SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-21341
OCWEN FINANCIAL CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 65-0039856
- ------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
THE FORUM, SUITE 1000
---------------------
1675 PALM BEACH LAKES BOULEVARD, WEST PALM BEACH, FLORIDA 33401
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(561) 681-8000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Number of shares of Common Stock, $.01 par value, outstanding at the close of
business on August 13, 1997: 29,802,610
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OCWEN FINANCIAL CORPORATION
FORM 10-Q
I N D E X
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PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Interim Financial Statements (Unaudited)........................... 3
Consolidated Statements of Financial Condition
at June 30, 1997 and December 31, 1996............................. 3
Consolidated Statements of Operations for the three and six
months ended June 30, 1997 and 1996................................ 4
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 1996 and six months
ended June 30, 1997................................................ 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and 1996................................ 6
Notes to Consolidated Financial Statements......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 42
Item 4. Submission of matters to a vote of Security holders................ 42
Item 6. Exhibits and Reports on Form 8-K................................... 42
Signature................................................................... 43
2
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PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited)
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------------------------------------
June 30, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions ............................... $ 6,911 $ 6,878
Interest bearing deposits ....................................................... 29,992 13,341
Federal funds sold and repurchase agreements .................................... 189,844 32,000
Securities held for trading ..................................................... -- 75,606
Securities available for sale, at market value .................................. 263,412 354,005
Loans available for sale, at lower of cost or market ............................ 103,627 126,366
Investment securities, net ...................................................... 38,821 8,901
Loan portfolio, net ............................................................. 433,663 402,582
Discount loan portfolio, net .................................................... 1,295,120 1,060,953
Principal, interest and dividends receivable .................................... 13,311 16,821
Investments in low income housing tax credit interests .......................... 101,204 93,309
Investment in joint ventures .................................................... 27,588 67,909
Real estate owned, net .......................................................... 117,703 103,704
Investment in real estate ....................................................... 63,679 41,033
Premises and equipment, net ..................................................... 17,531 14,619
Income taxes receivable ......................................................... 8,879 15,115
Deferred tax asset .............................................................. 10,718 5,860
Goodwill ........................................................................ 11,040 --
Other assets .................................................................... 53,836 44,683
----------- -----------
$ 2,786,879 $ 2,483,685
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ..................................................................... $ 2,198,603 $ 1,919,742
Advances from the Federal Home Loan Bank ..................................... -- 399
Securities sold under agreements to repurchase ............................... -- 74,546
Notes, debentures and other interest bearing obligations ..................... 286,972 225,573
Accrued expenses, payables and other liabilities ............................. 55,927 59,829
----------- -----------
Total liabilities .......................................................... $ 2,541,502 $ 2,280,089
----------- -----------
Minority interest ............................................................... 1,513 --
----------- -----------
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 June 30, 1997 and December 31,
1996, respectively ......................................................... 268 267
Additional paid-in capital ................................................... 23,124 23,258
Retained earnings ............................................................ 216,250 180,417
Unrealized gain on securities available for sale, net of taxes ............... 7,060 3,486
Notes receivable on exercise of common stock options ......................... (2,838) (3,832)
----------- -----------
Total stockholders' equity ................................................. 243,864 203,596
----------- -----------
$ 2,786,879 $ 2,483,685
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Three Months Six Months
--------------------------- ----------------------------
For the periods ended June 30, 1997 1996 1997 1996
- ------------------------------------------------------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Federal funds sold and repurchase agreements.............. $ 795 $ 1,329 $ 2,453 $ 2,098
Securities available for sale............................. 6,509 6,284 14,682 14,064
Securities held for trading............................... -- -- 248 --
Loans available for sale.................................. 3,973 4,887 6,824 11,484
Loans..................................................... 10,674 7,764 21,366 17,773
Discount loans............................................ 44,246 29,903 74,470 52,058
Investment securities and other........................... 745 1,335 1,426 1,980
----------- ------------ ------------ ------------
66,942 51,502 121,469 99,457
----------- ------------ ------------ ------------
Interest expense:
Deposits.................................................. 31,371 22,445 61,264 45,446
Securities sold under agreements to repurchase............ 204 32 477 685
Advances from the Federal Home Loan Bank.................. 145 993 428 2,032
Notes, debentures and other interest bearing obligations.. 7,148 3,434 13,863 6,873
----------- ------------ ------------ ------------
38,868 26,904 76,032 55,036
----------- ------------ ------------ ------------
Net interest income before provision for loan losses... 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
----------- ------------ ------------ ------------
Non-interest income:
Servicing fees and other charges........................... 4,845 1,468 10,081 787
Gains on sales of interest earning assets, net............. 23,365 4,584 40,143 9,601
Gain (loss) on real estate owned, net...................... 4,629 887 3,835 (1,028)
Other income............................................... 450 1,129 581 2,001
----------- ------------ ------------ ------------
33,289 8,068 54,640 11,361
----------- ------------ ------------ ------------
Non-interest expense
Compensation and employee benefits......................... 19,676 8,570 34,599 14,739
Occupancy and equipment.................................... 3,960 2,181 6,789 4,227
Net operating income (loss) on investments in real
estate and certain low-income housing tax credit
interests.............................................. 104 (399) 1,197 62
Other operating expenses................................... 7,340 3,518 11,192 6,526
----------- ------------ ------------ ------------
31,080 13,870 53,777 25,554
----------- ------------ ------------ ------------
Equity in earnings of investment in joint venture............ 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
=========== ============ ============ ============
Earnings per share:
Net income.............................................. $ 0.69 $ 0.45 $ 1.32 $ 0.57
=========== ============ ============ ============
Weighted average common shares outstanding................... 27,063,761 26,398,127 27,068,563 26,397,920
=========== ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
For the six months ended June 30, 1997 and the year ended
December 31, 1996
UNREALIZED
GAIN NOTES
(LOSS) 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......................... -- -- -- 35,833 -- -- 35,833
Repurchase of common stock options. -- -- (1,870) -- -- -- (1,870)
Exercise of common stock options... 55,341 1 1,736 -- -- -- 1,737
Repayment of notes receivable on
exercise of common
stock options .................. -- -- -- -- -- 994 994
Change in unrealized gain on
securities available for sale,
net of taxes.................... -- -- -- -- 3,574 -- 3,574
--------- --------- --------- --------- --------- --------- ---------
Balances at June 30, 1997.......... 26,799,511 $ 268 $ 23,124 $ 216,250 $ 7,060 $ (2,838) $ 243,864
========== ========= ========= ========= ========= ========== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
</TABLE>
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<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the six months ended June 30, 1997 1996
- ----------------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $ 35,833 $ 15,026
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Net cash provided from trading activities....................................... 106,833 4,744
Proceeds from sales of loans available for sale................................. 187,848 287,233
Purchases of loans available for sale........................................... (62,504) (142,150)
Origination of loans available for sale......................................... (126,502) (720)
Principal payments received on loans available for sale......................... 6,251 21,334
Premium amortization (discount accretion), net.................................. 23,310 3,229
Depreciation and amortization................................................... 11,339 1,997
Provision for loan losses....................................................... 17,651 14,370
Gains on sales of interest earning assets, net.................................. (40,143) (9,601)
Loss on sales of premises and equipment......................................... -- 97
(Gain) loss on sale of real estate owned, net................................... (8,220) 2,010
Gain on sale of interest in tax credit partnership interests -- (990)
Decrease in principal, interest and dividends receivable........................ 3,510 1,366
Decrease (increase) in income taxes receivable.................................. 6,236 (7,076)
(Increase) decrease in deferred tax asset....................................... (4,925) 4,282
Increase in goodwill............................................................ (11,040) --
(Increase) decrease in other assets............................................. (9,184) 4,345
Decrease in accrued expenses, payables and other liabilities.................... (7,858) (6,386)
--------- ----------
Net cash provided by operating activities.......................................... 128,435 193,110
--------- ----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale............................ 162,412 137,454
Purchases of securities available for sale...................................... (107,374) (85,557)
Maturities of and principal payments received on securities available for sale.. 11,930 23,021
Purchase of securities held for investment...................................... (29,920) --
Purchase of assets from Admiral................................................. (6,750) --
Purchase of low income housing tax credit interests............................. (16,200) (14,427)
Proceeds from low income housing tax credit interests........................... -- 3,704
Proceeds from sales of discount loans........................................... 221,966 22,152
Proceeds from sales of loans held for investment................................ 3,594 --
Purchase and originations of loans held for investment.......................... (99,851) (80,071)
Purchase of discount loans...................................................... (707,209) (120,590)
Decrease (increase) in investment in joint ventures............................. 40,321 (63,404)
Principal payments received on loans held for investment........................ 69,394 62,173
Principal payments received on discount loans................................... 159,144 135,851
Proceeds from sales of real estate owned........................................ 85,604 75,674
Purchase of real estate owned in connection with discount loan purchases........ (1,425) (1,434)
Proceeds from sale of premises and equipment.................................... -- 233
Additions to premises and equipment............................................. (5,718) (5,698)
---------- ----------
Net cash (used) provided by investing activities................................... (220,082) 89,081
---------- ----------
(Continued on next page)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
6
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
For the six months ended June 30, 1997 1996
- -------------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits......................................................... 278,861 529
Decrease in securities sold under agreements to repurchase................... (74,546) (84,761)
Proceeds from issuance of notes and borrowings under lines of credit......... 61,399 --
Payments on advances from Federal Home Loan Bank............................. (399) --
Payments and repurchase of notes and mortgages payable....................... -- (1,351)
Repayment of notes by executive officers..................................... 994 --
Exercise of common stock options............................................. 1,736 2
Repurchase of common stock options........................................... (1,870) (176)
--------- ----------
Net cash provided (used) by financing activities................................ 266,175 (85,757)
--------- ----------
Net increase in cash and cash equivalents....................................... 174,528 196,434
Cash and cash equivalents at beginning of period................................ 52,219 54,632
--------- ----------
Cash and cash equivalents at end of period...................................... $ 226,747 $ 251,066
========= ==========
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions............................ $ 6,911 $ 6,196
Interest bearing deposits.................................................... 29,992 57,638
Federal funds sold and repurchase agreements................................. 189,844 187,232
--------- ----------
$ 226,747 $ 251,066
========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................................... $ 77,512 $ 54,424
========= ==========
Income taxes............................................................... $ 7,354 $ 1,922
========= ==========
Supplemental schedule of non-cash investing and financing activities:
Exchange of discount loans and loans available for sale for securities..... $ 290,614 $ 134,785
========= ==========
Real estate owned acquired through foreclosure............................. $ 90,153 $ 43,299
========= ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
7
</TABLE>
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OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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
subsidiary, Ocwen Federal Bank FSB (the "Bank"), and Investors Mortgage
Insurance Holding Company ("IMI"). Ocwen also owns 80% of Ocwen Financial
Services ("OFS"), with the remaining 20% owned by Admiral Home Loan ("Admiral")
and reported in the consolidated financial statements as a minority interest.
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 June 30, 1997 and December
31, 1996, the results of its operations for the three and six months ended June
30, 1997 and 1996, its cash flows for the six months ended June 30, 1997 and
1996, and its changes in stockholders' equity for the year ended December 31,
1996 and the six months ended June 30, 1997. The results of operations and other
data for the six month period ended June 30, 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 June
30, 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 issued and delayed implementation for one year
certain provisions of SFAS No. 125. The Company's adoption of these statements
did not have any material impact on its results of operations, financial
position or cash flows.
On January 28, 1997 the Securities and Exchange Commission approved rule
amendments (Release #33-7386, the "Release") regarding disclosures about
derivative financial instruments, or other financial instruments and derivative
commodity instruments. The Release amended Rule 4-08 of Regulation S-X (General
Notes to Financial Statements) to add a new paragraph which requires extensive
detail regarding the accounting policies followed in connection with accounting
for derivative financial instruments and derivative commodity instruments. The
accounting policy
8
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OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
disclosure requirements are effective for periods ending after June 15, 1997.
See Note 4 below and Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset and Liability Management included in Item 2
hereof for the Company's accounting policy disclosures in accordance with the
requirements of the Release. The Release also added Item 305 to regulation S-K
to require quantitative (in one of three formats) and qualitative disclosures
outside of the financial statements about market risk inherent in derivative and
other financial instruments. The quantitative and qualitative disclosures about
market risks are effective for periods ending after June 15, 1997 which include
annual financial 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 issued
for periods ending after December 15, 1997, including interim periods and early
adoption is not permitted. SFAS No. 129 is also 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 corporation 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 LLC.
BCFL was formed to acquire multifamily loans. At June 30, 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 $26,532 and $67,909 at June 30, 1997 and
December 31, 1996, respectively, and is net of valuation allowances of $2,002
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 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. Equity in earnings for the six months ended June
30, 1997 includes 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.
9
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
Set forth below is the statement of financial condition of the LLC at the dates
indicated and a statement of operations for the six months ended June 30, 1997.
<TABLE>
<CAPTION>
BCBF, L.L.C.
STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
1997 1996
----------- ----------
<S> <C> <C>
Assets:
Cash $ 10 $ 10
Loans held for sale, at lower of cost or market value.......... 36,864 110,702
Real estate owned, net of valuation allowance of $175 and $511
at June 30, 1997 and December 31, 1996, respectively......... 13,970 25,595
Other assets................................................... 6,225 10,526
----------- ----------
$ 57,069 $ 146,833
=========== ==========
Liabilities and Owners' Equity
Liabilities:...................................................
Accrued expenses, payables and other liabilities............. $ 1 $ 787
----------- ----------
Total liabilities.......................................... $ 1 $ 787
----------- ----------
Owners' Equity:
Ocwen Federal Bank FSB......................................... 28,534 73,023
BlackRock Capital Finance L.P.................................. 28,534 73,023
----------- ----------
Total owners' equity......................................... 57,068 146,046
----------- ----------
$ 57,069 $ 146,833
=========== ==========
</TABLE>
BCBF, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE PERIOD
THREE MONTHS SIX MONTHS APRIL 10, 1996
ENDED ENDED THROUGH
JUNE 30, 1997 JUNE 30, 1997 JUNE 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Interest income........................... $ 1,869 $ 5,354 $ 9,309
Interest expense.......................... -- -- 8,279
------------- ------------ -------------
Net interest income.................... 1,869 5,354 1,030
------------- ------------ -------------
Non-interest income:
Gain on sale of loans held for sale.... -- 18,412 1,324
Gain on real estate owned, net......... (206) 1,337 --
Loan fees.............................. 1 23 7
------------- ------------ -------------
(205) 19,772 1,331
-------------- ------------ -------------
Operating expenses:
Loan servicing fees.................... 753 1,429 2,207
------------- ------------ -------------
Net income................................
$ 911 $ 23,697 $ 154
============= ============ =============
</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 regarding this transaction, see Management
10
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
Discussion and Analysis of Financial Condition and Results of Operations -
Non-interest Income included in Item 2 hereof.
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 notional amount. The terms of the swaps
provide for the Company to receive a floating rate of interest equal to 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 June 30, 1997 and December
31, 1996 follows:
<TABLE>
<CAPTION>
NOTIONAL LIBOR FIXED FLOATING RATE AT
MATURITY AMOUNT INDEX RATE END OF PERIOD FAIR VALUE
-------- -------- ----- ----- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 1997........ 1998 $ 41,460 1-Month 6.18% 5.69% $ 23
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 June 30, 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 were
as follows at the dates indicated:
<TABLE>
<CAPTION>
Maturity Notional Principal Fair Value
-------- ------------------ ----------
<S> <C> <C> <C>
JUNE 30, 1997
U.S. Treasury futures... 1997 $ 197,900 (1,182)
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 institutions subject to Office
of Thrift Supervision ("OTS") supervision. The Bank must follow specific capital
guidelines stipulated by the
11
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
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 June 30, 1997, the minimum regulatory capital requirements were:
o 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.
o 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 June 30, 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 total 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 June 30, 1997 that management believes have
changed the institution's category.
12
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
The following tables summarize the Bank's actual and required regulatory capital
at June 30, 1997
<TABLE>
<CAPTION>
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 9.65% $ 252,536
assets...............................
Net unrealized gain on certain
available for sale securities...... (7,044)
Excess mortgage servicing rights..... (254)
---------
Tangible capital, and ratio to
adjusted total assets................ 9.40% $ 245,238 1.50% $ 39,147
========== ========
Tier 1 (core) capital, and ratio to
adjusted total assets................ 9.40% $ 245,238 3.00% $ 78,294 5.00% $130,490
========== ======== ========
Tier 1 capital, and ratio to
risk-weighted assets................. 9.13% $ 245,238 6.00% $161,212
========== ========
Allowance for loan and lease losses..... 25,709
Subordinated debentures................. 100,000
----------
Tier 2 Capital....................... 125,709
----------
Total risk-based capital, and ratio
to risk-weighted assets.............. 13.81% $ 370,947 8.00% $214,949 10.00% $268,687
========== ======== ========
Total regulatory assets................. $2,617,108
==========
Adjusted total assets................ $2,609,810
==========
Risk-weighted assets................. $2,686,869
==========
</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 June 30, 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.
Notwithstanding the foregoing, however, the Bank's ability to make capital
distributions as a Tier 1 institution is limited by agreements between it and
the OTS to maintain specified capital levels and to dividend to Ocwen
subordinate and residual securities resulting from the Bank's securitization
activities, as discussed below.
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%
13
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
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%. Based upon recent discussions with the OTS, the Bank also
determined to transfer its single-family residential lending activities to
sub-prime borrowers to OFS. Additionally, the Bank agreed with the OTS (i) to
discontinue the purchase of subordinate classes of mortgage-related securities
created by unaffiliated parties, (ii) to sell the five such securities held by
it at March 31, 1997 (aggregate book value of $32,010), which was completed by a
sale to Ocwen Asset Investment Corp. ("OAIC"), a real estate investment trust in
which Ocwen owns a 9.8% interest, on May 19, 1997 (at a gain of $2,648 to the
Bank) and (iii) subject to the requirements of the OTS capital distribution
regulations, to dividend to Ocwen all subordinate and residual mortgage-related
securities acquired by it in connection with its securitization activities. The
Bank dividended two securities with an aggregate book value of $19,462 to Ocwen
in June 1997, and at June 30, 1997, the Bank held five subordinate securities
and one residual security which had an aggregate book value of $38,130. 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 June 30, 1997 the Company had commitments to (i) originate $32,683 of
sub-prime loans secured by single-family residential properties, (ii) fund
$52,058 of loans secured by multi-family residential buildings, (iii) fund
$15,189 of loans secured by office buildings and (iv) fund $33,693 of loans
secured by hotel properties. Additionally, the Company had commitments of $8,326
to purchase sub-prime loans secured by single-family residential properties. The
Company, through its investment in subordinate securities and REMIC residuals
which had a book value of $57,408 at June 30, 1997, supports senior classes of
mortgage-related securities having an outstanding principal balance of
$1,396,562.
The Company is subject to various pending legal proceedings in the ordinary
course of business. Management, after reviewing these claims with legal counsel,
is of the opinion that the resolution of these claims will not have a material
adverse effect on the Company's financial position, results of operations, cash
flows or liquidity.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 business activities are conducted primarily
through the Bank and currently consist primarily of its discount loan
acquisition, resolution and servicing activities, and various investment
activities, including investments in a wide variety of mortgage-related
securities and investments in low-income housing tax credit interests. The
Company obtains funds for investment in the foregoing and other business
activities primarily from brokered and other wholesale certificates of deposit
and, to a lesser extent, retail deposits obtained through its office in Fort
Lee, New Jersey, FHLB advances, reverse repurchase agreements, lines of credit
and asset securitizations.
The Company is a registered savings and loan holding company subject to
regulation by the OTS. The Bank 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 Federal Deposit Insurance Corporation
("FDIC") as a result of its membership in the Savings Association Insurance Fund
("SAIF") administered by the FDIC, which insures the Bank's deposits up to the
maximum extent permitted by law. The Bank is also subject to certain regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board") and currently is a member of the FHLB of New York, one of the 12
regional banks which comprise the FHLB System.
At June 30, 1997, the only significant subsidiaries of the Company,
other than the Bank, were IMI and OFS. IMI, through subsidiaries, 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. OFS was formed in October 1996 for the
purpose of purchasing substantially all of the assets of Admiral (a transaction
which closed on May 1, 1997), 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.
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 the Interim Consolidated Financial Statements and
related Notes included in Item 1 hereof.
RECENT DEVELOPMENTS
On July 15, 1997, IMI sold a 69% partnership interest in the Westin
Hotel for a minimal gain.
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 hereof, or that
any bid by the Company will be successful in whole or in part.
On August 6, 1997 the Securities and Exchange Commission ("SEC")
declared effective a Form S-1 registration statement with respect to the
offering by the Company to the public of 3,000,000 shares (plus up to 450,000
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
shares pursuant to the underwriters' over-allotment options) of newly-issued
common stock. The offering of such common stock , which closed on August 12,
1997, resulted in estimated net proceeds to the Company of $123.4 million.
Concurrently on August 6, 1997, the SEC declared effective a Form S-1
registration statement with respect to the offering by Ocwen Capital Trust I, a
newly-formed Delaware business trust and subsidiary of Ocwen, of $125.0 million
of 10 7/8% capital securities. The offering of such capital securities, which
also closed on August 12, 1997, resulted in estimated net proceeds to the
Company of $120.7 million.
On Friday, August 1, 1997 shares of the Company's common stock began
trading on the New York Stock Exchange ("NYSE") under the symbol "OCN". The
Company has traded on the NASDAQ National Market System under the symbol "OCWN"
since September 1996, when the Company completed its initial public offering.
Upon effectiveness of the NYSE listing, the Company delisted its common stock
from NASDAQ.
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At or For the Three Months Ended June 30,
-------------------------------------------
1997 1996 Change
----------- ----------- ---------
FOR THE PERIOD: (Dollars in thousands, except share data)
<S> <C> <C> <C>
Net interest income......................... $ 28,074 $ 24,598 14%
Provision for loan losses................... 7,909 4,964 (59)
Non-interest income......................... 33,289 8,068 313
Non-interest expense........................ 31,080 13,870 (124)
Equity in earnings of investment in joint
ventures.................................... 1,301 1,078 21
Net income.................................. 18,792 11,999 57
PER COMMON SHARE
Net income.................................. $ 0.69 $ 0.45 53%
Stock price: (1)
High..................................... 32.88 - -
Low ..................................... 25.50 - -
Close.................................... 32.63 - -
AVERAGE BALANCES
Interest-earning assets..................... $ 2,334,115 $ 1,517,572 54%
Interest-bearing liabilities................ 2,345,476 1,649,551 (42)
Stockholders' equity........................ 232,758 148,599 57
KEY RATIOS
Interest rate spread:.......................
Yield on interest-earning assets......... 11.47% 13.57% (15)%
Cost of interest-bearing liabilities..... 6.63 6.52 (2)
Interest rate spread................... 4.84 7.05 (31)
Annualized return on average assets (2)..... 2.75 2.27 21
Annualized return on average equity......... 32.29 32.30 -
Efficiency ratio (3)........................ 49.60 41.10 (21)
Core (leverage) capital ratio............... 9.40 6.74 39
Risk-based capital ratio.................... 13.81 13.61 1
At or For the Six Months Ended June 30,
-------------------------------------------
1997 1996 Change
----------- ----------- ---------
FOR THE PERIOD: (Dollars in thousands, except share data)
<S> <C> <C> <C>
Net interest income......................... $ 45,437 $ 44,421 2%
Provision for loan losses................... 17,651 14,370 (23)
Non-interest income......................... 54,640 11,361 381
Non-interest expense........................ 53,777 25,554 (110)
Equity in earnings of investment in joint
ventures.................................... 15,674 1,078 1,354
Net income.................................. 35,833 15,026 138
PER COMMON SHARE
Net income.................................. $ 1.32 $ 0.57 132
Stock price (1)
High..................................... 34.75 - -
Low ..................................... 25.25 - -
Close.................................... 32.63 - -
AVERAGE BALANCES
Interest-earning assets..................... $ 2,251,951 $ 1,572,250 43%
Interest-bearing liabilities................ 2,302,046 1,687,970 (36)
Stockholders' equity........................ 222,386 145,399 53
KEY RATIOS
Interest rate spread:.......................
Yield on interest-earning assets......... 10.79% 12.65% (15)%
Cost of interest-bearing liabilities..... 6.61 6.52 (1)
Interest rate spread................... 4.18 6.13 (32)
Annualized return on average assets (2)..... 2.68 1.48 81
Annualized return on average equity......... 32.23 20.67 56
Efficiency ratio (3)........................ 46.46 44.94 3
</TABLE>
(1) For the period ended June 30.
(2) Includes the Company's pro rata share of average assets held by its 50%
joint venture.
(3) Before provision for loan losses and including equity in earnings of
investment in joint venture.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
SUMMARY
The Company's net income amounted to $18.8 million or $0.69 per share
for the three months ended June 30, 1997 as compared to net income of $12.0
million, or $0.45 per share for the same period in 1996. For the six months
ended June 30, 1997, the Company's net income amounted to $35.8 million or $1.32
per share, compared to net income of $15.0 million, or $0.57 per share for the
same period in 1996.
The $3.5 million or 14% increase in net interest income during the
second quarter of 1997 as compared to the second quarter of 1996 is primarily
due to a $816.5 million increase in average interest-earnings assets offset in
part by a $695.9 million increase in average interest-bearing liabilities and a
221 basis point decline in the interest rate spread
The $25.2 million or 313% increase in non-interest income for the three
months ended June 30, 1997 is primarily due to a $17.2 million net gain earned
in connection with the securitization of 1,783 single-family residential loans
with an unpaid principal balance of $170.6 million (of which 1,751 loans with an
unpaid principal balance of $168.3 million were discount loans and 32 loans with
an unpaid principal balance of $2.3 million were from the loan portfolio), a
$4.5 million gain earned in connection with the securitization of 896 sub-prime
single-family residential mortgage 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. (See Note 5 to the Interim Consolidated
Financial Statements). The Company continues to service the loans for a fee and
has retained an interest in the related subordinate and residual class
securities. Also included in non-interest income for the six months ended June
30, 1997 is a $9.5 million gain resulting from the Company's direct
participation in a securitization by the Company, the LLC and an affiliate of
BlackRock of 2,916 discount mortgage loans on March 27, 1997 which were
previously acquired from HUD in 1995 and 1996.
Equity in earnings of investment in joint ventures of $15.7 million for
the six months ended June 30, 1997 includes $9.2 million representing the
Company's pro rata share of the gain recorded by the LLC in connection with the
March 27, 1997 securitization described above. The LLC, was formed in March,
1996 and began operations in the second quarter of 1996.
Non-interest expense increased $17.2 million or 124% during the three
months ended June 30, 1997, as compared to the same period in 1996, primarily
due to an increase in the average number of employees to 823 from 373 and an
increase in employee profit sharing expense of $3.3 million. For the six months
ended June 30, 1997, non-interest expense increased $28.2 million or 110% as
compared to the same period in 1996 primarily as a result of an increase in the
average number of employees to 721 from 349 and a $6.9 million increase in
employee profit sharing expense.
The following table presents the estimated contribution by business
activity to the Company's net income for the periods indicated.
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
-------------------------- ------------------------
1997 1996 1997 1996
------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Discount Loans:
Single-family residential loans..... 26% 3% 32% 2%
Large Commercial ................... 34 26 25 21
Small Commercial.................... 3 8 3 5
Investment in low-income housing tax
credits............................... 16 22 18 33
Commercial lending..................... 7 21 5 20
Sub-prime single family lending........ (1) 18 2 15
Mortgate loan servicing................ 1 1 3 4
Investment Securities.................. 9 1 9 1
Other.................................. 5 -- 3 (1)
------------ ---------- ---------- ---------
100% 100% 100% 100%
============ ========== ========== =========
</TABLE>
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
AVERAGE BALANCE AND RATE ANALYSIS. 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 rate spread and net interest margin. Information is based
on daily balances during the indicated periods.
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
Average Annualized Average Annualized
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Federal funds sold and
repurchase agreements ..... $ 63,192 $ 795 5.03% $ 97,678 $ 1,329 5.44%
Securities available for sale 308,267 6,509 8.45 281,970 6,284 8.91
Loans available for sale (1) . 135,801 3,973 11.70 218,719 4,887 8.94
Investment securities and
other (2) .................... 29,113 745 10.24 35,940 1,335 14.86
Loan portfolio (1) ........... 447,591 10,674 9.54 296,106 7,764 10.49
Discount loan portfolio ...... 1,350,151 44,246 13.11 587,159 29,903 20.37
---------- --------- ---------- ---------
Total interest-earning
assets, interest income ... 2,334,115 66,942 11.47 1,517,572 51,502 13.57
--------- ---------
Non-interest earning cash ... 12,204 6,639
Allowance for loan losses .... (21,441) (11,771)
Investments in
low-income housing
tax credit interests ...... 100,779 99,900
Investment in joint ventures . 30,128 55,440
Real estate owned, net ....... 102,527 142,010
Other assets ................. 174,002 87,196
---------- ----------
Total assets .............. $2,732,315 $1,896,986
========== ==========
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing demand
deposits ..................... $ 42,600 $ 496 4.66 $ 21,753 $ 176 3.24
Savings deposits ............. 2,037 12 2.36 3,423 19 2.22
Certificates of deposit .... 2,030,734 30,863 6.08 1,435,549 22,250 6.20
---------- --------- ---------- ---------
Total interest-bearing
deposits .................. 2,075,371 31,371 6.05 1,460,725 22,445 6.15
Notes, debentures and other .. 245,523 7,148 11.65 115,946 3,434 11.85
Securities sold under
agreements to repurchase .. 14,272 204 5.72 2,481 32 5.16
Federal Home Loan Bank advances 10,310 145 5.63 70,399 993 5.64
---------- --------- ---------- ---------
Total interest-bearing
liabilities, interest
expense ................. 2,345,476 38,868 6.63 1,649,551 26,904 6.52
--------- ---------
Non-interest bearing deposits 28,147 4,284
Escrow deposits .............. 72,006 40,437
Other liabilities ............ 53,928 54,115
---------- ----------
Total liabilities .......... 2,499,557 1,748,387
Stockholders' equity ......... 232,758 148,599
---------- ----------
Total liabilities and
stockholders' equity .... $2,732,315 $1,896,986
========== ==========
Net interest income before
provision for loan losses . $ 28,074 $ 24,598
========= =========
Net interest rate spread ..... 4.84% 7.05%
==== ====
Net interest rate margin ..... 4.81% 6.48%
==== ====
Ratio of interest-earning
assets to interest-bearing
liabilities ............... 99% 92%
== ==
</TABLE>
(1) The average balance includes non-performing loans, interest on which is
recognized on a cash basis.
(2) Included in interest income on investment securities and other is
interest income earned on that portion of the deferred tax asset which
relates to tax residuals. Inclusive of the average balance of the
deferred tax asset related to tax residuals as investment securities
and other, the average yield for the three months ended June 30, 1997
and 1996 would have been 10.34% and 10.93%, respectively.
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Six Months Ended June 30
----------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
Average Annualized Average Annualized
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Federal funds sold and
repurchase agreements .... $ 97,765 $ 2,453 5.02% $ 77,435 $ 2,098 5.42%
Securities available for sale 323,640 14,682 9.07 301,940 14,064 9.32
Securities held for trading.. 6,589 248 7.53 -- -- --
Loans available for sale (1). 127,823 6,824 10.68 240,009 11,484 9.57
Investment securities and
other (2)................. 26,306 1,426 10.84 37,273 1,980 10.62
Loan portfolio (1)........... 435,642 21,366 9.81 299,243 17,773 11.88
Discount loan portfolio...... 1,234,186 74,470 12.07 616,350 52,058 16.89
--------- -------- ---------- -------
Total interest - earning
assets, interest income... 2,251,951 121,469 10.79 1,572,250 99,457 12.65
-------- -------
Non-interest earning cash... 11,781 6,549
Allowance for loan losses.... (18,897) (7,307)
Investments in
low-income housing
tax credit interests...... 95,588 94,825
Investment in joint ventures. 46,882 27,720
Real estate owned, net....... 107,377 152,499
Other assets................. 176,625 78,165
----------- ----------
Total assets.............. $ 2,671,306 $1,924,701
=========== ==========
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing demand
deposits ................. $ 33,275 $ 723 4.35 $ 23,668 $ 405 3.42
Savings deposits............. 2,328 27 2.32 3,434 40 2.33
Certificates of deposit...... 1,997,377 60,514 6.06 1,450,536 45,001 6.20
----------- -------- ---------- -------
Total interest-bearing
deposits.................. 2,032,980 61,264 6.03 1,477,638 45,446 6.15
Notes, debentures and other.. 235,547 13,863 11.77 116,140 6,873 11.84
Securities sold under
agreements to repurchase.. 17,603 477 5.42 23,793 685 5.76
Federal Home Loan
Bank advances............. 15,916 428 5.38 70,399 2,032 5.77
----------- -------- ---------- -------
Total interest-bearing
liabilities,
interest expense....... 2,302,046 76,032 6.61 1,687,970 55,036 6.52
Non-interest bearing deposits 20,765 4,039
Escrow deposits.............. 71,860 38,773
Other liabilities............ 54,249 48,520
----------- ----------
Total liabilities......... 2,448,920 1,779,302
Stockholders' equity......... 222,386 145,399
----------- ----------
Total liabilities and
stockholders' equity...... $ 2,671,306 $1,924,701
=========== ==========
Net interest income before
provision for loan losses. $ 45,437 $44,421
======== =======
Net interest rate spread.. 4.18% 6.13%
==== ====
Net interest rate margin..... 4.04% 5.65%
==== ====
Ratio of interest-earning
assets to interest-bearing
liabilities .............. 98% 93%
== ==
</TABLE>
(1) The average balance includes non-performing loans, interest on which is
recognized on a cash basis.
(2) Included in interest income on investment securities and other is
interest income earned on that portion of the deferred tax asset which
relates to tax residuals. Inclusive of the average balance of the
deferred tax asset related to tax residuals as investment securities
and other, the average yield for the six months ended June 30, 1997 and
1996 would have been 10.90% and 7.39%, respectively.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
RATE/VOLUME ANALYSIS. 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 Six months
------------------------------ -------------------------------
FOR THE PERIODS ENDED JUNE 30- 1997 vs. 1996 1997 vs. 1996
------------------------------ -------------------------------
(DOLLARS IN THOUSANDS) Increase (decrease) due to Increase (decrease) due to
------------------------------ -------------------------------
Rate Volume Total Rate Volume Total
------- --------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and
repurchase agreements.... $ (94) $ (440) $ (534) $ (164) $ 519 $ 355
Securities held for trading -- -- -- 248 -- 248
Securities available for
sale..................... (341) 566 225 (373) 991 618
Loans available for sale. 1,254 (2,168) (914) 1,206 (5,866) (4,660)
Loan portfolio........... (757) 3,667 2,910 (3,487) 7,080 3,593
Discount loan portfolio.. (13,644) 27,987 14,343 (18,173) 40,585 22,412
Investment securities and
other.................... (366) (224) (590) 40 (594) (554)
-------- -------- --------- -------- ------- ---------
Total interest-earning
assets................... (13,948) 29,388 15,440 (20,703) 42,715 22,012
-------- -------- --------- --------- ------- ---------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits................. 101 219 320 127 191 318
Savings deposits......... 1 (8) (7) -- (13) (13)
Certificates of deposit.. (441) 9,054 8,613 (1,078) 16,591 15,513
--------- -------- --------- --------- ------- ---------
Total interest-bearing
deposits................. (339) 9,265 8,926 (951) 16,769 15,818
Subordinated debentures.. (59) 3,773 3,714 (38) 7,028 6,990
Securities sold under
agreements to repurchase. 3 169 172 (38) (170) (208)
Federal Home Loan Bank
advances............... (3) (845) (848) (130) (1,474) (1,604)
-------- -------- --------- -------- ------- ---------
Total interest-bearing
liabilities.......... (398) 12,362 11,964 (1,157) 22,153 20,996
--------- -------- --------- -------- ------- ---------
Increase in net interest
income................... $(13,550) $ 17,026 $ 3,476 $(19,546) $20,562 $ 1,016
======== ======== ========= ========= ======= =========
</TABLE>
RESULTS OF OPERATIONS: THREE AND SIX MONTHS ENDED JUNE 30, 1997 VERSUS THREE AND
SIX MONTHS ENDED JUNE 30, 1996
NET INTEREST INCOME. The Company's net interest income of $28.1 million
increased $3.5 million or 14% during the three months ended June 30, 1997 as
compared to the comparable period in the prior year. Interest income increased
$15.4 million or 30% due to a $816.5 million or 54% increase in the Company's
average interest-earning assets from period to period which was offset in part
by a 210 basis point decrease in the weighted average yield earned. Interest
expense increased $12.0 million or 44% due to a $695.9 million or 42% increase
in the Company's average interest-bearing liabilities.
Net interest income of $45.4 million for the six months ended June 30,
1997 increased $1.0 million or 2% over the comparable period of the prior year.
The increase resulted from the $679.7 million or 43% increase in average
interest-earning assets from period to period which was offset in part by a 186
basis point decrease in the weighted average yield earned on those assets, net
of the $614.1 million or 36% increase in the average interest-bearing
liabilities.
INTEREST INCOME. Interest income on the discount loan portfolio
increased by $14.3 million or 48% in the three months ended June 30, 1997 versus
the three months ended June 30, 1996 as a result of a $763.0 million or 130%
increase in the average balance of the discount loan portfolio which was offset
in part by 726 basis point decline in the weighted average yield earned. For the
six months ended June 30, 1997 as compared to the same period in 1996, interest
income on the discount loan portfolio increased $22.4 million or 43% due to a
$617.8 million or 100% increase in the average balance of the discount loan
portfolio which was offset in part by a 482 basis point decrease in the weighted
average yield earned. The decline in the yields during 1997, as compared to
1996, is primarily attributable to
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
an increase in the average balance of single-family discount loans acquired from
HUD, significant resolutions of residential and commercial loans during the
second quarter of 1996 and the Company's decision to cease accretion of discount
on nonperforming single-family discount loans effective January 1, 1997.
Discount accretion on non-performing single-family residential discount loans
amounted to $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. The Company believes that for the remainder of 1997
the yield earned on its discount loan portfolio will remain below the yield
earned in the prior year due to its decision to cease accretion of discount and
its current strategy of attempting to work with borrowers to either (i) bring
their loans current, (ii) modify the terms of their loans, (iii) enter into
forbearance agreements that require the borrower to make monthly payments
greater than or equal to scheduled payment amount or (iv) refinance the loans
with the Company. This resolution strategy results in lower initial yields as
compared to borrowers paying off their loans in full or in part, and to the
extent the loans are ultimately sold will result in a significant portion of the
earnings being reflected in gains on sales of interest earning assets. In
addition, the majority of the single-family HUD loans acquired by the Company in
February 1997 are currently under a HUD forbearance plan, whereby the borrower
makes payments based upon ability to pay for a specific period of time, which
generally results in a lower effective yield than the contract rate. Once this
period is over the borrower must make at least its contractual mortgage payment
or the Company can pursue foreclosure or other actions. Virtually all the loans
currently serviced by the Company under these plans will reach the end of the
grace period by July 1998. The yield on the overall discount loan portfolio is
also likely to continue to fluctuate from quarter to quarter as a result of the
timing of resolutions, particularly the resolution of large multifamily and
commercial loans, and the mix of the overall portfolio between paying and
nonpaying loans.
Interest income on the loan portfolio increased by $2.9 million or 37%
in the second quarter of 1997 from the comparable period in 1996 primarily due
to an increase in the average balance of the loan portfolio for the three months
ended June 30, 1997 of $151.5 million or 51% over that of the same period in
1996, offset in part by a 95 basis point decrease in the weighted average yield
earned. For the six months ended June 30, 1997, interest income on the loan
portfolio increased $3.6 million or 20% over that of the same period in 1996 as
a result of a $136.4 million or 46% increase in the average balance of the loan
portfolio which was offset in part by a 207 basis point decrease in the weighted
average yield earned on the portfolio. The decline in the yield during the six
months ended June 30, 1997 was primarily due to $2.1 million of additional
interest earned during the first quarter of 1996 in connection with the
repayment of hotel loans.
Interest income on loans available for sale decreased $914,000 million
or 19% during the second quarter of 1997 as compared to 1996 primarily as a
result of a $82.9 million decrease in the average balance offset in part by a
276 basis point increase in the weighted average yield earned. For the first six
months of 1997, interest income on loans available for sale decreased $4.7
million or 41% during the first six months 1997 as compared to 1996 due to a
decrease in the average balance of loans available for sale of $112.2 million or
47% which was offset in part by a 111 basis point increase in the weighted
average yield earned. The increase in weighted average yields for the three and
six months ended June 30, 1997, as compared to comparable periods in 1996, is
primarily due to significant resolutions of non-performing sub-prime
single-family loans during the second quarter of 1997.
INTEREST EXPENSE. The increases in interest expense during the three
and six months ended June 30, 1997, as compared to the same periods in 1996,
reflect 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 $1.44
billion and $1.45 billion during the three and six months ended June 30, 1996,
respectively, to $2.0 billion during the three and six months ended June 30,
1997.
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 discount loan portfolio at a level which management considers adequate
based upon an evaluation of known and inherent risks in such loan portfolios.
Management's periodic evaluation is based upon an analysis of each of the
discount loan portfolio and the loan portfolio, historical loss experience,
current economic conditions and other relevant factors.
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the components of the Company's provision for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
For the periods ended June 30- Three Months Six Months
------------------------- -------------------------
(Dollars in thousands) 1997 1996 1997 1996
- -------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Discount loans................ $ 7,769 $ 4,545 $ 16,165 $ 13,238
Loan portfolio................ 140 419 1,486 1,132
--------- --------- --------- ---------
Total.................... $ 7,909 $ 4,964 $ 17,651 $ 14,370
========= ========= ========= =========
</TABLE>
The amount provided for discount loans during the first six months of
1997 included $2.0 million established during the first quarter on single-family
residential loans acquired from HUD in 1995 and 1996 which were not included in
the March 1997 securitization.
Although management utilizes its best judgment in providing for
possible loan losses, there can be no assurance that the Company will not change
its provisions for possible loan losses in subsequent periods to a higher level
from that recorded to date in 1997. Changing economic and business conditions,
fluctuations in local markets for real estate, future changes in nonperforming
asset trends, large upward movements in market interest rates or other reasons
could affect the Company's future provisions for loan losses. In addition, the
OTS, as an integral part of its examination process, periodically reviews the
adequacy of the Company's allowances for losses on loans and discount 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. For further discussion and analysis regarding the provisions for
loan losses, see "Changes in Financial Condition - Allowances for Losses."
NON-INTEREST INCOME. The following table sets forth the principal
components of the Company's non-interest income during the periods indicated.
<TABLE>
<CAPTION>
For the periods ended June 30 - Three months Six months
------------------------- ------------------------
(Dollars in thousands) 1997 1996 1997 1996
--------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Servicing fees and other charges.......... $ 4,845 $ 1,468 $ 10,081 $ 787
Gains on sales of interest-earning assets, 23,365 4,584 40,143 9,601
net..................................
Income (loss) on real estate owned, net... 4,629 887 3,835 (1,028)
Other income.............................. 450 1,129 581 2,001
---------- ---------- ---------- ----------
Total................................ $ 33,289 $ 8,068 $ 54,640 $ 11,361
========== ========== ========== ==========
</TABLE>
The increase in servicing fees and other charges during 1997 was due to
an increase in loan servicing and related fees as a result of the Company's
increase in loans (primarily non-performing) serviced for others. The average
unpaid principal balance of loans serviced for others amounted to $2.50 billion
and $2.27 billion during the three and six months ended June 30, 1997,
respectively, as compared to $561.8 million and $450.3 million during the three
and six months ended June 30, 1996. Included in servicing fees and other charges
during the first six months of 1997 was $1.1 million of fees earned during the
first quarter in connection with the setup of loans transferred to the Company
for servicing during the quarter. In addition, servicing fees and other charges
earned during the first six months of 1996 included a $928,000 valuation
adjustment recorded during the first quarter to mortgage servicing rights due to
a significant increase in prepayments of the underlying loans serviced resulting
primarily from refinancings.
Net gains on sales of interest-earning assets in the second quarter of
1997 were primarily comprised of a $17.2 million gain in connection with the
securitization of 1,783 single-family residential loans with an aggregate unpaid
principal balance of $170.6 million (of which 1,751 loans with an unpaid
principal balance of $168.3 million were discount loans and 32 loans with an
unpaid principal balance of $2.3 million were from the loan portfolio), a $3.8
million net gain in connection with the securitization of 896 single-family
residential mortgage 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. Net gains on sales of interest-earning assets in the
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
second quarter of 1996 were primarily comprised of a $5.9 million of gain from
the sale of sub-prime single-family residential loans with an aggregate unpaid
principal balance of $223.1 million.
The following table sets forth the results of the Company's investment
in real estate owned, which was primarily related to the discount loan
portfolio, during the periods indicated:
<TABLE>
For the periods ended June 30 - Three months Six months
(Dollars in thousands) 1997 1996 1997 1996
------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Gains on sales......................... $ 6,568 $ 3,878 $ 10,466 $ 7,778
Provision for loss in fair value....... 90 (3,410) (2,247) (9,788)
Rental income (carrying costs), net.... (2,029) 419 (4,384) 982
--------- --------- --------- ---------
Income (loss) on real estate owned, net $ 4,629 $ 887 $ 3,835 $ (1,028)
========= ========= ========= =========
</TABLE>
Included in gains on sales of real estate owned for the six months
ended June 30, 1997 was a gain of $430,000 on a bulk sale of 228 properties for
$21.2 million.
NON-INTEREST EXPENSE. The following table sets forth the principal
components of the Company's non-interest expense during the periods indicated.
<TABLE>
<CAPTION>
For the periods ended June 30 - Three months Six months
(Dollars in thousands) 1997 1996 1997 1996
- ------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Compensation and employee benefits.................. $ 19,676 $ 8,570 $ 34,599 $ 14,739
Occupancy and equipment............................. 3,960 2,181 6,789 4,227
Net operating loss (income) on investments in real
estate and certain low-income housing tax credit
interests......................................... 104 (399) 1,197 62
Other operating expenses............................ 7,340 3,518 11,192 6,526
--------- --------- --------- ---------
Total............................................ $ 31,080 $ 13,870 $ 53,777 $ 25,554
========= ========= ========= =========
</TABLE>
The increases in compensation and employee benefits during the three
and six months ended June 30, 1997 reflect increases in the average number of
full-time equivalent employees as well as increases in profit sharing expense.
The average number of full-time equivalent employees was 664 and 638 during the
three and six months ended June 30, 1997, respectively, and 368 and 344 during
the three and six months ended June 30, 1996, respectively. Profit sharing
expenses accounted for $3.3 million of the $11.1 million increase in
compensation and benefits during the second quarter of 1997 as compared to the
same period in 1996, and $6.9 million of the $19.9 million increase during the
first six months of 1997 as compared to the same period in 1996.
The increases in occupancy and equipment expenses during the three and
six months ended June 30, 1997, as compared to the same periods in the prior
year, were primarily due to increases in data processing costs and general
office expenses.
Net operating losses on investments in real estate and certain
low-income housing tax credit interests, which includes hotel operations,
increased $503,000 and $1.1 million during the three and six months ended June
30, 1997, respectively, primarily as a result of net operating losses and
depreciation expense on low-income housing tax credit interests placed in
service since the second quarter of 1996. The associated tax credits on such
projects are reported as a reduction of income tax expense. See "Income Tax
Expense" below.
Other operating expenses increased $3.8 million during the three months
ended June 30, 1997, as compared to the comparable period in the prior year
primarily due to a $1.3 million write-off of a receivable, $1.2 million of
certain other one-time charges and a $719,000 increase in loan related expenses.
EQUITY IN EARNINGS OF INVESTMENT IN JOINT VENTURES. Equity in earnings
of investment in joint ventures of $1.3 million and $1.1 million for the three
months ended June 30, 1997 and 1996, respectively, and $15.7 million and $1.1
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
million for the six months ended June 30, 1997 and 1996, respectively, relates
to the LLC, the joint venture formed in March 1996 to acquire discount
single-family residential loans from HUD. The Company's earnings from this joint
venture consist of 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.
Net income of the joint venture is primarily attributable to interest income on
discount loans and gains on the sale of discount loans, including the
securitization of HUD loans in March 1997. Equity in earnings for the six months
ended June 30, 1997 includes the recapture of $2.6 million of valuation
allowances established in 1996 by the Company on its equity investment in the
LLC as a result of the resolution and securitization of loans during the first
quarter. See Note 3 to the Interim Consolidated Financial Statements included in
Item 1 hereof.
INCOME TAX EXPENSE. Income tax expense amounted to $5.1 million and
$2.9 million during the three months ended June 30, 1997 and 1996, respectively,
and $8.7 million and $1.9 million during the six months ended June 30, 1997 and
1996, respectively. The Company's effective tax rate was 21.65% and 19.52%
during the three months ended June 30, 1997 and 1996, respectively, and 19.70%
and 11.28% during the six months ended June 30, 1997 and 1996, respectively. The
Company's income tax expense is reported net of tax credits of $2.9 million and
$2.5 million during the second quarter of 1997 and 1996, respectively, and $6.5
million and $4.9 million during the first six months of 1997 and 1996,
respectively, resulting from the Company's investment in certain 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 three months ended June 30,
1997 and 1996, respectively, and 34.35% and 40.30% during the six months ended
June 30, 1997 and 1996, respectively. See "Changes in Financial
Condition-Investments in Low Income Housing Tax Credit Interests" for additional
information regarding tax credits.
MINORITY INTEREST. Minority interest in net loss of consolidated
subsidiary represents the loss attributable to the 20% interest in OFS owned by
Admiral.
CHANGES IN FINANCIAL CONDITION
GENERAL. From December 31, 1996 to June 30, 1997 total assets increased
by $303.2 million or 12%. This increase was primarily due to a $234.2 million
increase in discount loans, a $31.1 million increase in the loan portfolio and a
$174.5 million increase in cash and cash equivalents, offset in part by a $90.6
million decrease in securities available for sale, a $75.6 million decrease in
securities held for trading, a $22.7 million decrease in loans available for
sale and a $40.3 million decrease in investment in joint ventures. Total
liabilities increased by $261.4 million from December 31, 1996 to June 30, 1997
and was primarily due to a $278.9 million increase in deposits, $61.4 million
increase in notes, debentures and other interest bearing obligations offset by a
$74.5 million decrease in securities sold under agreements to repurchase.
SECURITIES HELD FOR TRADING. The Company held a $75.6 million
single-family CMO for trading at December 31, 1996. This security, which was
acquired from the LLC in connection with the LLC's securitization in October
1996, was sold in January 1997.
SECURITIES AVAILABLE FOR SALE. At June 30, 1997, an aggregate of $7.1
million of net unrealized gains, net of related deferred taxes of $4.1 million
on securities classified as available for sale, were included in stockholders'
equity, as compared to $3.5 million of net unrealized gains at December 31,
1996, net of related deferred taxes of $2.0 million.
26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the carrying value of the Company's
securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Dollars in thousands)
-------------- --------------
<S> <C> <C>
Mortgage-related securities:
Single-family residential:
AAA-rated CMOs.................................... $ 100,800 $ 73,935
FHLMC interest only............................... 53,415 47,571
FNMA interest only................................ 30,782 49,380
AAA-rated interest only........................... 2,018 1,173
Subordinates...................................... 29,863 19,164
REMIC residuals................................... 25,478 20,560
Futures contracts................................. 23 (1,921)
-------------- --------------
242,379 209,862
-------------- --------------
Multi-family residential and commercial:
AAA-rated interest only........................... 9,563 83,590
Non-investment grade interest only................ 2,058 3,799
Subordinates...................................... 9,423 57,534
Futures contracts................................. (11) (780)
-------------- --------------
21,033 144,143
-------------- --------------
Total........................................... $ 263,412 $ 354,005
============== ==============
</TABLE>
The Company's securities available for sale of $263.4 million at June
30, 1997 decreased by $90.6 million or 26% from December 31, 1996 due primarily
to $157.3 million of sales and $37.3 million of principal repayments and net
premium amortization, offset in part by $107.4 million of purchases.
The Company 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 on May 19, 1997. The Company may retain
subordinate classes or REMIC residuals resulting from the securitization of
assets held by it directly or indirectly through the Bank and investments in
joint ventures, although any such securities held by the Bank will be
distributed to Ocwen as a dividend, subject to the Bank's ability to declare
such dividends under applicable limitations. Two such securities with an
aggregate book value of $19.5 million were distributed to Ocwen in the form of a
dividend during June 1997. At June 30, 1997, the Bank held five subordinate
securities and one residual security with an aggregate carrying value and book
value of $39.1 million and $38.1 million, respectively, which are anticipated to
be dividended to Ocwen in the future.
LOANS AVAILABLE FOR SALE. The Company's loans available for sale at
June 30, 1997, which are carried at the lower of cost or fair value, decreased
by $22.7 million or 18% from December 31, 1996 and consist primarily of
single-family residential loans to sub-prime borrowers. The Company generally
intends to sell or securitize its single-family residential loans to sub-prime
borrowers and, as a result, all of such loans were classified as available for
sale at June 30, 1997 and December 31, 1996. Based upon recent discussions with
the OTS, the Bank has determined to transfer its single-family residential
lending activities to sub-prime borrowers to OFS. See Note 5 to the Interim
Consolidated Financial Statements included in Item 1 hereof.
The following table sets forth the composition of the Company's loans
available for sale by type of loan at the dates indicated.
June 30, December 31,
1997 1996
(Dollars in thousands)
------------ -------------
Single-family residential loans $ 103,024 $ 111,980
Multi-family residential loans - 13,657
Consumer loans 603 729
------------ -------------
$ 103,627 $ 126,366
============ =============
27
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the activity in the Company's net loans available
for sale during the periods indicated.
<TABLE>
<CAPTION>
Three months Six months
For the periods ended June 30 - ----------------------- -----------------------
(Dollars in thousands) 1997 1996 1997 1996
- -------------------------------------------------- --------- --------- -------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period................. $ 88,511 $ 253,583 $126,366 $ 251,790
Purchases:
Single-family residential................... 24,837 61,502 62,504 131,694
Multi-family residential.................... -- -- -- 10,456
--------- --------- --------- ---------
24,837 61,502 62,504 142,150
--------- --------- --------- ---------
Originations:
Single-family residential................... 98,338 720 126,502 720
Sales.......................................... (102,362) (223,135) (187,848) (285,173)
Lower of cost or market reserve................ (600) (452) (442) (1,790)
Loans transferred to loan portfolio............ -- (1,973) (13,694) (9)
Principal repayments, net of capitalized (3,292) (5,495) (6,251) (22,443)
interest....................................
Transfer to real estate owned.................. (1,805) (672) (3,510) (1,167)
--------- --------- --------- ---------
Net increase (decrease) in loans............ 15,116 (169,505) (22,739) (167,712)
--------- -------- ---------- -------
Balance at end of period....................... $ 103,627 $ 84,078 $103,627 $ 84,078
========= ========= ======== =========
</TABLE>
During the first six months of 1997 and 1996 the Company purchased and
originated $186.4 million and $132.4 million, respectively, of single-family
residential loans to sub-prime borrowers. The Company also sold $183.4 million
of sub-prime loans during the first six months of 1997 for a gain of $7.3
million. Of the $183.4 million and $285.2 million of sub-prime loans sold during
the first six months of 1997 and 1996, respectively, $104.8 million and $134.8
million, respectively, were the result of the Company's securitization of such
loans.
The following table presents a summary of the Company's non-performing loans
(loans which were past due 90 days or more) in the loans available for sale
portfolio at the dates indicated:
June 30, December 31,
1997 1996
(Dollars in thousands)
----------- -----------
Non-performing loans:
Single-family ........................ $ 14,626 $ 14,410
Consumer ............................. 41 36
----------- -----------
$ 14,667 $ 14,446
=========== ===========
Non-performing loans as a percentage of:
Total loans available for sale ....... 14.15% 11.43%
Total assets ......................... 0.53% 0.58%
Non-performing loans available for sale consist primarily of sub-prime
single-family residential loans, reflecting the higher risks of default
associated with such loans. Although sub-prime loans generally have higher
levels of default than prime loans, the Company believes that the borrower's
equity in the secured property and its expertise in the area of resolution of
non-performing loans will continue to make its sub-prime residential loan
program a profitable one notwithstanding such defaults and any resulting losses.
28
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
INVESTMENT SECURITIES. Investment securities increased by $29.9 million
from December 31, 1996 to June 30, 1997 as a result of the Company's $27.9
million investment in 9.8% of the outstanding common stock of OAIC during the
second quarter of 1997 and a $2.0 million increase in the required holdings of
FHLB stock.
DISCOUNT LOAN PORTFOLIO. The following table sets forth the composition
of the Company's discount loan portfolio by type of loan at the dates indicated.
June 30, December 31,
1997 1996
------------ -------------
(Dollars in thousands)
Single-family residential loans (1)... $ 730,188 $ 504,049
Multi-family residential loans........ 298,788 341,796
Commercial real estate loans.......... 559,599 465,801
Other loans........................... 1,852 2,753
------------ ------------
Total discount loans............... 1,590,427 1,314,399
Unaccreted discount................... (275,456) (241,908)
Allowance for loan losses............. (19,851) (11,538)
------------- ------------
Discount loans, net................ $ 1,295,120 $ 1,060,953
============ ============
(1) Does not include the Company's 50% ownership interest in the LLC, which
held $36.9 million and $110.7 million of discount single-family
residential loans at June 30, 1997 and December 31, 1996, respectively.
See "Changes in Financial Condition - Investment in Joint Ventures"
below. Inclusive of the Company's pro rata interest in such loans, the
Company's discount loans, net amounted to $1.31 billion and $1.12
billion at June 30, 1997 and December 31, 1996, respectively.
The following tables set forth the activity in the Company's gross discount loan
portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------
1997 1996
------------------------ --------------------------
No. of No. of
Balance Loans Balance Loans
----------- --------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period .......... $ 1,562,385 12,202 $ 854,383 3,816
Acquisitions ............................ 399,473 1,543 126,893 137
Resolutions and repayments .............. (134,224) (532) (116,748) (357)
Loans transferred to real estate owned .. (68,912) (352) (34,080) (251)
Sales ................................... (168,295) (1,751) (127) (1)
----------- --------- ---------- ----------
Balance at end of period ................ $ 1,590,427 11,110 $ 830,321 3,344
=========== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------
1997 1996
------------------------ --------------------------
No. of No. of
Balance Loans Balance Loans
----------- --------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period........... $ 1,314,399 5,460 $ 943,529 4,543
Acquisitions............................. 842,351 9,754 161,811 144
Resolutions and repayments............... (197,777) (726) (188,780) (642)
Loans transferred to real estate owned... (120,498) (744) (59,613) (444)
Sales.................................... (248,048) (2,634) (26,626) (257)
----------- ----------- ----------- ------------
Balance at end of period................. $ 1,590,427 11,110 $ 830,321 3,344
=========== =========== =========== ===========
</TABLE>
(1) During the first six months of 1997, acquisitions consisted of $563.5
million of single-family residential loans, $23.3 million of
multi-family residential loans and $255.6 million of commercial real
estate and land loans. Included in acquisitions for the first six
months of 1997 are the Bank's approximate one-half allocated share of
29
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
13,781 single-family residential loans acquired by the Company and its
co-investor at an auction by HUD during the first quarter with an
aggregate unpaid principal balance of $855.7 million for a purchase
price of $757.4 million.
The following table sets forth certain information relating to the
payment status of loans in the Company's discount loan portfolio at the dates
indicated.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
--------------------------- ----------------------
Principal % of Principal % of
Amount Loans Amount Loans
----------- ---------- --------- ----------
Loans without Forbearance Agreements:
<S> <C> <C> <C> <C>
Current....................................... $ 542,451 34.10% $ 572,043 43.52%
Past due 31 to 89 days........................ 11,235 0.71 19,458 1.48
Past due 90 days or more...................... 557,552 35.06 506,113 38.51
Acquired and servicing not yet transferred.... 126,047 7.93 149,564 11.38
---------- ------ ---------- ------
Subtotal.................................... 1,237,285 77.80 1,247,178 94.89
---------- ------ ---------- ------
Loans with Forbearance Agreements:
Current....................................... 7,831 0.49 7,554 0.57
Past due 31 to 89 days........................ 1,930 0.12 2,703 0.21
Past due 90 days or more (1)................. 343,381 21.59 56,964 4.33
---------- ------ ---------- ------
Subtotal.................................... 353,142 22.20 67,221 5.11
------------ ------ ---------- ------
Total............................................ $1,590,427 100.00% $1,314,399 100.00%
========== ====== ========== ======
</TABLE>
(1) Includes $172.9 million of loans which were less than 90 days past due
under forbearance agreements at June 30, 1997, of which $153.6 million
were current and $19.3 million were past due 31 to 89 days.
For discussion and analysis regarding the allowance for loan losses on
discount loans, see "Changes in Financial Condition - Allowance for Losses"
below.
LOAN PORTFOLIO. The following table sets forth the composition of the
Company's loan portfolio by type of loan at the dates indicated.
June 30, December 31,
1997 1996
(Dollars in thousands)
------------ ------------
Single-family residential loans............. $ 52,195 $ 73,186
Multi-family residential loans.............. 88,894 67,842
Commercial real estate and land loans:
Hotel.................................... 189,053 200,311
Office buildings......................... 153,268 128,782
Land..................................... 1,575 2,332
Other.................................... 21,990 25,623
------------ ------------
Total.................................. 365,886 357,048
Commercial non-mortgage..................... - 2,614
Consumer.................................... 325 424
------------ ------------
Total loans............................ 507,300 501,114
Undisbursed loan funds...................... (63,645) (89,840)
Unaccreted discount......................... (5,018) (5,169)
Allowance for loan losses................... (4,974) (3,523)
------------- ------------
Loans, net............................. $ 433,663 $ 402,582
============ ============
30
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the activity in the Company's gross loan
portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three months Six months
For the periods ended June 30 - ------------------------- -------------------------
(Dollars in thousands) 1997 1996 1997 1996
- ---------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of period................ $ 512,494 $ 330,066 $ 501,114 $ 342,649
Originations:
Single-family residential loans............ -- 3,377 1,769 7,556
Multi-family residential loans............. 57 37,839 12,737 45,249
Commercial real estate loans and land loans 47,200 31,916 47,200 52,916
Commercial non-mortgage and consumer loans. -- -- 1,134 --
----------- ----------- ----------- -----------
Total loans originated................... 47,257 73,132 62,840 105,721
----------- ----------- ----------- -----------
Purchases..................................... 78 -- 78 --
Sales......................................... (2,346) -- (2,346) --
Loans transferred from available for sale..... -- 2,006 13,802 6
Principal repayments, net of capitalized
interest...................................... (50,183) (15,765) (67,835) (58,694)
Transfer to real estate owned................. -- (315) (353) (558)
----------- ----------- ------------ ------------
Net (decrease) increase in loans......... (5,194) 59,058 6,186 46,475
------------ ----------- ----------- -----------
Balance at end of period.................... $ 507,300 $ 389,124 $ 507,300 $ 389,124
=========== =========== ============ ===========
</TABLE>
The following table presents a summary of the Company's non-performing
loans (loans which are past due 90 days or more) in the loan portfolio and
significant ratios at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------------- ---------------
(Dollars in thousands)
Non-performing loans (1):
<S> <C> <C>
Single-family residential loans............................ $ 1,593 $ 2,123
Multi-family residential loans............................. 7,517 106
Consumer and other loans................................... 33 55
-------------- ---------------
$ 9,143 $ 2,284
=============== ==============
Non-performing loans as a percentage of:
Total loans (2)............................................ 2.06% 0.56%
Total assets............................................... 0.33% 0.09%
</TABLE>
(1) The Company did not have any loans which were accuring interest but
past due 90 days or more at the dates indicated.
(2) Total loans is net of undisbursed loan proceeds.
ALLOWANCES FOR LOSSES. The Company maintains an allowance for loan
losses for each of its loan portfolio and discount 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. When an impaired loan is either sold, transferred to real estate
owned or charged off, only the excess or unused portion of any related specific
valuation allowance is credited to the provision for loan losses.
31
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the allocation of the Company's
allowance for loan losses at June 30, 1997 and December 31, 1996 by loan
category and the percentage of loans in each category to total loans in the
respective portfolios at the dates indicated:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
--------------------------------- -----------------------------------
Gross Gross
Loan Loan
Allowance Balance Percent Allowance Balance Percent
--------- ------- ------- --------- ---------- -------
Loan Portfolio:
<S> <C> <C> <C> <C> <C> <C>
Single-family................ $ 385 $ 52,195 10.3% $ 520 $ 73,186 14.6%
Multi-family................. 1,798 88,894 17.5% 673 67,842 13.5%
Commercial real estate....... 2,773 365,886 72.1% 2,299 357,048 71.3%
Commercial non-mortgage...... -- -- --% 11 2,614 0.5%
Consumer..................... 18 325 0.1% 20 424 0.1%
-------- ---------- ------- --------- ---------- --------
$ 4,974 $ 507,300 100.0% $ 3,523 $ 501,114 100.0%
======== ========== ====== ========= ========== ======
Discount loan portfolio:
Single-family................ $ 10,204 $ 730,188 45.9% $ 3,528 $ 504,049 38.4%
Multi-family................. 4,184 298,788 18.8% 3,124 341,796 26.0%
Commercial real estate....... 5,463 559,599 35.2% 4,886 465,801 35.4%
Other........................ -- 1,852 0.1% -- 2,753 0.2%
-------- ---------- ------- --------- ---------- -------
$ 19,851 $1,590,427 100.0% $ 11,538 $1,314,399 100.0%
======== ========== ====== ========= ========== ======
</TABLE>
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
The following table summarizes activity in the allowance for loan losses by
portfolio and property type during the six months ended June 30, 1997.
<TABLE>
<CAPTION>
Balance Balance
December 31, June 30,
1996 Additions Charge-offs Recoveries 1997
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Loan Portfolio:
Single-family.................. $ 520 $ (100) $ (35) $ -- $ 385
Multi-family................... 673 1,125 -- -- 1,798
Commercial real estate......... 2,299 474 -- -- 2,773
Commercial non-mortgage........ 11 (11) -- -- --
Consumer....................... 20 (2) -- -- 18
------------ ------------- ------------ ------------ ------------
$ 3,523 $ 1,486 $ (35) $ -- $ 4,974
============ ============ ============= ============ ============
Discount loans:
Single-family.................. $ 3,528 $ 11,324 $ (4,743) 95 $ 10,204
Multi-family................... 3,124 1,774 (714) -- 4,184
Commercial..................... 4,886 3,067 (2,490) -- 5,463
------------ ------------ ------------- ------------ ------------
$ 11,538 $ 16,165 $ (7,947) $ 95 $ 19,851
============ ============ ============== ============ ============
</TABLE>
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. In 1993, the
Company commenced a program to invest in multi-family residential projects which
have been allocated low income housing tax credits under Section 42 of the
Internal Revenue Code by a state tax credit allocating agency. At June 30, 1997
the Company had $101.2 million of investments in low-income housing tax credit
interests as compared to $93.3 million at December 31, 1996, an increase of $7.9
million or 8%.
32
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Investments by the Company in low-income housing tax credit interests made
on or after May 18, 1995 in which the Company invests solely as a limited
partner, which amounted to $26.2 million at June 30, 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 $47.8 million at June 30, 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, general partner amounted to $27.2 million
at June 30, 1997 and are presented on a consolidated basis.
INVESTMENT IN JOINT VENTURES. The Company's investment in joint ventures
decreased 59% from $67.9 million at December 31, 1996 to $27.6 million at June
30, 1997. The decrease in investment in joint ventures is primarily due to the
sale of loans and real estate owned by the LLC, including the $51.7 million
securitization of loans in March 1997, offset in part by the Company's $1.1
million investment in BCFL in January 1997. The Company's investment in the LLC
amounted to $26.5 million and $67.9 million at June 30, 1997 and December 31,
1996, respectively, and is net of valuation allowances of $2.0 million and $5.1
million, respectively. See Note 3 to the Interim Consolidated Financial
Statements included in Item 1 hereof.
In connection with the LLC's acquisition of the loans from HUD ("HUD
Loans"), the Company entered into an agreement with the LLC to service the HUD
Loans in accordance with its loan servicing and loan default resolution
procedures. In return for such servicing, the Company receives specified fees
which are payable on a monthly basis. The Company did not pay any additional
amount to acquire these servicing rights and, as a result, the acquisition of
the right to service the HUD Loans for the LLC did not result in the Company's
recording capitalized mortgage servicing rights for financial reporting
purposes. All of the HUD Loans are secured by second mortgage liens on
single-family residential properties. In addition, 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.
The following table sets forth information relating to the payment status
of the HUD Loans (gross principal amount) at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
---------------------- ---------------------
Principal % of HUD Principal % of HUD
Amount Loans Amount Loans
---------- -------- --------- --------
HUD Loans without Forbearance Agreements:
<S> <C> <C> <C> <C>
Current....................................... $ 2,551 4.66% $ 6,709 4.21%
Past due 31 to 89 days........................ 260 0.47 3,011 1.89
Past due 90 days or more...................... 27,150 49.59 84,509 53.02
--------- ------ --------- -------
Subtotal.................................... 29,961 54.72 94,229 59.12
--------- ------ --------- -------
HUD Loans with Forbearance Agreements:
Current....................................... 2,589 4.73 4,867 3.05
Past due 31 to 89 days........................ 1,131 2.07 5,168 3.24
Past due 90 days or more (1)................. 21,069 38.48 55,141 34.59
--------- ------ --------- -------
Subtotal.................................... 24,789 45.28 65,176 40.88
--------- ------ --------- -------
Total............................................ $ 54,750 100.00% $ 159,405 100.00%
========= ====== ========= ======
</TABLE>
(1) Includes $19.5 million of loans which were less than 90 days past due
under forbearance agreements at June 30, 1997, of which $17.6 million
were current and $1.9 million were past due 31 to 89 days.
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
33
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
included in the Company's real estate owned are periodically re-evaluated to
determine that they are being carried at the lower of cost or fair value less
estimated costs to dispose. Rental income related to properties is reported as
earned. Holding and maintenance costs related to properties are recorded as
period costs as incurred. 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 the 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.
The following table sets forth certain information relating to the
Company's real estate owned at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Discount loan portfolio:
Single-family residential................ $ 53,700 $ 49,728
Multi-family residential................. 15,341 14,046
Commercial real estate................... 45,400 36,264
----------- -----------
Total.................................. 114,441 100,038
Loan portfolio........................... 483 592
Loans available for sale portfolio....... 2,779 3,074
----------- -----------
$ 117,703 $ 103,704
=========== ===========
</TABLE>
The following schedule sets forth the activity in the valuation allowance
on real estate owned for the periods indicated.
<TABLE>
<CAPTION>
For the period ended June 30 - Three Months Six Months
--------------------------- ---------------------------
(Dollars in thousands) 1997 1996 1997 1996
- ----------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period.... $ 7,591 $ 8,590 $ 11,493 $ 4,606
Provision for loss in fair value.. (90) 3,410 2,246 9,788
Charge-offs and sales............. (1,868) (2,264) (8,106) (4,658)
---------- ---------- ---------- ----------
Balance at end of period.......... $ 5,633 $ 9,736 $ 5,633 $ 9,736
========== ========== ========== ==========
</TABLE>
The decline in the valuation allowance on real estate owned is primarily
due to increased valuation allowance on discount loans and the reversal of
valuation allowance in connection with sales of real estate owned.
The following table sets forth the activity in the real estate owned during
the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------------------------------
1997 1996
----------------------------- ---------------------------
No. of No. of
Amount Properties Amount Properties
--------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ..... $ 98,466 702 $ 151,256 1,034
Properties acquired through
foreclosure or deed-in-lieu
thereof ........................ 52,605 370 27,039 263
Acquired in connection with
acquisitions of discount loans . 1,070 17 443 0
Sales .............................. (36,396) (223) (43,988) (273)
Change in allowance ................ 1,958 -- (1,146) --
-------- ------- -------- ------
Balance at end of period ........... $ 117,703 866 $ 133,604 1,024
======== ======= ======== ======
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Six Months Ended June 30,
-------------------------------------------------------------------
1997 1996
---------------------------- --------------------------
No. of No. of
Amount Properties Amount Properties
--------- ---------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ..... $ 103,704 825 $ 166,556 1,070
Properties acquired through
foreclosure or deed-in-lieu
thereof ........................ 90,258 777 43,259 463
Acquired in connection with
acquisitions of discount loans . 1,140 20 1,640 3
Sales .............................. (83,259) (756) (72,721) (512)
Change in allowance ................ 5,860 -- (5,130) --
--------- -------- --------- --------
Balance at end of period ........... $ 117,703 866 $ 133,604 1,024
========= ======== ========= ========
</TABLE>
The following table sets forth the amount of time that the Company had held
its real estate owned at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
One to two months............................................... $ 39,270 $ 17,695
Three to four months............................................ 21,466 15,291
Five to six months.............................................. 18,502 14,348
Seven to twelve months.......................................... 12,210 13,004
Over twelve months.............................................. 26,255 43,366
--------------- ---------------
$ 117,703 $ 103,704
=============== ===============
</TABLE>
INVESTMENT IN REAL ESTATE. In conjunction with its multi-family 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 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 increased to $48.1 million
at June 30, 1997, as compared to $24.9 million at December 31, 1996 primarily as
a result of additional funding under existing commitments. Currently, the
Company does not intend, except for commitments outstanding, to originate new
loans in which it participates in the residual profits in underlying real
estate.
The Company also has invested in the Westin Hotel, Columbus, located in
Columbus, Ohio. The Company's investment in such property decreased to $15.6
million at June 30, 1997 from $16.1 million at December 31, 1996 as a result of
depreciation recorded against the asset. On July 15, 1997, the Company sold a
69% partnership interest in the Westin Hotel for a minimal gain.
35
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
DEFERRED TAX ASSET. At June 30, 1997 the deferred tax asset, net of
deferred tax liabilities, amounted to $10.7 million, an increase of $4.8 million
from the $5.9 million deferred tax asset at December 31, 1996. At June 30, 1997,
the gross deferred tax asset amounted to $23.0 million and consisted primarily
of $1.5 million of mark-to-market adjustments and reserves on real estate owned,
$4.0 million of deferred interest expense on the discount loan portfolio, $7.4
million of valuation allowance reserves, $2.5 million of profit sharing expense
and $1.8 million of contingency reserves, and the gross deferred tax liability
amounted to $12.3 million and consisted of primarily of $3.6 million of deferred
interest income on the discount loan portfolio, $1.8 million related to hedging
transactions and $3.9 million of mark-to-market adjustments 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 adjustments 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 adjustments on certain
securities available for sale.
As a result of the Company's earnings history, current tax position and
taxable income projections, management believes that the Company will generate
sufficient taxable income in future years to realize the deferred tax asset
which existed at June 30, 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 June 30, 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.
GOODWILL. During the second quarter of 1997, the Company consolidated its
sub-prime single-family lending operations within OFS in connection with its
acquisition of substantially all of the assets of Admiral. 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.
DEPOSITS. Deposits increased $278.9 million from December 31, 1996. The
increase in deposits during 1997 was primarily the result of brokered deposits
obtained through national investment banking firms which solicit deposits from
their customers, which amounted to $1.50 billion at June 30, 1997, as compared
to $1.22 billion at December 31, 1996. The Company also obtains deposits through
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 $511.4 million at June 30, 1997, as compared
to $540.6 million at December 31, 1996. At June 30, 1997 the Company had $206.7
million of certificates of deposit in amounts of $100,000 or more, including
$87.3 million of deposits of states and political subdivisions in the U.S. which
are secured or collateralized as required under state law. For additional
information, see "- Liquidity, Commitments and Off-Balance Sheet Risks" below.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under
agreements to repurchase decreased $74.5 million to $0 from December 31, 1996 to
June 30, 1997. From time to time, the Company utilizes such collateralized
borrowings as additional sources of liquidity.
NOTES, DEBENTURES AND OTHER INTEREST-BEARING OBLIGATIONS. Notes, debentures
and other interest-bearing obligations increased by $61.4 million from December
31, 1996 to June 30, 1997 primarily as a result of $46.2 million in borrowings
under two new lines of credits established at OFS (see "Liquidity, Commitments
and Off-Balance Sheet Risks") and the issuance of $15.2 million in short-term
notes payable of which $12.4 million was repaid in July 1997. Notes, debentures
and other interest-bearing obligations also consist of $100 million of 12%
Debentures issued in June 1995 and due June 2005, and $125.0 of 11.875% notes
issued in September 1996 and due September 2003.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $40.3 million or
20% from December 31, 1996 to June 30, 1997. The increase in stockholders'
equity during this period was primarily attributable to net income of $35.8
million and an increase of $3.6 million in the unrealized gain on securities
available for sale. See the Consolidated Statements of Changes in Stockholders'
Equity in the Interim Consolidated Financial Statements included in Item 1
hereof.
36
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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, in accordance with policies approved by the Board of Directors of
the Company. 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
June 30, 1997, the Company had entered into interest rate exchange agreements
with an aggregate notional amount of $41.5 million. Interest rate exchange
agreements had the effect of decreasing the Bank's net interest income by
$41,000 and $0 during the three months ended June 30, 1997 and 1996,
respectively, and $115,000 and $0 during the six months ended June 30, 1997 and
1996, 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 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 June 30, 1997, the Company
had entered into U.S. Treasury futures (short) contracts with an aggregate
notional amount of $197.9 million. The Company had no outstanding Eurodollar
futures contracts at June 30, 1997. Futures contracts had the effect of
decreasing the Bank's net interest income by $205,000 and $161,000 during the
three months ended June 30, 1997 and 1996, respectively, and $1.1 million and
$401,000 during the six months ended June 30, 1997 and 1996, respectively. See
Note 4 to the Interim Consolidated Financial Statements included in Item 1
hereof.
The Asset/Liability Committee's methods for evaluating interest rate risk
include an analysis of the Company's interest rate sensitivity "gap", which is
defined as the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
the amount of interest-rate sensitive liabilities. A gap is considered negative
when the amount of interest-rate sensitive liabilities exceeds interest-rate
sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net interest income
adversely. Because different types of assets and liabilities with the same or
similar maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
The following table sets forth the estimated maturity or repricing of the
Company's interest-earning assets and interest-bearing liabilities at June 30,
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 second
scheduled to adjust and not in the period in which they mature, (ii) fixed-rate
37
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 Company, and (vi) escrow deposits and other non-interest bearing checking
accounts, which amounted to $102.3 million at June 30, 1997, are excluded.
Management believes that these assumptions approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of the
Company's assets and liabilities in the table could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which the assumptions are based.
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------------------------
More than 1
Within 4 to 12 Year to 3 3 Years and
3 Months Months Years Over Total
----------- --------- ----------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Interest-earning cash, federal
funds sold and repurchase
agreements ...................... $219,836 $ -- $ -- $ -- $ 219,836
Securities available for sale ...... 31,197 60,506 91,621 80,088 263,412
Loans available for sale (1) ....... 10,622 35,014 50,030 7,961 103,627
Investment securities, net ......... -- -- -- 38,821 38,821
Loan portfolio, net (1) ............ 130,769 65,611 74,894 162,389 433,663
Discount loan portfolio, net ....... 113,282 415,174 366,719 399,945 1,295,120
-------- --------- --------- --------- -----------
Total rate-sensitive assets ...... 505,706 576,305 583,264 689,204 2,354,479
-------- --------- --------- --------- -----------
Rate-Sensitive Liabilities:
NOW and money market checking
deposits ......................... 22,261 1,052 2,110 4,097 29,520
Savings deposits ................... 196 260 515 915 1,886
Certificates of deposit ............ 251,959 593,825 753,861 465,284 2,064,929
-------- --------- --------- --------- -----------
Total interest-bearing deposits... 274,416 595,137 756,486 470,296 2,096,335
Notes, debentures and other
interest bearing obligations...... 61,400 -- -- 225,572 286,972
-------- --------- --------- --------- -----------
Total rate-sensitive
liabilities ..................... 335,816 595,137 756,486 695,868 2,383,307
Interest rate sensitivity gap
before off-balance sheet financial
instruments ...................... 169,890 (18,832) (173,222) (6,664) (28,828)
Off-Balance Sheet Financial
Instruments:
Futures contracts and interest
rate swap ....................... 195,159 (14,948) (32,091) (148,120) --
-------- --------- --------- --------- -----------
Interest rate sensitivity gap ........ $365,049 $ (33,780) $(205,313) $(154,784) $ (28,828)
======== ========= ========= ========= ===========
Cumulative interest rate
sensitivity gap ................. $365,049 $ 331,269 $ 125,956 $ (28,828)
======== ========= ========= =========
Cumulative interest rate sensitivity
gap as a percentage of total rate-
sensitive assets............... 15.50% 14.07% 5.35% (1.22)%
======== ========= ========= =========
</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 Company.
38
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth at June 30, 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.
Change Estimated Change in
(in Basis Points) -------------------------------------
in Interest Rates Net Interest Income MVPE
----------------- ------------------- ------
+400 13.96% (17.78)%
+300 7.59 (11.22)
+200 1.22 (4.53)
+100 3.01 0.35
0 -- --
-100 (3.37) (10.37)
-200 (6.72) (21.99)
-300 (16.81) (25.82)
-400 (26.90) (25.98)
The negative estimated changes in MVPE for -100 to -400 changes in interest
rates is attributable to the Company's sensitivity to decreases in interest
rates. Such sensitivity stems from the Company's investments in IO stripped
mortgage-backed securities. IO strips exhibit considerably more price volatility
than mortgage 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, 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. The Company generally attempts to offset the interest rate risk
associated with a particular IO strip by purchasing other securities which
reduce such risk.
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 June 30, 1997 the Company had $2.06 billion of
39
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
certificates of deposit, including $1.50 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 June 30, 1998 and 1999 and thereafter amounted to
$845.8 million, $491.7 million and $727.4 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. Although at June 30,
1997, the Company had FHLB advances outstanding, it was eligible to borrow up to
an aggregate of $170.6 million from the FHLB of New York (subject to the
availability of acceptable collateral) and had $127.2 million of single-family
residential loans, $10.4 million of multi-family residential loans and $33.0
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 $148.8 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: (1) 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 National Association.
An aggregate of $46.2 million was outstanding to OFS under these lines of credit
at June 30, 1997, which have interest rates which float in accordance with a
designated prime rate.
Additionally, the Company is currently exploring obtaining an approximately
$20.0 million line of credit to the Company and an approximately $500.0 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's operating activities provided cash flows of $128.4 million
and $193.1 million during the six months ended June 30, 1997 and 1996,
respectively. During the foregoing periods cash resources were provided
primarily by net income, sale of securities held for trading 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 $220.1 million
and provided cash flows totaling $89.1 million during the six months ended June
30, 1997 and 1996, respectively. During the foregoing periods, cash flows from
investing activities were provided primarily by principal payments on and sales
of 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 $266.2 million and used $85.8
million during the six months ended June 30, 1997 and 1996, respectively. Cash
flows from financing activities primarily relate to changes in the Company's
deposits and reverse repurchase agreements.
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 (which has been
proposed to be reduced to 4%), 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 5.91% during the six months ended June 30, 1997
and amounted to 8.48% at June 30, 1997.
40
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
At June 30, 1997, the Company had $141.9 million of unfunded commitments
related to purchase and originations of loans. 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 June 30, 1997, see Note 6 to the Interim Consolidated Financial
Statements included in Item 1 hereof.
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 included in Item 1
hereof.
The Company conducts business with a variety of financial institutions and
other companies in the normal course of business, including counterparties to
its off-balance sheet financial instruments. The Company is subject to potential
financial loss if the counterparty is unable to complete an agreed upon
transaction. The Company seeks to limit counterparty risk through financial
analysis, dollar limits and other monitoring procedures.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured savings associations such as the Bank are required to
maintain minimum levels of regulatory capital. These standards generally must be
as stringent as the comparable capital requirements imposed on national banks.
The OTS also is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis. 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 believes at this time that it will continue to be a "well-capitalized
institution" under OTS regulations. See Note 5 to the Interim Consolidated
Financial Statements included in Item 1 hereof.
In August 1993, the OTS promulgated regulations which incorporate an
interest rate risk component into the OTS risk-based capital requirements, and
in August 1995 the OTS postponed the effectiveness of this regulation after
having previously deferred the effective date several times. Because only
institutions whose measured interest rate risk exceeds certain parameters will
be subject to the interest rate risk capital requirement, management of the Bank
does not believe that this regulation will increase the Bank's risk-based
regulatory capital requirement if it becomes effective in its current form. For
additional information relating to regulatory capital requirements and the
Bank's capital ratios, see Note 5 to the Interim Consolidated Financial
Statements included in Item 1 hereof.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are not, and certain statements
contained in future filings by the Company with the SEC, in the Company's press
releases or in the Company's other public or shareholder communications may not
be, based on historical facts and are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements which are based on various assumptions (some of which are beyond the
Company's control), may be identified by reference to a future period or
periods, or by the use of forward-looking terminology, such as "may," "will,"
"believe," "expect," "anticipate," "continue," or similar terms or variations on
those terms, or the negative of those terms. Actual results could differ
materially from those set forth in forward-looking statements due to a variety
of factors, including, but not limited to, those related to the economic
environment, particularly in the market areas in which the Company operates,
competitive products and pricing, fiscal and monetary policies of the U.S.
Government, changes in government regulations affecting financial institutions,
including regulatory fees and capital requirements, changes in prevailing
interest rates, acquisitions and the integration of acquired businesses, credit
risk management, asset/liability management, the financial and securities
markets and the availability of and costs associated with sources of liquidity.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the results of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
41
<PAGE>
PART II OTHER INFORMATION
ITEM 1. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on Tuesday, May
27, 1997 the following individuals were elected to the Board of Directors:
Votes
Votes for Withheld
----------------------- ------------------
William C. Erbey 21,425,765 30,480
W. C. Martin 21,456,245 0
Howard H. Simon 21,425,765 30,480
Barry N. Wish 21,425,765 30,480
Thomas F. Lewis 21,456,244 1
The following proposal was approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Votes for Votes against Abstentions
--------------- --------------- ---------------
<S> <C> <C> <C>
1. Ratify the appointment of Price Waterhouse
LLP as independent auditors for the fiscal
year ending December 31, 1997 21,455,145 100 1,000
</TABLE>
There were no broker non-votes recorded with respect to such matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed with or incorporated by reference in this
report on Form 10-Q:
4.3 Certificate of Trust of of Ocwen Capital Trust I (i)
4.4 Amended and Restated Declaration of Trust of Ocwen
Capital Trust I (i)
4.5 Form of Capital Security of Ocwen Capital Trust 1 (included as
Exhibit A to Exhibit 4.4)
4.6 Form of Indenture relating to 10 7/8% Junior Subordinated Debentures
due 2027 of the Company (i)
4.7 Form of 10 7/8% Junior Subordinated Debenture due 2027 of the Company
(included as Exhibit A to Exhibit 4.6)
4.8 Form of Guarantee of the Company relating to the Capital Securites of
Ocwen Capital Trust I (i)
4.9 Form of Indenture relating to the 12% Subordinated Debentures due
2005 of Ocwen Federal Bank F.S.B. (ii)
4.10 Form of 12% Subordinated Debentures due 2005 of Ocwen Federal Bank
F.S.B. (ii)
27 Financial Data Schedule
- ----------------
(i) Incorporated by reference to the similarly identified exhibit filed in
connection with the Company's Registration Statement on Form S-1 (File No.
333-28889), as amended, declared effective by the Commission on August 6, 1997.
(ii) To be provided to the Commission on request.
(b) Reports on Form 8-K.
1. A Form 8-K was filed by the Company on May 1, 1997 which contained a
news release announcing the Company's financial results for the
quarter ended March 31, 1997.
2. A Form 8-K was filed by the Company on July 28, 1997 which contained
a news release announcing the Company's financial results for the
three and six month periods ended June 30, 1997
42
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Ocwen Financial Corporation
By: /s/ Mark S. Zeidman
----------------------------------------------
Mark S. Zeidman,
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as its principal financial officer)
Date: August 14, 1997
43
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM OCWEN FINANCIAL
CORPORATION'S CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND STATEMENT OF
OPERATIONS.
</LEGEND>
<CIK> 0000873860
<NAME> Ocwen Financial Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,911
<INT-BEARING-DEPOSITS> 29,992
<FED-FUNDS-SOLD> 189,844
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 263,412
<INVESTMENTS-CARRYING> 38,821
<INVESTMENTS-MARKET> 0
<LOANS> 1,832,410<F1>
<ALLOWANCE> 24,825<F2>
<TOTAL-ASSETS> 2,786,879
<DEPOSITS> 2,198,603
<SHORT-TERM> 0
<LIABILITIES-OTHER> 55,927
<LONG-TERM> 286,972
0
0
<COMMON> 268
<OTHER-SE> 243,596
<TOTAL-LIABILITIES-AND-EQUITY> 2,786,879
<INTEREST-LOAN> 102,660
<INTEREST-INVEST> 16,356
<INTEREST-OTHER> 2,453
<INTEREST-TOTAL> 121,469
<INTEREST-DEPOSIT> 61,264
<INTEREST-EXPENSE> 76,032
<INTEREST-INCOME-NET> 45,437
<LOAN-LOSSES> 17,651
<SECURITIES-GAINS> 29,593
<EXPENSE-OTHER> 53,777
<INCOME-PRETAX> 44,323
<INCOME-PRE-EXTRAORDINARY> 44,323
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,833
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 10.79
<LOANS-NON> 847,655
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,061
<CHARGE-OFFS> 7,982
<RECOVERIES> 95
<ALLOWANCE-CLOSE> 24,825
<ALLOWANCE-DOMESTIC> 24,825
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<F1> Tag 17 includes loans available for sale of $103,627, loan portfolio
of $433,663, and discount loan portfolio of $1,295,120.
<F2> Tag 18 includes allowance for loan losses on loan portfolio of $4,974,
and on discount loan portfolio of $19,851.
</TABLE>
