 10, 1996 (see
Exhibit 1 to Form T-1 filed in connection with Registration Statement No.
333-06249, which is incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to
Commence Business (see Exhibit 2 to Form T-1 filed in connection with
Registration Statement No. 33-50010, which is incorporated by reference. On
July 14, 1996, in connection with the merger of Chemical Bank and The Chase
Manhattan Bank (National Association), Chemical Bank, the surviving
corporation, was renamed The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to
Form T-1 filed in connection with Registration Statement No. 333-06249, which
is incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the
Act (see Exhibit 6 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996,
in connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
7. A copy of the latest report of condition of the Trustee,
published pursuant to law or the requirements of its supervising or examining
authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York and State of New York, on the 30th
day of July, 1997.
THE CHASE MANHATTAN BANK
By /S/Joanne Adamis
--------------------
Joanne Adamis
Second Vice President
<PAGE>
Exhibit 7 to Form T-1
Bank Call Notice
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,
at the close of business March 31, 1997, in
accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
IN MILLIONS
---------------
<S> <C>
ASSETS
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin.............................................. $ 11,721
Interest-bearing balances....................................................................... 3,473
Securities:.......................................................................................
Held to maturity securities....................................................................... 2,965
Available for sale securities..................................................................... 35,903
Federal Funds sold and securities purchased under agreements to resell............................ 24,025
Loans and lease financing receivables:
Loans and leases, net of unearned income............................... $ 123,957
Less: Allowance for loan and lease losses.............................. 2,853
Less: Allocated transfer risk reserve.................................. 13
---------------
Loans and leases, net of unearned income, allowance, and reserve................................ 121,091
Trading Assets.................................................................................... 54,340
Premises and fixed assets (including capitalized leases).......................................... 2,875
Other real estate owned........................................................................... 302
Investments in unconsolidated subsidiaries and associated companies............................... 139
Customers' liability to this bank on acceptances outstanding...................................... 2,270
Intangible assets................................................................................. 1,535
Other assets...................................................................................... 10,283
---------------
TOTAL ASSETS...................................................................................... $ 270,922
---------------
---------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
IN MILLIONS
---------------
<S> <C>
LIABILITIES
Deposits
In domestic offices............................................................................. $ 84,776
Noninterest-bearing.................................................... $ 32,492
Interest-bearing....................................................... 52,284
In foreign offices, Edge and Agreement subsidiaries, and IBF's.................................. 69,171
Noninterest-bearing.................................................... $ 4,181
Interest-bearing....................................................... 64,990
Federal funds purchased and securities sold under agreements to repurchase....................... 32,885
Demand notes issued to the U.S. Treasury.......................................................... 1,000
Trading liabilities............................................................................... 42,538
Other Borrowed money (includes mortgage indebtedness and obligations under calitalized leases):
With a remaining maturity of one year or less................................................... 4,431
With a remaining maturity of more than one year................................................. 466
Bank's liability on acceptances executed and outstanding.......................................... 2,270
Subordinated notes and debentures................................................................. 5,911
Other liabilities................................................................................. 11,575
TOTAL LIABILITIES................................................................................. 255,023
---------------
EQUITY CAPITAL
Perpetual Preferred stock and related surplus..................................................... 0
Common stock...................................................................................... 1,211
Surplus (exclude all surplus related to preferred stock).......................................... 10,283
Undivided profits and capital reserves............................................................ 4,941
Net unrealized holding gains (Losses) on available-for-sale securities............................ (552)
Cumulative foreign currency translation adjustments............................................... 16
TOTAL EQUITY CAPITAL.............................................................................. 15,899
---------------
TOTAL LIABILITIES, LIMITED-LIFE PREFERRED STOCK AND EQUITY CAPITAL................................ $ 270,922
---------------
---------------
</TABLE>
I, Joseph L. Sclafani, E.V.P. & Controller of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
WALTER V. SHIPLEY )
THOMAS G. LABRECQUE ) DIRECTORS
WILLIAM B. HARRISON, JR. )
5
<PAGE>
____________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
___________________________________________
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
________________________________________
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
New York 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 Park Avenue
New York, New York 10017
(Address of principal executive offices) (Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
_____________________________________________
OCWEN FINANCIAL CORPORATION
(Exact name of obligor as specified in its charter)
Florida 65-0039856
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
The Forum, Suite 1000
1675 Palm Beach Lakes Blvd.
West Palm Beach, Florida 33401
(Address of principal executive offices) (Zip Code)
_____________________________________________
Guarantee of Capital Securities of
Ocwen Capital Trust I
(Title of the indenture securities)
<PAGE>
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising
authority to which it is subject.
New York State Banking Department, State House,
Albany, New York 12110.
Board of Governors of the Federal Reserve System,
Washington, D.C., 20551
Federal Reserve Bank of New York, District No. 2,
33 Liberty Street, New York, N.Y.
Federal Deposit Insurance Corporation, Washington,
D.C., 20429.
(b) Whether it is authorized to exercise corporate
trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe
each such affiliation.
None.
<PAGE>
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of
Amendment dated February 17, 1969, August 31, 1977, December 31, 1980,
September 9, 1982, February 28, 1985, December 2, 1991 and July 10, 1996 (see
Exhibit 1 to Form T-1 filed in connection with Registration Statement No.
333-06249, which is incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14,
1996, in connection with the merger of Chemical Bank and The Chase Manhattan
Bank (National Association), Chemical Bank, the surviving corporation, was
renamed The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act
(see Exhibit 6 to Form T-1 filed in connection with Registration Statement
No. 33-50010, which is incorporated by reference. On July 14, 1996, in
connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York and State of New York, on the 30th
day of July, 1997.
THE CHASE MANHATTAN BANK
By /S/Joanne Adamis
---------------------
Joanne Adamis
Second Vice President
<PAGE>
Exhibit 7 to Form T-1
Bank Call Notice
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,
at the close of business March 31, 1997, in
accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
IN MILLIONS
---------------
<S> <C>
ASSETS
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin.............................................. $ 11,721
Interest-bearing balances....................................................................... 3,473
Securities:.......................................................................................
Held to maturity securities....................................................................... 2,965
Available for sale securities..................................................................... 35,903
Federal Funds sold and securities purchased under agreements to resell............................ 24,025
Loans and lease financing receivables:
Loans and leases, net of unearned income............................... $ 123,957
Less: Allowance for loan and lease losses.............................. 2,853
Less: Allocated transfer risk reserve.................................. 13
---------------
Loans and leases, net of unearned income, allowance, and reserve................................ 121,091
Trading Assets.................................................................................... 54,340
Premises and fixed assets (including capitalized leases).......................................... 2,875
Other real estate owned........................................................................... 302
Investments in unconsolidated subsidiaries and associated companies............................... 139
Customers' liability to this bank on acceptances outstanding...................................... 2,270
Intangible assets................................................................................. 1,535
Other assets...................................................................................... 10,283
---------------
TOTAL ASSETS...................................................................................... $ 270,922
---------------
---------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
IN MILLIONS
---------------
<S> <C>
LIABILITIES
Deposits
In domestic offices............................................................................. $ 84,776
Noninterest-bearing.................................................... $ 32,492
Interest-bearing....................................................... 52,284
In foreign offices, Edge and Agreement subsidiaries, and IBF's.................................. 69,171
Noninterest-bearing.................................................... $ 4,181
Interest-bearing....................................................... 64,990
Federal funds purchased and securities sold under agreements to repurchase....................... 32,885
Demand notes issued to the U.S. Treasury.......................................................... 1,000
Trading liabilities............................................................................... 42,538
Other Borrowed money (includes mortgage indebtedness and obligations under calitalized leases):
With a remaining maturity of one year or less..................................................... 4,431
With a remaining maturity of more than one year................................................... 466
Bank's liability on acceptances executed and outstanding.......................................... 2,270
Subordinated notes and debentures................................................................. 5,911
Other liabilities................................................................................. 11,575
TOTAL LIABILITIES................................................................................. 255,023
---------------
EQUITY CAPITAL
Perpetual Preferred stock and related surplus..................................................... 0
Common stock...................................................................................... 1,211
Surplus (exclude all surplus related to preferred stock).......................................... 10,283
Undivided profits and capital reserves............................................................ 4,941
Net unrealized holding gains (Losses) on available-for-sale securities............................ (552)
Cumulative foreign currency translation adjustments............................................... 16
TOTAL EQUITY CAPITAL.............................................................................. 15,899
---------------
TOTAL LIABILITIES, LIMITED-LIFE PREFERRED STOCK AND EQUITY CAPITAL................................ $ 270,922
---------------
---------------
</TABLE>
I, Joseph L. Sclafani, E.V.P. & Controller of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
WALTER V. SHIPLEY )
THOMAS G. LABRECQUE ) DIRECTORS
WILLIAM B. HARRISON, JR. )
5
