BCBF, L.L.C.
STATEMENT OF FINANCIAL CONDITION
December 31, 1996
(Dollars in thousands)
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
--------
--------
The accompanying notes are an integral part of these financial statements.
BCBF, L.L.C.
STATEMENT OF OPERATIONS
For the Period March 13, 1996 through December 31, 1996
(Dollars in thousands)
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
-----------
-----------
The accompanying notes are an integral part of these financial statements.
BCBF, L.L.C
STATEMENT OF CHANGES IN OWNERS' EQUITY
For the Period March 13, 1996 through December 31, 1996
(Dollars in thousands)
Ocwen Federal BlackRock Capital
Bank FSB Finance L.P. Total
------------- ---------------- -------
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
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
BCBF, L.L.C.
STATEMENT OF CASH FLOWS
For the period March 13, 1996 through December 31, 1996
(Dollars in thousands)
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)
---------
---------
The accompanying notes are an integral part of these financial statements.
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.
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands)
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 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.
2
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands)
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 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.
3
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands)
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.
4
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands)
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.
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:
Carrying Amount Fair Value
--------------- ----------
Financial Assets:
Cash and cash equivalents $ 10 $ 10
Loans held for sale 110,702 110,702
Real estate owned, net 25,595 31,738
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 realize 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.
5
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands)
The LLC's HUD Loan portfolio, which has been designated held for sale,
consists of the following at December 31, 1996 :
Unpaid principal balance $ 159,405
Discount (48,703)
---------
$ 110,702
---------
---------
The following table sets forth information relating to the payment status of
the HUD Loans at December 31, 1996:
% of HUD
Amount Loans
-------- -----
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 %
--------
--------
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.
6
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands)
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:
Texas $ 30,382
California 26,596
Connecticut 11,729
Maryland 9,487
Colorado 9,018
Other 72,193
--------
Total $159,405
--------
--------
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 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:
Single-family residential $ 26,106
Valuation allowance (511)
--------
Real estate owned, net $ 25,595
--------
--------
7
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands)
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:
Balance, beginning of period $ -
Provision for losses 636
Charge-offs and sales (125)
---------
Balance, end of period $ 511
---------
---------
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:
Texas $ 7,782
California 6,992
Maryland 2,692
Virginia 1,318
Georgia 1,274
Other 5,537
---------
Total $ 25,595
---------
---------
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:
Description:
Gains on sales $ 775
Provision for losses (636)
Carrying costs, net of rental income (269)
-------
Loss on real estate owned, net $ (130)
-------
-------
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.
8
BCBF, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Dollars in thousands)
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.
9
[LOGO]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
January 24, 1997
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.
/s/ Price Waterhouse LLP