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 September 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 November 11, 1997: 30,276,045
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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 September 30, 1997 and December 31, 1996................... 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1997 and 1996...................... 4
Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended September 30, 1997 and
the year ended December 31, 1996.............................. 5
Consolidated Statements of Cash Flows for the nine
months ended September 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..................................... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 45
Item 2. Changes in Securities and use of proceeds..................... 45
Item 6. Exhibits and Reports on Form 8-K.............................. 45
Signature.............................................................. 46
2
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PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited)
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1997 1996
--------------- ---------------
Assets
<S> <C> <C>
Cash and amounts due from depository institutions ............................... $ 15,641 $ 6,878
Interest earning deposits ....................................................... 7,469 13,341
Federal funds sold and repurchase agreements .................................... 82,844 32,000
Securities held for trading ..................................................... -- 75,606
Securities available for sale, at market value .................................. 264,723 354,005
Loans available for sale, at lower of cost or market ............................ 190,012 126,366
Investment securities, net ...................................................... 54,042 8,901
Loan portfolio, net ............................................................. 392,523 402,582
Discount loan portfolio, net .................................................... 1,471,251 1,060,953
Investments in low-income housing tax credit interests .......................... 92,329 93,309
Investment in joint ventures .................................................... 23,931 67,909
Real estate owned, net .......................................................... 149,357 103,704
Investment in real estate ....................................................... 57,244 41,033
Premises and equipment, net ..................................................... 19,710 14,619
Income taxes receivable ......................................................... 20,876 15,115
Deferred tax asset .............................................................. 14,649 5,860
Excess of purchase price over net assets acquired ............................... 10,854 --
Principal, interest and dividends receivable .................................... 15,133 16,821
Escrow advances on loans ........................................................ 42,180 27,409
Other assets .................................................................... 31,532 17,274
----------- -----------
$ 2,956,300 $ 2,483,685
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ..................................................................... $ 1,970,952 $ 1,919,742
Advances from the Federal Home Loan Bank ..................................... -- 399
Securities sold under agreements to repurchase ............................... 3,075 74,546
Notes, debentures and other interest bearing obligations ..................... 368,287 225,573
Accrued interest payable ..................................................... 42,226 24,843
Accrued expenses, payables and other liabilities ............................. 27,330 34,986
----------- -----------
Total liabilities .......................................................... 2,411,870 2,280,089
----------- -----------
Company-obligated, mandatorily redeemable securities of subsidiary trust holding
solely junior subordinated debentures of the Company ...................... 125,000 --
Minority interest ............................................................... 1,386 --
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; 60,505,220 and
53,488,340 shares issued and outstanding at September 30, 1997 and December
31, 1996, respectively ..................................................... 605 535
Additional paid-in capital ................................................... 164,790 22,990
Retained earnings ............................................................ 236,415 180,417
Unrealized gain on securities available for sale and equity securities, net of 17,933 3,486
taxes
Notes receivable on exercise of common stock options ......................... (1,699) (3,832)
----------- -----------
Total stockholders' equity ................................................. 418,044 203,596
----------- -----------
$ 2,956,300 $ 2,483,685
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Three Months Nine Months
---------------------------- ----------------------------
For the periods ended September 30, 1997 1996 1997 1996
- ------------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Federal funds sold and repurchase agreements ............. $ 4,844 $ 1,742 $ 7,296 $ 3,840
Securities available for sale ............................ 8,087 5,890 22,770 19,954
Securities held for trading .............................. -- -- 248 --
Loans available for sale ................................. 4,267 2,685 11,091 14,169
Loans .................................................... 16,425 8,961 37,791 26,734
Discount loans ........................................... 42,370 23,794 116,840 75,852
Investment securities and other .......................... 1,333 1,073 2,759 3,053
------------ ------------ ------------ ------------
77,326 44,145 198,795 143,602
------------ ------------ ------------ ------------
Interest expense:
Deposits ................................................. 31,057 22,788 92,321 68,234
Securities sold under agreements to repurchase ........... 56 -- 533 685
Advances from the Federal Home Loan Bank ................. 8 958 436 2,990
Notes, debentures and other interest bearing obligations . 8,823 3,471 22,686 10,344
------------ ------------ ------------ ------------
39,944 27,217 115,976 82,253
------------ ------------ ------------ ------------
Net interest income before provision for loan losses .. 37,382 16,928 82,819 61,349
Provision for loan losses ................................... 4,088 4,469 21,739 18,839
------------ ------------ ------------ ------------
Net interest income after provision for loan losses ... 33,294 12,459 61,080 42,510
------------ ------------ ------------ ------------
Non-interest income:
Servicing fees and other charges .......................... 7,321 1,158 17,402 1,945
Gains on sales of interest earning assets, net ............ 5,999 7,979 46,142 17,580
Gain on real estate owned, net ........................... 4,793 5,495 8,628 4,467
Other income .............................................. 7,318 514 7,898 2,515
------------ ------------ ------------ ------------
25,431 15,146 80,070 26,507
------------ ------------ ------------ ------------
Non-interest expense
Compensation and employee benefits ........................ 20,471 8,431 55,069 23,170
Occupancy and equipment ................................... 5,029 2,151 11,818 6,378
Net operating loss (income) on investments in real
estate and certain low-income housing
tax credit interests ................................... 622 (161) 1,819 (99)
Savings Association Insurance Fund
recapitalization assessment ........................... -- 7,140 -- 7,140
Other operating expenses .................................. 5,097 3,970 16,289 10,496
------------ ------------ ------------ ------------
31,219 21,531 84,995 47,085
------------ ------------ ------------ ------------
Distributions on Company-obligated, mandatorily redeemable
securities of subsidiary trust holding solely junior
subordinated debentures of the Company ................... 1,850 -- 1,850 --
Equity in earnings of investment in joint venture ........... 546 4,139 16,220 5,217
Income before income taxes ............................. 26,202 10,213 70,525 27,149
Income tax expense .......................................... (6,179) (157) (14,911) (2,067)
Minority interest in net loss of consolidated subsidiary .... 142 -- 384 --
------------ ------------ ------------ ------------
Net income ............................................. $ 20,165 $ 10,056 $ 55,998 $ 25,082
============ ============ ============ ============
Earnings per share:
Net income ............................................. $ 0.35 $ 0.19 $ 1.01 $ 0.47
============ ============ ============ ============
Weighted average common shares outstanding .................. 57,749,958 53,890,606 55,341,404 53,192,424
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND THE YEAR ENDED
DECEMBER 31, 1996
Notes
Unrealized receivable
gain (loss) on exercise
Common Stock Additional on of common
----------------------- paid-in Retained securities, stock
Shares Amount capital earnings net of taxes options Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 ..... 47,624,540 $ 476 $ 10,211 $ 130,275 $ (1,415) $ -- $ 139,547
Net Income ........................ -- -- -- 50,142 -- -- 50,142
Repurchase of common stock options -- -- (177) -- -- -- (177)
Exercise of common stock options .. 5,857,660 59 12,933 -- -- -- 12,992
Issuance of common stock .......... 6,140 -- 23 -- -- -- 23
Notes receivable on exercise of
common stock options, net of
repayments ..................... -- -- -- -- -- (3,832) (3,832)
Change in unrealized gain on
securities net of taxes ........ -- -- -- -- 4,901 -- 4,901
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1996 ..... 53,488,340 535 22,990 180,417 3,486 (3,832) 203,596
Net income ........................ -- -- -- 55,998 -- -- 55,998
Issuance of common stock .......... 6,906,198 69 141,934 -- -- -- 142,003
Repurchase of common stock options -- -- (1,870) -- -- -- (1,870)
Exercise of common stock options .. 110,682 1 1,736 -- -- -- 1,737
Repayment of notes receivable on
exercise of common stock
options, net of advances ....... -- -- -- -- -- 2,133 2,133
Change in unrealized gain on
securities, net of taxes ....... -- -- -- -- 14,447 -- 14,447
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at September 30, 1997 .... 60,505,220 $ 605 $ 164,790 $ 236,415 $ 17,933 $ (1,699) $ 418,044
========== ========== ========== ========== ========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the nine months ended September 30, 1997 1996
---------------------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................................... $ 55,998 $ 25,082
Adjustments to reconcile net income to net cash provided by operating
activities:
Net cash provided from trading activities ...................................... 112,905 7,232
Proceeds from sales of loans available for sale ................................ 301,773 393,963
Purchases of loans available for sale .......................................... (86,606) (237,416)
Origination of loans available for sale ........................................ (297,254) (2,154)
Principal payments received on loans available for sale ........................ 11,975 22,427
Premium amortization (discount accretion), net ................................. 33,678 1,487
Depreciation and amortization .................................................. 13,073 5,287
Provision for loan losses ...................................................... 21,739 18,839
Gains on sales of interest earning assets, net ................................. (46,142) (17,580)
Loss on sales of premises and equipment ........................................ -- 97
Provision for real estate owned ............................................... 4,725 13,801
Gain on sale of real estate owned, net ......................................... (19,637) (17,758)
Gain on sale of interest in tax credit partnership interests ................... (6,298) (990)
Decrease in principal, interest and dividends receivable ....................... 1,688 490
Increase in income taxes receivable ............................................ (5,761) (12,175)
(Increase) decrease in deferred tax asset ...................................... (8,789) 4,090
Increase in escrow advances .................................................... (14,771) (3,316)
Increase in other assets ....................................................... (14,258) (15,593)
Increase in accrued expenses, interest payable and other liabilities ........... 9,724 2,638
----------- -----------
Net cash provided by operating activities ......................................... 67,762 188,451
----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale ........................... 215,033 169,112
Purchases of securities available for sale ..................................... (193,244) (95,271)
Maturities of and principal payments received on securities available for sale . 30,065 22,512
Maturities of and principal payments received on securities held for investment -- 10,000
Purchase of securities held for investment ..................................... (29,920) --
Purchase of assets from Admiral ................................................ (6,750) --
Investment in real estate ...................................................... (16,211) --
Purchase of low income housing tax credit interests ............................ (23,525) (27,647)
Proceeds from sales of low income housing tax credit interests ................. 22,026 3,704
Proceeds from sales of discount loans .......................................... 221,966 39,137
Proceeds from sales of loans held for investment ............................... 2,384 --
Purchase and originations of loans held for investment, net
of undisbursed loan funds .................................................... (103,161) (171,889)
Purchase of discount loans ..................................................... (1,107,494) (529,267)
Decrease (increase) in investment in joint ventures ............................ 43,978 (60,885)
Principal payments received on loans held for investment ....................... 137,699 97,374
Principal payments received on discount loans .................................. 305,466 188,164
Proceeds from sales of real estate owned ....................................... 130,617 136,717
Purchase of real estate owned in connection with discount loan purchases ....... (21,963) (2,314)
Proceeds from sale of premises and equipment ................................... -- 233
Additions to premises and equipment ............................................ (9,259) (7,600)
Other, net ..................................................................... 1,636 (276)
----------- -----------
Net cash used by investing activities ............................................. (400,657) (228,196)
----------- -----------
</TABLE>
(Continued on next page)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the nine months ended September 30, 1997 1996
- --------------------------------------------------------------------------- --------- ---------
Cash flows from financing activities:
<S> <C> <C>
Increase in deposits ................................................... 51,210 148,677
Decrease in securities sold under agreements to repurchase ............. (71,471) (84,761)
Proceeds from issuance of notes, debentures and other interest bearing
obligations, net of repayments ........................................ 142,714 125,000
Payments on advances from Federal Home Loan Bank ....................... (399) --
Payments and repurchase of notes and mortgages payable ................. -- (1,385)
Loans made to executive officers, net of repayments .................... 2,133 (5,782)
Exercise of common stock options ....................................... 1,737 12,992
Proceeds from issuance of Capital Trust Securities ..................... 125,000 --
Payment of Capital Trust Securities issuance costs ..................... (4,322) --
Issuance of shares of common stock, net ................................ 141,898 --
Repurchase of common stock options ..................................... (1,870) (177)
--------- ---------
Net cash provided by financing activities ................................. 386,630 194,564
--------- ---------
Net increase in cash and cash equivalents ................................. 53,735 154,819
Cash and cash equivalents at beginning of period .......................... 52,219 54,632
--------- ---------
Cash and cash equivalents at end of period ................................ $ 105,954 $ 209,451
========= =========
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions ...................... $ 15,641 $ 7,278
Interest earning deposits .............................................. 7,469 17,173
Federal funds sold and repurchase agreements ........................... 82,844 185,000
--------- ---------
$ 105,954 $ 209,451
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................................. $ 105,597 $ 76,071
========= =========
Income taxes ......................................................... $ 29,461 $ 4,462
========= =========
Supplemental schedule of non-cash investing and financing activities:
Exchange of discount loans and loans available for sale for securities $ 393,615 $ 219,633
========= =========
Real estate owned acquired through foreclosure ....................... $ 139,416 $ 78,818
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
7
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OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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
subsidiaries, Ocwen Federal Bank FSB (the "Bank"), Investors Mortgage Insurance
Holding Company ("IMI") and Ocwen Capital Trust I. 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 September 30, 1997 and
December 31, 1996, the results of its operations for the three and nine months
ended September 30, 1997 and 1996, its cash flows for the nine months ended
September 30, 1997 and 1996, and its changes in stockholders' equity for the
year ended December 31, 1996 and the nine months ended September 30, 1997. The
results of operations and other data for the nine month period ended September
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 September 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
8
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OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
for derivative financial instruments and derivative commodity instruments. The
accounting policy disclosure requirements are effective for periods ending after
June 15, 1997. See Note 5 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 September 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 $22,875 and $67,909 at September 30, 1997 and
December 31, 1996, respectively, and is net of valuation allowances of $1,771
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 nine months ended
September 30, 1997 includes the recapture of $3,344 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 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
SEPTEMBER 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 nine months ended September 30,
1997.
BCBF, L.L.C.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------- ----------
<S> <C> <C>
Assets:
Cash .......................................................... $ 10 $ 10
Loans held for sale, at lower of cost or market value.......... 31,190 110,702
Real estate owned, net of valuation allowance of $340 and $511
at September 30, 1997 and December 31, 1996, respectively.... 13,257 25,595
Other assets................................................... 4,849 10,526
----------- ----------
$ 49,306 $ 146,833
=========== ==========
Liabilities and Owners' Equity
Liabilities:
Accrued expenses, payables and other liabilities............. $ 14 $ 787
----------- ----------
Total liabilities.......................................... 14 787
----------- ----------
Owners' Equity:
Ocwen Federal Bank FSB......................................... 24,646 73,023
BlackRock Capital Finance L.P.................................. 24,646 73,023
----------- ----------
Total owners' equity......................................... 49,292 146,046
----------- ----------
$ 49,306 $ 146,833
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
BCBF, L.L.C.
STATEMENTS OF OPERATIONS
For the For the For the Period
Three months Nine months April 10, 1996
ended ended through
September 30, September 30, September 30,
1997 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Interest income........................... $ 1,264 $ 7,742 $ 26,616
Interest expense.......................... -- -- 17,185
------------- ------------ -------------
Net interest income..................... 1,264 7,742 9,431
------------- ------------ -------------
Non-interest income:
Gain (loss) on sale of loans held for
sale .................................. (187) 17,101 1,324
Gain (loss) on real estate owned, net... (612) 725 (63)
Loan fees............................... -- 23 16
------------- ------------ -------------
(799) 17,849 1,277
-------------- ------------ -------------
Operating expenses:
Loan servicing fees..................... 208 1,636 4,500
Other loan expenses..................... 13 14 273
-------------- ------------ -------------
221 1,650 4,773
-------------- ------------ -------------
Net income................................ $ 244 $ 23,941 $ 5,935
============= ============ =============
</TABLE>
10
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
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's Discussion and
Analysis of Financial Condition and Results of Operations - Non-interest Income"
included in Item 2 hereof.
NOTE 4 CAPITAL SECURITIES
In August 1997, Ocwen Capital Trust I, a wholly-owned subsidiary of Ocwen,
issued $125.0 million of 10 7/8% Capital Securities (the "Capital Securities").
Proceeds from issuance of the Capital Securities were invested in 10 7/8% Junior
Subordinated Debentures issued by Ocwen. The Junior Subordinated Debentures,
which represent the sole assets of Ocwen Capital Trust I, will mature on August
1, 2027.
Holders of the Capital Securities will be entitled to receive cumulative cash
distributions accruing from the date of original issuance and payable
semi-annually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998, at an annual rate of 10 7/8% of the liquidation amount of
$1,000 per Capital Security. Payment of distributions out of moneys held by
Ocwen Capital Trust I, and payments on liquidation of Ocwen Capital Trust I or
the redemption of Capital Securities, are guaranteed by the Company to the
extent Ocwen Capital Trust I has funds available. If the Company does not make
principal or interest payments on the Junior Subordinated Debentures, Ocwen
Capital Trust I will not have sufficient funds to make distributions on the
Capital Securities, in which event the guarantee shall not apply to such
distributions until Ocwen Capital Trust I has sufficient funds available
therefor.
The Company has the right to defer payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 10 consecutive semi-annual periods with respect to each deferral
period, provided that no extension period may extend beyond the stated maturity
of the Junior Subordinated Debentures. Upon the termination of any such
extension period and the payment of all amounts then due on any interest payment
date, the Company may elect to begin a new extension period. Accordingly, there
could be multiple extension periods of varying lengths throughout the term of
the Junior Subordinated Debentures. If interest payments on the Junior
Subordinated Debentures are deferred, distributions on the Capital Securities
will also be deferred and the Company may not, and may not permit any subsidiary
of the Company to, (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, the
Company's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities that rank
PARI PASSU with or junior to the Junior Subordinated Debentures. During an
extension period, interest on the Junior Subordinated Debentures will continue
to accrue at the rate of 10 7/8% per annum, compounded semi-annually.
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company, subject to the receipt of any necessary prior regulatory
approval, (i) in whole or in part on or after August 1, 2007 at a redemption
price equal to 105.438% of the principal amount thereof on August 1, 2007
declining ratably on each August 1 thereafter to 100% on or after August 1,
2017, plus accrued interest thereon, or (ii) at any time, in whole (but not in
part), upon the occurrence and continuation of a special event (defined as a tax
event, regulatory capital event or an investment company event) at a redemption
price equal to the greater of (a) 100% of the principal amount thereof or (b)
the sum of the present values of the principal amount and premium payable with
respect to an optional redemption of such Junior Subordinated Debentures on
August 1, 2007, together with scheduled payments of interest from the prepayment
date to August 1, 2007, discounted to the prepayment date on a semi-annual basis
at the adjusted Treasury rate plus accrued interest thereon to the date of
prepayment. The Capital Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at maturity or
their earlier redemption, in an amount equal to the amount of the related Junior
Subordinated Debentures maturing or being redeemed and at a redemption price
equal to the redemption price of the Junior Subordinated Debentures, plus
accumulated and unpaid distributions thereon to the date of redemption.
11
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
For financial reporting purposes, Ocwen Capital Trust I is treated as a
subsidiary of the Company and, accordingly, the accounts of Ocwen Capital Trust
I are included in the consolidated financial statements of the Company.
Intercompany transactions between Ocwen Capital Trust I and the Company,
including the Junior Subordinated Debentures, are eliminated in the consolidated
financial statements of the Company. The Capital Securities are presented as a
separate caption between liabilities and stockholders' equity in the
consolidated statement of financial condition of the Company as
"Company-obligated, mandatorily redeemable securities of subsidiary trust
holding solely junior subordinated debentures of the Company". Distributions
payable on the Capital Securities are recorded as a separate caption immediately
following non-interest expense in the consolidated statement of operations of
the Company. The Company intends to continue this method of accounting going
forward.
NOTE 5 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 swaps at September 30, 1997 and
December 31, 1996 follow:
<TABLE>
<CAPTION>
Notional LIBOR Fixed Floating Rate at
Maturity Amount Index Rate End of Period Fair Value
-------- ---------- -------- ------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1997... 1998 $ 39,170 1-Month 6.18% 5.66% $ (120)
DECEMBER 31, 1996.... 1998 $ 45,720 1-Month 6.18% 5.67% $ (103)
</TABLE>
The 1-month LIBOR was 5.66% and 5.50% on September 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:
Maturity Notional Principal Fair Value
------------ --------------------- ------------
SEPTEMBER 30, 1997
U.S. Treasury futures... 1997 $ 313,200 $ (1,444)
DECEMBER 31, 1996
Eurodollar futures...... 1997 $ 365,000 $ (558)
1998 40,000 (87)
U.S. Treasury futures... 1997 165,100 498
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.
12
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
NOTE 6 STOCK SPLIT
On October 29, 1997, the Company's Board of Directors approved a 2-for-1 stock
split of its issued and outstanding common stock, par value $.01 per share. The
Company will effect the stock split through the distribution of authorized but
unissued shares of its common stock on November 20, 1997, to holders of record
of its common stock at the close of business on November 12, 1997. All
references in the consolidated financial statements to the number of shares and
per share amounts have been adjusted retroactively for the stock split.
NOTE 7 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 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 September 30, 1997, the minimum regulatory
capital requirements were:
o Tangible and core capital of 1.5 percent and 3.0 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 8.0 percent of
the value of risk-weighted assets.
At September 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 and must not be subject to any written agreement, order or
directive issued by the OTS to meet and maintain a specific capital level for
any capital measure. 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 September 30, 1997 that
management believes have changed the institution's category.
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%. There can be no assurance that in the future the OTS will agree
to a decrease in such requirements, will not seek to increase such requirements
or will not impose these or other individual regulatory capital requirements in
a manner which affects the Bank's status as a "well capitalized" institution
under applicable laws and regulations. Based upon recent discussions with the
OTS, the Bank also transfered 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, through IMI, 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. At September 30, 1997, the Bank held five
subordinate securities and one residual security which had an aggregate book
value of $37,795, of which one subordinate security and one residual security
with an aggregate book value of $14,305 were dividended to Ocwen in October
1997. The Bank believes at this time that it will continue to be a
"well-capitalized institution" under OTS regulations.
13
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
The following tables summarize the Bank's actual and required regulatory capital
at September 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
assets............................... 10.62% $ 271,583
Net unrealized gain on certain available
for sale securities.................. (3,862)
Excess mortgage servicing rights..... (288)
----------
Tangible capital, and ratio to
adjusted total assets................ 10.48% $ 267,433 1.50% $ 38,290
========== ========
Tier 1 (core) capital, and ratio to
adjusted total assets................ 10.48% $ 267,433 3.00% $ 76,581 5.00% $127,635
========== ======== ========
Tier 1 capital, and ratio to
risk-weighted assets................. 9.57% $ 267,433 6.00% $167,630
========== ========
Allowance for loan and lease losses..... 23,352
Subordinated debentures.............. 100,000
----------
Tier 2 Capital....................... 123,352
----------
Total risk-based capital, and ratio
to risk-weighted assets.............. 13.99% $ 390,785 8.00% $223,507 10.00% $279,383
========== ======== ========
Total regulatory assets................. $2,556,842
==========
Adjusted total assets................ $2,552,692
==========
Risk-weighted assets................. $2,793,833
==========
</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 September 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.
In addition to these OTS regulations governing capital distributions, the
indenture governing the $100,000 of 12% subordinated debentures (the
"Debentures") due 2005 and issued by the Bank on June 12, 1995 limits the
declaration or payment of dividends and the purchase or redemption of common or
preferred stock in the aggregate to the sum of 50% of consolidated net income
and 100% of all capital contributions and proceeds from the issuance or sale
(other than to a subsidiary) of common stock, since the date the Debentures were
issued.
14
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
NOTE 8 COMMITMENTS AND CONTINGENCIES
At September 30, 1997 the Company had commitments to (i) originate $164,475 of
sub-prime loans secured by single-family residential properties, (ii) fund
$32,655 of loans secured by multi-family residential buildings, (iii) fund
$12,827 of loans secured by office buildings and (iv) fund $21,800 of loans
secured by hotel properties. Additionally, the Company had commitments of $2,294
to purchase sub-prime loans secured by single-family residential properties and
$2,520 discount loans secured by commercial properties. The Company, through its
investment in subordinate securities and REMIC residuals which had a book value
of $63,841 at September 30, 1997, supports senior classes of mortgage-related
securities having an outstanding principal balance of $1,442,472.
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.
15
<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 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 September 30, 1997, the only significant subsidiaries of the
Company, other than the Bank, were IMI, OFS and Ocwen Capital Trust I. Prior to
July 15, 1997, IMI, through subsidiaries, owned and managed the Westin Hotel
(the "Hotel") in Columbus, Ohio. On July 15, 1997, IMI sold a 69% partnership
interest in the Hotel for a minimal gain and no longer manages the Hotel. In
addition, IMI owns 9.8% of the outstanding common stock of OAIC and through
subsidiaries, also owns non-residential real estate properties as well as
residential units in cooperative buildings which were acquired simultaneously
with loans formerly held by the Bank which have either been fully satisfied or
resulted in foreclosed property currently held by the Bank. 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. Ocwen Capital Trust I, a wholly owned subsidiary of Ocwen,
was formed for the express purpose of issuing $125.0 million of 10 7/8% Capital
Securities, the proceeds of which were invested in 10 7/8% Junior Subordinated
Debentures issued by Ocwen.
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 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's
common stock had 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.
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
shares pursuant to the underwriters' over-allotment option) of newly-issued
common stock. The offering of such common stock, which closed on August 12,
1997, resulted in estimated net proceeds of 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 the 10 7/8% Capital Securities,
which also closed on August 12, 1997, resulted in estimated net proceeds to the
Company of $120.7 million. On September 4, 1997 the underwriters exercised their
over-allotment option to purchase 450,000 shares of common stock. The exercise
of such option, which closed on September 9, 1997, resulted in net proceeds to
the Company of $18.6 million.
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
On September 24, 1997 the Company and UBS Mortgage, Inc. ("UBS") were
jointly awarded 10,992 single-family discount loans with an unpaid principal
balance of approximately $692.0 million auctioned by the Department of Housing
and Urban Development. As between the Company and UBS, Ocwen was allocated 5,461
of those loans with an aggregate principal balance of $346.0 million.
On September 25, 1997 the Company completed the securitization of 910
sub-prime single-family residential mortgage loans with an aggregate unpaid
principal balance of $102.2 million. The Company recorded total gains of $5.4
million on the sale of the senior classes of securities in connection with this
transaction. The Company continues to service the loans for a fee and has
retained an interest in the related residual class security.
On September 26, 1997 the Company completed the sale of an investment
in low-income housing tax credit interest and realized a gain of $6.3 million on
proceeds of $22.0 million.
On October 3, 1997 the Company, as part of a larger transaction
involving the Company and BlackRock, completed the securitization of 302 small
commercial mortgage loans with an aggregate unpaid principal balance of $62.7
million. The Company recorded total gains of $2.6 million on the sale of the
senior classes of securities in connection with this transaction. The Company
has retained an interest in the related residual class securities.
On October 24, 1997, the Bank entered into an agreement to act as a
special loan servicer to sub-service approximately $75.0 million of 90-day-plus
delinquent domestic loans for which Cityscape Corp. ("Cityscape") is the
servicer under various securitizations. This agreement, which is subject to the
approval of such securitizations' bond insurers, trustees and rating agencies,
calls for Cityscape to transfer to the Bank the special servicing of
approximately 1,000 non-performing loans.
On October 29, 1997, the Company's Board of Directors approved a
2-for-1 stock split of its issued and outstanding common stock, par value $.01
per share. The Company will effect the stock split through the distribution of
authorized but unissued shares of its common stock on November 20, 1997, to
holders of record of its common stock at the close of business on November 12,
1997. All references herein to the number of shares and per share amounts have
been adjusted retroactively for the stock split.
On November 6, 1997, the Company acquired Amos, Inc., a Connecticut
based company engaged primarily in the development of mortgage loan servicing
software. Amos' products are Microsoft Windows based, client/server architecture
and feature real-time processing, year 2000 compliance, a scaleable database
platform and strong workflow capabilities. The aggregate purchase price was
approximately $9.7 million, including $4.9 million which is contingent on Amos,
Inc. meeting certain software development performance criteria.
17
<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 September 30,
--------------------------------------------------
1997 1996 Change
---------------- ------------------- -------------
FOR THE PERIOD: (Dollars in thousands, except share data)
<S> <C> <C> <C>
Net interest income ........................ $ 37,382 $ 16,928 121%
Provision for loan losses .................. 4,088 4,469 (9)
Non-interest income ........................ 25,431 15,146 68
Non-interest expense ....................... 31,219 21,531 45
Equity in earnings of investment in joint
ventures ................................. 546 4,139 (87)
Net income ................................. 20,165 10,056 101
PER COMMON SHARE
Net income (5) ............................. $ 0.35 $ 0.19 84%
Stock price: (1) ...........................
High .................................... 22.38 10.50 113
Low ..................................... 16.06 9.50 69
Close ................................... 21.06 10.19 107
AVERAGE BALANCES
Interest-earning assets .................... $ 2,423,833 $ 1,559,942 55%
Interest-bearing liabilities ............... 2,362,201 1,701,987 39
Stockholders' equity ....................... 304,770 161,878 88
KEY RATIOS
Interest rate spread:
Yield on interest-earning assets ........ 12.76% 11.32% 13%
Cost of interest-bearing liabilities .... 6.76 6.40 6
Interest rate spread .................. 6.00 4.92 22
Annualized return on average assets (2) .... 2.78 1.85 50
Annualized return on average equity ........ 26.47 24.85 7
Efficiency ratio(3) (4) .................... 49.27 42.30 16
Core (leverage) capital ratio .............. 10.48 8.65 21
Risk-based capital ratio ................... 13.99 13.64 3
At or For the Nine Months Ended September 30,
--------------------------------------------------
1997 1996 Change
---------------- ------------------- -------------
FOR THE PERIOD: (Dollars in thousands, except share data)
Net interest income ........................ $ 82,819 $ 61,349 35%
Provision for loan losses .................. 21,739 18,839 15
Non-interest income ........................ 80,070 26,507 202
Non-interest expense ....................... 84,995 47,085 81
Equity in earnings of investment in joint
ventures ................................. 16,220 5,217 211
Net income ................................. 55,998 25,082 123
PER COMMON SHARE
Net income (5) ............................. $ 1.01 $ 0.47 115%
Stock price (1)
High .................................... 22.38 10.50 113
Low ..................................... 12.63 9.50 33
Close ................................... 21.06 10.19 107
AVERAGE BALANCES
Interest-earning assets .................... $ 2,308,516 $ 1,563,579 48%
Interest-bearing liabilities ............... 2,322,348 1,709,455 36
Stockholders' equity ....................... 250,077 151,056 66
KEY RATIOS
Interest rate spread:
Yield on interest-earning assets ........ 11.48% 12.25% (6)%
Cost of interest-bearing liabilities .... 6.66 6.42 4
Interest rate spread .................. 4.82 5.83 (17)
Annualized return on average assets (2)..... 2.71 1.54 76
Annualized return on average equity ........ 29.86 22.14 35
Efficiency ratio (3)(4). ................... 47.45 43.91 8
</TABLE>
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
(1) For the period ended September 30 retroactively adjusted for the
2-for-1 stock split approved by the Company's Board of Director's
on October 29, 1997.
(2) Includes the Company's pro rata share of average assets held by
its 50% joint venture.
(3) Excluding 1996 SAIF assessment. Inclusive of the SAIF assessment,
the efficiency ratio for the three and nine months ended
September 30, 1996 would have been 59.46% and 50.59%,
respectively.
(4) Before provision for loan losses and including equity in earnings
of investment in joint venture.
(5) Retroactively adjusted for the 2-for-1 stock split approved by
the Company's Board of Directors on October 29, 1997. Exclusive
of such retroactive adjustment, earnings per share would have
been $0.70 and $0.37 for the three months ended September 30,
1997 and 1996, respectively, and $2.02 and $0.94 for the nine
months ended September 30, 1997 and 1996, respectively. See Note
6 to the Interim Consolidated Financial Statements included in
Item 1 hereof.
THIRD QUARTER SUMMARY
The Company's net income amounted to $20.2 million or $0.35 per share
for the three months ended September 30, 1997 as compared to net income of $10.1
million, or $0.19 per share for the same period in 1996.
The $20.5 million or 121% increase in net interest income during the
third quarter of 1997 as compared to the third quarter of 1996 is primarily due
to an $863.9 million increase in average interest-earnings assets, primarily
discount loans, offset in part by a $660.2 million increase in average
interest-bearing liabilities, and a 183 basis point increase in the net interest
margin due largely to $5.5 million of additional interest received in connection
with the payoff of three loans held in the loan portfolio.
The $10.3 million or 68% increase in non-interest income for the three
months ended September 30, 1997 is the result of a $6.3 million gain recognized
in connection with the sale of an investment in a low-income housing tax credit
interest and a $6.2 million increase in servicing fees and other charges
reflecting a 194% increase in the average balance of loans serviced for others,
offset in part by a $2.0 million decline in gains on sales of interest earning
assets.
Equity in earnings of investment in joint ventures of $546,000 for the
three months ended September 30, 1997 declined $3.6 million or 87% as compared
to the same period in 1996 as a result of the declining asset base of the joint
ventures 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.
Non-interest expense increased $9.7 million or 45% during the three
months ended September 30, 1997 as compared to the same period in 1996 primarily
as a result of (i) a $12.0 million increase in compensation and benefits, due to
a 135% increase in the average number of employees and a $4.4 million increase
in employee profit sharing expense in line with improved earnings and (ii) a
$2.9 million increase in occupancy and equipment expense, offset by (iii) a $7.1
million assessment during the third quarter of 1996 to recapitalize the SAIF.
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 Nine months ended
September 30, September 30,
------------------------- --------------------------
1997 1996 1997 1996
- --------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Discount Loans:
Single-family residential loans..... (8)% -% 18% 1%
Large Commercial ................... 48 43 33 30
Small Commercial.................... 2 7 3 6
Investment in low-income housing tax
credits.............................. 25 23 21 29
Commercial lending..................... 18 10 10 16
Sub-prime single family lending........ (2) 13 1 14
Mortgage loan servicing................ 7 4 4 4
Investment securities.................. 10 2 9 1
Other.................................. - (2) 1 (1)
--- ---- --- ---
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
20
<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 September 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 ....... $ 341,868 $ 4,844 5.67% $ 126,121 $ 1,742 5.52%
Securities available for sale .. 232,957 8,087 13.89 256,926 5,890 9.17
Loans available for sale (1) ... 172,053 4,267 9.92 116,806 2,685 9.19
Investment securities and
other (2) ................... 48,018 1,333 11.10 45,503 1,073 9.43
Loan portfolio (1) ............. 412,520 16,425 15.93 325,830 8,961 11.00
Discount loan portfolio ........ 1,216,417 42,370 13.93 688,756 23,794 13.82
---------- --------- ---------- ---------
Total interest-earning
assets, interest income ..... 2,423,833 77,326 12.76 1,559,942 44,145 11.32
--------- ---------
Non-interest earning cash ..... 6,061 6,639
Allowance for loan losses ...... (25,415) (14,048)
Investments in low-income
housing tax credit interests. 95,399 100,015
Investment in joint ventures ... 25,552 62,192
Real estate owned, net ......... 139,143 126,458
Other assets ................... 238,941 101,893
---------- ----------
Total assets ................ $2,903,514 $1,943,091
========== ==========
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing demand
deposits ....................... $ 34,521 $ 282 3.27% $ 46,444 $ 334 2.88
Savings deposits ............... 1,933 11 2.28 3,505 20 2.28
Certificates of deposit ........ 1,964,058 30,764 6.27 1,464,844 22,434 6.13
---------- --------- ---------- ---------
Total interest-bearing
deposits ................. 2,000,512 31,057 6.21 1,514,793 22,788 6.02
Notes, debentures and other .... 358,058 8,823 9.86 115,696 3,471 12.00
Securities sold under
agreements to repurchase .... 3,075 56 7.28 - - -
Federal Home Loan Bank advances. 556 8 5.76 71,498 958 5.36
---------- --------- ---------- ---------
Total interest-bearing
liabilities, interest
expense ................... 2,362,201 39,944 6.76 1,701,987 27,217 6.40
--------- ---------
Non-interest bearing deposits . 37,269 15,966
Escrow deposits ................ 80,840 12,493
Other liabilities .............. 118,434 50,767
---------- ----------
Total liabilities ............ 2,598,744 1,781,213
Stockholders' equity ........... 304,770 161,878
---------- ----------
Total liabilities and
stockholders' equity ...... $2,903,514 $1,943,091
========== ==========
Net interest income before
provision for loan losses ... $ 37,382 $ 16,928
========= =========
Net interest rate spread ....... 6.00% 4.92%
===== =====
Net interest margin ............ 6.17% 4.34%
===== =====
Ratio of interest-earning
assets to interest-bearing
liabilities ................. 103% 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 September 30,
1997 and 1996 would have been 10.86% and 7.43%, respectively.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Nine months ended September 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..... $ 179,132 $ 7,296 5.43% $ 90,709 $ 3,840 5.64%
Securities available for sale 293,393 22,770 10.35 286,935 19,954 9.27
Securities held for trading.. 4,393 248 7.53 -- -- --
Loans available for sale (1). 142,194 11,091 10.40 198,941 14,169 9.50
Investment securities and
other (2) ................ 33,388 2,759 11.02 40,951 3,053 9.94
Loan portfolio (1) .......... 427,749 37,791 11.78 305,458 26,734 11.67
Discount loan portfolio...... 1,228,267 116,840 12.68 640,585 75,852 15.79
----------- ---------- ---------- --------
Total interest - earning
assets, interest income... 2,308,516 198,795 11.48 1,563,579 143,602 12.25
---------- --------
Non-interest earning cash... 9,872 6,461
Allowance for loan losses.... (21,274) (9,554)
Investments in low income
housing tax credit
interests................. 95,525 92,767
Investment in joint ventures. 39,772 39,442
Real estate owned, net....... 117,966 143,819
Other assets................. 197,516 97,560
----------- ----------
Total assets.............. $ 2,747,893 $1,934,074
=========== ==========
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing demand
deposits ................. $ 33,940 $ 1,005 3.95% $ 48,073 $ 785 2.18%
Savings deposits............. 2,197 38 2.31 3,458 60 2.31
Certificates of deposit...... 1,986,270 91,278 6.13 1,455,305 67,389 6.17
----------- -------- ---------- --------
Total interest-bearing
deposits.................. 2,022,407 92,321 6.09 1,506,836 68,234 6.04
Notes, debentures and other.. 276,385 22,686 10.94 115,992 10,344 11.89
Securities sold under
agreements to repurchase.. 12,760 533 5.57 15,862 685 5.76
Federal Home Loan
Bank advances............. 10,796 436 5.38 70,765 2,990 5.63
----------- -------- ---------- --------
Total interest-bearing
liabilities, interest
interest expense......... 2,322,348 115,976 6.66 1,709,455 82,253 6.42
Non-interest bearing deposits 26,986 -------- 9,352 --------
Escrow deposits.............. 74,853 11,452
Other liabilities............ 73,629 52,759
----------- ----------
Total liabilities......... 2,497,816 1,783,018
Stockholders' equity......... 250,077 151,056
----------- ----------
Total liabilities and
stockholders' equity...... $ 2,747,893 $1,934,074
=========== ==========
Net interest income before
provision for loan losses. $ 82,819 $ 61,349
======== ========
Net interest rate spread.. 4.82% 5.83%
===== =====
Net interest margin.......... 4.78% 5.23%
===== =====
Ratio of interest-earning
assets to interest-bearing
liabilities .............. 99% 91%
=== ===
</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 nine months ended September 30,
1997 and 1996 would have been 10.92% and 7.28%, respectively.
22
<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
<TABLE>
<CAPTION>
change due to rate.
Three months Nine months
--------------------------------- ---------------------------------
1997 vs. 1996 1997 vs. 1996
FOR THE PERIODS ENDED SEPTEMBER 30 --------------------------------- ---------------------------------
(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 ....... $ 46 $ 3,056 $ 3,102 $ (369) $ 3,825 $ 3,456
Securities held for trading . -- -- -- 248 -- 248
Securities available for sale 2,790 (593) 2,197 2,358 458 2,816
Loans available for sale .... 226 1,356 1,582 2,825 (5,903) (3,078)
Loans ....................... 4,682 2,782 7,464 255 10,802 11,057
Discount loans .............. 198 18,378 18,576 (36,438) 77,426 40,988
Investment securities and
other ....................... 198 62 260 633 (927) (294)
-------- -------- -------- -------- -------- --------
Total interest-earning
assets .................. 8,140 25,041 33,181 (30,488) 85,681 55,193
-------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand
deposits .................... 41 (93) (52) 764 (544) 220
Savings deposits ............ -- (9) (9) -- (22) (22)
Certificates of deposit ..... 521 7,809 8,330 (1,294) 25,183 23,889
-------- -------- -------- -------- -------- --------
Total interest-bearing
deposits .................. 562 7,707 8,269 (530) 24,617 24,087
Notes, debentures and other
interest bearing obligations (722) 6,074 5,352 (2,096) 14,438 12,342
Securities sold under
agreements to repurchase .... 28 28 56 (22) (130) (152)
Federal Home Loan Bank
advances .................. 66 (1,016) (950) (127) (2,427) (2,554)
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities .............. (66) 12,793 12,727 (2,775) 36,498 33,723
-------- -------- -------- -------- -------- --------
Increase in net interest income $ 8,206 $ 12,248 $ 20,454 $(27,713) $ 49,183 $ 21,470
======== ======== ======== ======== ======== ========
</TABLE>
RESULTS OF OPERATIONS: THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
NET INTEREST INCOME. The Company's net interest income of $37.4 million
increased $20.5 million or 121% during the three months ended September 30, 1997
as compared to the comparable period in the prior year. Interest income
increased $33.2 million or 75% due to an $863.9 million or 55% increase in the
Company's average interest-earning assets from period to period and a 144 basis
point increase in the weighted average yield earned. Interest expense increased
$12.7 million or 47% due to a $660.2 million or 39% increase in the Company's
average interest-bearing liabilities.
Net interest income of $82.8 million for the nine months ended
September 30, 1997 increased $21.5 million or 35% over the comparable period of
the prior year. The increase resulted from a $744.9 million or 48% increase in
average interest-earning assets from period to period which was offset in part
by a 77 basis point decrease in the weighted average yield earned on those
assets, and a $612.9 million or 36% increase in average interest-bearing
liabilities.
INTEREST INCOME. Interest income on the discount loan portfolio
increased by $18.6 million or 78% in the three months ended September 30, 1997
versus the three months ended September 30, 1996 as a result of a $527.7 million
or 77% increase in the average balance of the discount loan portfolio. For the
nine months ended September 30, 1997 as compared to the same period in 1996,
interest income on the discount loan portfolio increased $41.0 million or 54%
due to a $587.7 million or 92% increase in the average balance of the discount
loan portfolio which was offset in part by a 311 basis point decrease in the
weighted average yield earned. The decline in the yields during the nine months
ended September 30, 1997, as compared to 1996, is primarily attributable to an
increase in the average balance of
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
single-family discount loans acquired from HUD, and the Company's decision to
cease accretion of discount on non-performing single-family discount loans
effective January 1, 1997. Discount accretion on non-performing single-family
residential discount loans amounted to $1.3 million or 77 basis points in yield
during the three months ended September 30, 1996 and $6.3 million or 132 basis
points in yield during the nine months ended September 30, 1996. The Company
believes that for the remainder of 1997 the yield earned on its single-family
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 and September 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. 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 $7.5 million or 83%
in the third quarter of 1997 from the comparable period in 1996 primarily due to
$5.5 million of additional interest received in connection with the payoff of
three loans secured by hotel and office properties and, to a lesser extent, an
increase in the average balance of the loan portfolio for the three months ended
September 30, 1997 of $86.7 million or 27% over that of the same period in 1996.
For the nine months ended September 30, 1997, interest income on the loan
portfolio increased $11.1 million or 41% over that of the same period in 1996 as
a result of a $122.3 million or 40% increase in the average balance of the loan
portfolio. Interest income on the loan portfolio includes $6.4 million and $2.1
million of additional interest received during the nine months ended September
30, 1997 and 1996, respectively, in connection with the payoff of loans.
Interest income on federal funds sold and repurchase agreements
increased $3.1 million or 178% during the third quarter of 1997 as compared to
the same period in 1996 primarily as a result of a $215.7 million increase in
the average balance. Interest income on federal funds sold and repurchase
agreements increased $3.5 million or 90% during the nine months ended September
30, 1997 as compared to the same period in 1996 due to an increase in the
average balance of $88.4 million or 97%.
INTEREST EXPENSE. The increases in interest expense during the three
and nine months ended September 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 $1.46
billion during the three and nine months ended September 30, 1996, to $1.96
billion and $1.99 billion during the three and nine months ended September 30,
1997, respectively. Also contributing to the increase in interest expense during
1997 is the interest expense on lines of credit established at OFS (see "Notes,
Debentures and other Interest-Bearing Obligations"), which amounted to $2.0
million and $2.3 million during the three and nine months ended September 30,
1997, respectively, as compared to $0 during 1996.
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.
24
<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>
Three Months Nine Months
For the periods ended September 30- ------------------------- -------------------------
(Dollars in thousands) 1997 1996 1997 1996
- ----------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Discount loans................ $ 4,245 $ 3,902 $ 20,409 $ 17,140
Loan portfolio................ (157) 567 1,330 1,699
---------- --------- --------- ---------
Total.................... $ 4,088 $ 4,469 $ 21,739 $ 18,839
========= ========= ========= =========
</TABLE>
The amount provided for discount loans during the nine months ended
September 30, 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. The negative loan portfolio loss
provision of $(157) during the three months ended September 30, 1997 is
primarily due to the recapture of previously established loss provisions in
connection with significant payoffs of loans during the third quarter of 1997.
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 non-performing
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>
Three Months Nine Months
For the periods ended September 30- --------------------------- ---------------------------
(Dollars in thousands) 1997 1996 1997 1996
- ------------------------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Servicing fees and other charges.......... $ 7,321 $ 1,158 $ 17,402 $ 1,945
Gains on sales of interest-earning assets,
net.................................. 5,999 7,979 46,142 17,580
Gain on real estate owned, net............ 4,793 5,495 8,628 4,467
Other income.............................. 7,318 514 7,898 2,515
----------- ----------- ----------- -----------
Total................................ $ 25,431 $ 15,146 $ 80,070 $ 26,507
=========== =========== =========== ===========
</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 sub-prime and non-performing) serviced for others.
The average unpaid principal balance of loans serviced for others amounted to
$3.03 billion and $2.52 billion during the three and nine months ended September
30, 1997, respectively, as compared to $1.03 billion and $645.1 million during
the three and nine months ended September 30, 1996, respectively. Included in
servicing fees and other charges during the nine months ended September 30, 1997
was $1.8 million of fees earned in connection with the setup of loans
transferred to the Company for servicing during the period, of which $668,000
were earned during the third quarter. In addition, servicing fees and other
charges earned during the nine months ended September 30, 1996 included $1.6
million in valuation adjustments as a result of $928,000 and $702,000 charges
recorded during the first and third quarters, respectively, to purchased
mortgage servicing rights due to a significant increase in prepayments of the
underlying loans serviced resulting primarily from refinancings.
The following table sets forth the Company's loans serviced for others
at September 30, 1997.
<TABLE>
<CAPTION>
----------------------- ----------------------- ----------------------- -----------------------
Discount Loans Sub-prime Loans Other Loans Total
----------------------- ----------------------- ----------------------- -----------------------
No. of No. of No. of No. of
Amount Loans Amount Loans Amount Loans Amount Loans
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans securitized and sold
with recourse .......... $ 422,960 7,444 $ 372,662 3,361 $ -- -- $ 795,622 10,805
Loans services for third
parties ................ 1,563,931 24,469 922,010 11,069 159,877 1,156 2,645,818 36,694
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$1,986,891 31,913 $1,294,672 14,430 $ 159,877 1,156 $3,441,440 47,499
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
Net gains on sales of interest-earning assets in the third quarter of
1997 were primarily comprised of a $5.4 million gain in connection with the
securitization of 910 sub-prime single-family residential loans with an
aggregate unpaid principal balance of $102.2 million. The Company continues to
service the loans for a fee and has retained an interest in the related residual
class security with a book value of $7.0 million. Net gains on sales of
interest-earning assets in the third quarter of 1996 were primarily comprised of
a $2.5 million gain from the sale of sub-prime single-family residential loans,
a $2.0 million gain on the sale of a subordinate security, a $4.5 million gain
on the sale of a commercial discount loan, a
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
$539,000 loss on the sale of multi-family loans and a $492,000 adjustment to
record delinquent single-family loans to sub-prime borrowers carried as
available for sale to the lower of cost or market.
Net gains on sales of interest-earning assets for the nine months ended
September 30, 1997 also included (i) a $17.2 million gain in connection with the
securitization of 1,783 single-family residential discount 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)
and in which the Company has retained an interest in the related residual class
security with a book value of $6.7 million, (ii) a $4.5 million net gain in
connection with the securitization of 896 sub-prime single-family residential
loans with an aggregate unpaid principal balance of $104.8 million and in which
the Company has retained an interest in the related residual class security with
a book value of $7.1 million, (iii) a $2.6 million gain on the sale of
mortgage-related securities to OAIC, (iv) $2.7 million of gains from the sales
of single-family sub-prime loans, (v) $3.5 million of gains from sales of
certain large commercial loans in the Company's discount loan portfolio and (vi)
a $9.5 million net gain in connection with the securitization completed in March
1997 of single-family residential mortgage loans acquired from HUD in 1995 and
1996 and in which the Company has retained an interest in the related residual
class security with a book value of $3.0 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>
<CAPTION>
Three Months Nine Months
For the periods ended September 30- --------------------------- -----------------------
(Dollars in thousands) 1997 1996 1997 1996
- --------------------------------------- --------------------------- -----------------------
<S> <C> <C> <C> <C>
Gains on sales......................... $ 9,171 $ 9,730 $ 19,637 $ 17,758
Provision for loss in fair value....... (2,478) (4,013) (4,725) (13,801)
Rental income (carrying costs), net.... (1,900) (222) (6,284) 510
---------- ----------- ---------- ---------
Gain on real estate owned, net....... $ 4,793 $ 5,495 $ 8,628 $ 4,467
========= ========= ========= =========
</TABLE>
Included in other income for the three and nine months ended September
30, 1997 is a $6.3 million gain recognized in connection with the sale of an
investment in low-income housing tax credit project.
NON-INTEREST EXPENSE. The following table sets forth the principal
components of the Company's non-interest expense during the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
For the periods ended September 30- ----------------------- -------------------
(Dollars in thousands) 1997 1996 1997 1996
- --------------------------------------------------- ----------------------- -------------------
<S> <C> <C> <C> <C>
Compensation and employee benefits ................ $ 20,471 $ 8,431 $ 55,069 $ 23,170
Occupancy and equipment ........................... 5,029 2,151 11,818 6,378
Net operating loss (income) on investments in real
estate and certain low-income housing tax credit
interests ....................................... 622 (161) 1,819 (99)
Savings Association Insurance Fund recapitalization
assessment .................................... -- 7,140 -- 7,140
Other operating expenses .......................... 5,097 3,970 16,289 10,496
-------- -------- -------- --------
Total .......................................... $ 31,219 $ 21,531 $ 84,995 $ 47,085
======== ======== ======== ========
</TABLE>
The increases in compensation and employee benefits during the three
and nine months ended September 30, 1997 reflect increases in the average number
of full-time equivalent employees as well as increases in profit sharing expense
in line with improved earnings. The average number of full-time equivalent
employees was 944 and 795 during the three and nine months ended September 30,
1997, respectively, and 402 and 368 during the three and nine months ended
September 30, 1996, respectively. Profit sharing expenses accounted for $4.4
million of the $12.0 million increase in compensation and benefits during the
third quarter of 1997 as compared to the same period in 1996, and $11.2 million
of the $31.9 million increase during the nine months ended September 30, 1997 as
compared to the same period in 1996.
The increases in occupancy and equipment expenses during the three and
nine months ended September 30, 1997, as compared to the same periods in the
prior year, were primarily due to increases in data processing costs, general
26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
office equipment expenses and rent expense, all largely attributable to the
increase in leased corporate and loan production office space and the increase
in employees discussed above.
Net operating losses on investments in real estate and certain
low-income housing tax credit interests, which includes hotel operations,
increased $783,000 and $1.9 million during the three and nine months ended
September 30, 1997, respectively, primarily as a result of net operating losses
and depreciation expense on low-income housing tax credit properties placed in
service during 1997. The associated tax credits on such projects are reported as
a reduction of income tax expense. See "Income Tax Expense" below.
Included in non-interest expense for the three and nine months ended
September 30, 1996 is a $7.1 million non-recurring expense related to the FDIC's
assessment to recapitalize the SAIF.
Other operating expenses increased by $1.1 million during the three
months ended September 30, 1997 as compared to the comparable period in the
prior year primarily due to a $763,000 increase in loan related expenses. Other
operating expenses increased $5.8 million during the nine months ended September
30, 1997, as compared to the comparable period in the prior year primarily due
to a $2.2 million increase in loan related expenses, a $1.4 million reserve
established for a receivable, a $1.1 million increase in professional fees, a
$636,000 increase in amortization of offering costs, $600,000 of certain other
one-time charges and $310,000 of amortization of excess of purchase price over
net assets acquired, offset in part by a $1.3 million decrease in FDIC insurance
premiums.
DISTRIBUTIONS ON COMPANY-OBLIGATED, MANDATORILY REDEEMABLE SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE
COMPANY. In August 1997, Ocwen Capital Trust I, a wholly owned subsidiary of
Ocwen, issued $125.0 million of 10 7/8% Capital Securities. Cash distributions
on the Capital Securities accrue from the date of original issuance and payable
semi-annually in arrears on February 1, and August 1 of each year, commencing on
February 1, 1998, at an annual rate of 10 7/8% of the liquidation amount of
$1,000 per Capital Security. Through September 30, 1997, the Company has accrued
$1.9 million of distributions payable to holders of the Capital Securities.
EQUITY IN EARNINGS OF INVESTMENT IN JOINT VENTURES. Equity in earnings
of investment in joint ventures of $546,000 and $4.1 million for the three
months ended September 30, 1997 and 1996, respectively, and $16.2 million and
$5.2 million for the nine months ended September 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 a $9.2 million gain in connection with the
securitization of HUD loans in March 1997. Equity in earnings for the nine
months ended September 30, 1997 includes the recapture of $3.3 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
1997. See Note 3 to the Interim Consolidated Financial Statements included in
Item 1 hereof.
INCOME TAX EXPENSE. Income tax expense amounted to $6.2 million and
$157,000 during the three months ended September 30, 1997 and 1996,
respectively, and $14.9 million and $2.1 million during the nine months ended
September 30, 1997 and 1996, respectively. The Company's income tax expense is
reported net of tax credits of $3.9 million and $2.3 million during the third
quarter of 1997 and 1996, respectively, and $10.3 million and $7.2 million
during the nine months ended September 30, 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 38.3% and 33.4% during the three months ended September 30, 1997 and 1996,
respectively, and 35.8% and 34.3% during the nine months ended September 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 September 30, 1997 total assets
increased by $472.6 million or 19%. This increase was primarily due to a $410.4
million increase in discount loans, a $63.6 million increase in the loans
available for sale, a $53.7 million increase in cash and cash equivalents, a
$45.7 million increase in real estate owned, a $45.1 million increase in
investment securities and a $29.0 million increase in escrow advances and other
assets, offset in part by an $89.3 million decrease in securities available for
sale, a $75.6 million decrease in securities held for trading and a $44.0
million decrease in investment in joint ventures. Total liabilities increased by
$131.8 million from December 31, 1996 to September 30, 1997 and was primarily
due to a $51.2 million increase in deposits and a $142.7 million increase in
notes, debentures and other interest bearing obligations, offset by a $71.5
million decrease in securities sold under agreements to repurchase.
27
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 September 30, 1997, an aggregate of
$4.5 million of net unrealized gains, net of related deferred taxes of $2.7
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.
The following table sets forth the carrying value (which represents
market value) of the Company's securities available for sale at the dates
indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- --------------
(Dollars in thousands)
<S> <C> <C>
Mortgage-related securities:
Single-family residential:
AAA-rated CMOs.................................... $ 39,575 $ 73,935
FHLMC interest only............................... 58,101 47,571
FNMA interest only................................ 60,968 49,380
AAA-rated interest only........................... 29,840 1,173
Subordinates...................................... 37,335 19,164
REMIC residuals................................... 25,515 20,560
Futures contracts................................. (120) (1,921)
--------------- --------------
251,214 209,862
-------------- --------------
Multi-family residential and commercial:
AAA-rated interest only........................... 1,812 83,590
Non-investment grade interest only................ 2,190 3,799
Subordinates...................................... 9,507 57,534
Futures contracts................................. -- (780)
-------------- --------------
13,509 144,143
-------------- --------------
Total........................................... $ 264,723 $ 354,005
============== ==============
</TABLE>
The Company's securities available for sale of $264.7 million at
September 30, 1997 decreased by $89.3 million or 25% from December 31, 1996 due
primarily to $208.9 million of sales, $30.1 million of maturities and principal
repayments and $33.7 million of net premium amortization, offset in part by
$193.2 million of purchases.
The Company currently plans not 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 September 30, 1997, the Bank held five subordinate
securities and one residual security with an aggregate carrying value and book
value of $45.0 million and $37.8 million, respectively, of which one subordinate
security and one residual security with an aggregate book value of $14.3 million
were dividended to Ocwen in November 1997.
LOANS AVAILABLE FOR SALE. The Company's loans available for sale at
September 30, 1997, which are carried at the lower of cost or fair value,
increased by $63.6 million or 50% 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 September 30, 1997 and December 31, 1996. The Company's single-family
residential lending activities to sub-prime borrowers is conducted by OFS.
28
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the composition of the Company's loans
available for sale by type of loan at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- -------------
(Dollars in thousands)
<S> <C> <C>
Single-family residential loans................... $ 189,466 $ 111,980
Multi-family residential loans.................... - 13,657
Consumer loans.................................... 546 729
-------------- -------------
$ 190,012 $ 126,366
============== =============
</TABLE>
The following table sets forth the activity in the Company's net loans available
for sale during the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
For the periods ended September 30, - ---------------------- ----------------------
(Dollars in thousands) 1997 1996 1997 1996
- ---------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period ......... $ 103,627 $ 84,078 $ 126,366 $ 251,790
Purchases:
Single-family residential ........... 24,102 95,266 86,606 226,960
Multi-family residential ............ -- -- -- 10,456
--------- --------- --------- ---------
24,102 95,266 86,606 237,416
--------- --------- --------- ---------
Originations:
Single-family residential ........... 170,752 1,434 297,254 2,154
Sales .................................. (101,271) (107,267) (289,119) (392,440)
Increase in lower of cost
or market reserve ..................... (683) (492) (1,125) (2,282)
Loans transferred to loan portfolio .... -- -- (13,694) (9)
Principal repayments, net of capitalized
interest ............................ (5,724) (1,109) (11,975) (23,552)
Transfer to real estate owned .......... (791) (1,662) (4,301) (2,829)
--------- --------- --------- ---------
Net increase (decrease) in loans .... 86,385 (13,830) 63,646 (181,542)
--------- --------- --------- ---------
Balance at end of period ............... $ 190,012 $ 70,248 $ 190,012 $ 70,248
========= ========= ========= =========
</TABLE>
During the nine months ended September 30, 1997 and 1996 the Company purchased
and originated $379.8 million and $230.6 million, respectively, of single-family
residential loans to sub-prime borrowers. The Company also sold $285.1 million
of sub-prime loans during the nine months ended September 30, 1997 for a gain of
$12.7 million. Of the $285.1 million and $377.5 million of sub-prime loans sold
during the nine months ended September 30, 1997 and 1996, respectively, $207.0
million and $219.6 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:
September 30, December 31,
1997 1996
----------- -----------
(Dollars in thousands)
Non-performing loans:
Single-family........................ $ 12,601 $ 14,410
Consumer............................. 42 36
----------- -----------
$ 12,643 $ 14,446
Non-performing loans as a percentage of:
Total loans available for sale....... 6.65% 11.43%
Total assets ........................ 0.43% 0.58%
29
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 mitigate any resulting losses.
INVESTMENT SECURITIES. Investment securities increased by $45.1 million
from December 31, 1996 to September 30, 1997 as a result of the Company's $43.1
million investment in 9.8% of the outstanding common stock of OAIC and a $2.0
million increase in the required holdings of FHLB stock. At September 30, 1997 a
$13.4 million net unrealized gain, net of related deferred taxes of $1.8
million, was included in stockholders' equity in connection with the Company's
investment in the outstanding common stock of OAIC.
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.
September 30, December 31,
1997 1996
----------- -----------
(Dollars in thousands)
Single-family residential loans (1) $ 1,047,192 $ 504,049
Multi-family residential loans .... 241,981 341,796
Commercial real estate loans ...... 515,082 465,801
Other loans ....................... 1,864 2,753
----------- -----------
Total discount loans ........... 1,806,119 1,314,399
Unaccreted discount ............... (316,531) (241,908)
Allowance for loan losses ......... (18,337) (11,538)
----------- -----------
Discount loans, net ............ $ 1,471,251 $ 1,060,953
=========== ===========
(1) Does not include the Company's 50% ownership interest in the LLC, which
held $31.2 million and $110.7 million of discount single-family
residential loans at September 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 $1.49 billion and
$1.12 billion at September 30, 1997 and December 31, 1996,
respectively.
30
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following tables set forth the activity in the Company's gross discount loan
portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------------------------------
1997 1996
----------------------------- --------------------------
No. of No. of
Balance Loans Balance Loans
----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ....... $ 1,590,427 11,110 $ 830,321 3,344
Acquisitions ......................... 445,869 6,455 509,819 2,507
Resolutions and repayments ........... (160,277) (786) (76,380) (310)
Loans transferred to real estate owned (69,900) (358) (47,767) (232)
Sales ................................ -- -- (12,987) (3)
----------- ----------- ----------- -----------
Balance at end of period ............. $ 1,806,119 16,421 $ 1,203,006 5,306
=========== =========== =========== ===========
Nine months ended September 30,
--------------------------------------------------------
1997 1996
----------------------------- --------------------------
No. of No. of
Balance Loans Balance Loans
----------- ----------- ----------- -----------
(Dollars in thousands)
Balance at beginning of period ....... $ 1,314,399 5,460 $ 943,529 4,543
Acquisitions (1) ..................... 1,288,220 16,209 671,630 2,651
Resolutions and repayments ........... (358,054) (1,512) (265,160) (952)
Loans transferred to real estate owned (190,398) (1,102) (107,380) (676)
Sales ................................ (248,048) (2,634) (39,613) (260)
----------- ----------- ----------- -----------
Balance at end of period ............. $ 1,806,119 16,421 $ 1,203,006 5,306
=========== =========== =========== ===========
</TABLE>
(1) During the nine months ended September 30, 1997, acquisitions consisted
of $949.9 million of single-family residential loans, $57.6 million of
multi-family residential loans and $280.7 million of commercial real
estate and land loans. Included in acquisitions for the nine months
ended September 30, 1997 are the Company's approximate one-half
allocated share of (i) 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 and (ii) 10,992
single-family residential loans acquired by the Company and its
co-investor at an auction by HUD during the third quarter with an
aggregate unpaid principal balance of $692.0 million for a purchase
price of $585.0 million.
31
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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>
September 30, 1997 December 31, 1996
---------------------- ----------------------
Principal Principal
Amount % of Loans Amount % of Loans
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Loans without Forbearance Agreements:
Current .................................. $ 422,574 23.40% $ 572,043 43.52%
Past due 31 to 89 days ................... 13,074 0.72 19,458 1.48
Past due 90 days or more ................. 571,483 31.64 506,113 38.51
Acquired and servicing not yet transferred 79,731 4.41 149,564 11.38
---------- ------ ----------- ------
Subtotal ............................... 1,086,862 60.17 1,247,178 94.89
---------- ------ ----------- ------
Loans with Forbearance Agreements:
Current .................................. 86,253 4.78 7,554 0.57
Past due 31 to 89 days ................... 10,864 0.60 2,703 0.21
Past due 90 days or more (1) ............ 622,140 34.45 56,964 4.33
---------- ------ ----------- ------
Subtotal ............................... 719,257 39.83 67,221 5.11
---------- ------ ----------- ------
Total ....................................... $1,806,119 100.00% $1,314,399 100.00%
========== ====== ========== ======
</TABLE>
(1) Includes $345.0 million of loans which were less than 90 days past due
under the terms of the forbearance agreements at September 30, 1997, of
which $297.0 million were current and $48.0 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.
September 30, December 31,
1997 1996
--------- ---------
(Dollars in thousands)
Single-family residential loans ...... $ 48,805 $ 73,186
Multi-family residential loans ....... 86,918 67,842
Commercial real estate and land loans:
Hotel ............................. 173,249 200,311
Office buildings .................. 122,732 128,782
Land .............................. 1,167 2,332
Other ............................. 18,796 25,623
--------- ---------
Total ........................... 315,944 357,048
Commercial non-mortgage .............. -- 2,614
Consumer ............................. 300 424
--------- ---------
Total loans ..................... 451,967 501,114
Undisbursed loan funds ............... (50,075) (89,840)
Unaccreted discount .................. (4,635) (5,169)
Allowance for loan losses ............ (4,734) (3,523)
--------- ---------
Loans, net ...................... $ 392,523 $ 402,582
========= =========
32
<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 Nine months
For the periods ended September 30 - ---------------------- ----------------------
(Dollars in thousands) 1997 1996 1997 1996
- ---------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period ............... $ 507,300 $ 389,124 $ 501,114 $ 342,649
Originations:
Single-family residential loans ........... 218 3,125 1,987 10,681
Multi-family residential loans ............ 257 67,515 12,994 112,764
Commercial real estate loans and land loans 2,835 80,595 50,035 133,511
Commercial non-mortgage and consumer loans -- 1,500 1,134 1,500
--------- --------- --------- ---------
Total loans originated .................. 3,310 152,735 66,150 258,456
--------- --------- --------- ---------
Purchases .................................... -- 278 78 278
Sales ........................................ -- -- (2,346) --
Loans transferred from available for sale .... -- -- 13,802 6
Principal repayments, net of capitalized
interest .................................... (58,481) (33,332) (126,316) (92,026)
Transfer to real estate owned ................ (162) (607) (515) (1,165)
--------- --------- --------- ---------
Net (decrease) increase in loans ........ (55,333) 119,074 (49,147) 165,549
--------- --------- --------- ---------
Balance at end of period ..................... $ 451,967 $ 508,198 $ 451,967 $ 508,198
========= ========= ========= =========
</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>
September 30, December 31,
1997 1996
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Non-performing loans (1):
Single-family residential loans............................ $ 1,957 $ 2,123
Multi-family residential loans............................. 7,583 106
Consumer and other loans................................... 33 55
--------------- ---------------
$ 9,573 $ 2,284
============== ==============
Non-performing loans as a percentage of:
Total loans (2)............................................ 2.44% 0.56%
Total assets............................................... 0.32% 0.09%
</TABLE>
(1) The Company did not have any loans which were accruing 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.
33
<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 the dates indicated by loan category and the
percentage of loans in each category to total loans in the respective portfolios
at the dates indicated:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
--------------------------------- ---------------------------------
Gross Gross
Loan Loan
Allowance Balance Percent Allowance Balance Percent
--------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Loan Portfolio:
Single-family ......... $ 378 $ 48,805 10.8% $ 520 $ 73,186 14.6%
Multi-family .......... 1,783 86,918 19.2% 673 67,842 13.5%
Commercial real estate. 2,556 315,944 69.9% 2,299 357,048 71.3%
Commercial non-mortgage -- -- 11 2,614 0.5%
Consumer .............. 17 300 0.1% 20 424 0.1%
---------- ---------- ------ ---------- ---------- -----
$ 4,734 $ 451,967 100.0% $ 3,523 $ 501,114 100.0%
========== ========== ====== ========== ========== =====
Discount loan portfolio:
Single-family ......... $ 10,467 $1,047,192 58.0% $ 3,528 $ 504,049 38.4%
Multi-family .......... 3,375 241,981 13.4% 3,124 341,796 26.0%
Commercial real estate. 4,495 515,082 28.5% 4,886 465,801 35.4%
Other ................. -- 1,864 0.1% -- 2,753 0.2%
---------- ---------- ------ ---------- ---------- -----
$ 18,337 $1,806,119 100.0% $ 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 nine months ended September 30,
1997.
<TABLE>
<CAPTION>
Balance Balance
December 31, September 30,
1996 Additions Charge-offs Recoveries 1997
--------- --------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Loan Portfolio:
Single-family .......... $ 520 $ (23) $ (119) $ -- $ 378
Multi-family ........... 673 1,110 -- -- 1,783
Commercial real estate.. 2,299 257 -- -- 2,556
Commercial non-mortgage. 11 (11) -- -- --
Consumer ............... 20 (3) -- -- 17
-------- -------- -------- -------- ----------
$ 3,523 $ 1,330 $ (119) $ -- $ 4,734
======== ======== ======== ======== ==========
Discount loans:
Single-family ......... $ 3,528 $ 15,768 $ (9,164) 335 $ 10,467
Multi-family .......... 3,124 1,739 (1,488) -- 3,375
Commercial ............ 4,886 2,902 (3,293) -- 4,495
-------- -------- -------- -------- ----------
$ 11,538 $ 20,409 $(13,945) $ 335 $ 18,337
======== ======== ======== ======== ==========
</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 September 30, 1997 the
Company had $92.3 million of investments in low-income housing tax credit
interests as compared to $93.3 million at December 31, 1996. On September 26,
1997 the Company completed the sale of its investment in a low-income housing
tax credit project and realized a gain of $6.3 million on proceeds of $22.0
million.
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 $29.1 million at September 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 $32.1 million at September 30,
1997, are accounted for under the effective yield method as a reduction of
income tax expense.
34
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Low-income housing tax credit partnerships in which the Company invests as both
a limited and, through a subsidiary, general partner amounted to $31.1 million
at September 30, 1997 and are presented on a consolidated basis.
INVESTMENT IN JOINT VENTURES. The Company's investment in joint
ventures decreased 65% from $67.9 million at December 31, 1996 to $23.9 million
at September 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 $22.9 million and $67.9 million at September 30, 1997 and
December 31, 1996, respectively, and is net of valuation allowances of $1.8
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>
September 30, 1997 December 31, 1996
--------------------- ----------------------
Principal % of HUD Principal % of HUD
Amount Loans Amount Loans
--------- ------- --------- -------
<S> <C> <C> <C> <C>
HUD Loans without Forbearance Agreements:
Current....................................... $ 2,141 4.69% $ 6,709 4.21%
Past due 31 to 89 days:....................... 507 1.11 3,011 1.89
Past due 90 days or more...................... 17,291 37.85 84,509 53.02
--------- ------ --------- -------
Subtotal.................................... 19,939 43.65 94,229 59.12
--------- ------ --------- -------
HUD Loans with Forbearance Agreements:
Current....................................... 2,551 5.59 4,867 3.05
Past due 31 to 89 days........................ 693 1.52 5,168 3.24
Past due 90 days or more (1)................. 22,492 49.24 55,141 34.59
--------- ------ --------- -------
Subtotal.................................... 25,736 56.35 65,176 40.88
--------- ------ --------- -------
Total............................................ $ 45,675 100.00% $ 159,405 100.00%
========= ====== ========= ======
</TABLE>
(1) Includes $20.6 million of loans which were less than 90 days past due
under the terms of the forbearance agreements at September 30, 1997, of
which $19.0 million were current and $1.6 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
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.
35
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth certain information relating to the
Company's real estate owned at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ----------------
(Dollars in thousands)
Discount loan portfolio:
<S> <C> <C>
Single-family residential................................ $ 65,150 $ 49,728
Multi-family residential................................. 22,207 14,046
Commercial real estate................................... 59,285 36,264
------------ ----------------
Total.................................................. 146,642 100,038
Loan portfolio........................................... 323 592
Loans available for sale portfolio....................... 2,392 3,074
------------ ----------------
$ 149,357 $ 103,704
============ ================
</TABLE>
The following table sets forth the activity in the valuation allowance
on real estate owned for the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
For the period ended September 30 --------------------------- ---------------------------
(Dollars in thousands) 1997 1996 1997 1996
- ------------------------------------ ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period.... $ 5,633 $ 9,736 $ 11,493 $ 4,606
Provision for loss in fair value.. 2,478 4,013 4,725 13,801
Charge-offs and sales............. (2,307) (2,776) (10,414) (7,434)
---------- ---------- ---------- ----------
Balance at end of period.......... $ 5,804 $ 10,973 $ 5,804 $ 10,973
========== ========== ========== ==========
</TABLE>
The decline in the valuation allowance on real estate owned is
primarily due to increased write offs of loans before transfer to real estate
owned and the reversal of valuation allowance in connection with sales of real
estate owned.
36
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the activity in real estate owned during
the periods indicated.
<TABLE>
<CAPTION>
Three months ended September 30,
----------------------------------------------------
1997 1996
----------------------------------------------------
No. of No. of
Amount Properties Amount Properties
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ..... $ 117,703 866 $ 133,604 1,024
Properties acquired through
foreclosure or deed-in-lieu
thereof ..................... 49,158 372 35,559 253
Acquired in connection with
acquisitions of discount loans . 20,823 176 674 4
Sales .............................. (38,156) (308) (53,632) (373)
Change in allowance ................ (171) -- (1,237) --
--------- --------- --------- ---------
Balance at end of period ........... $ 149,357 1,106 $ 114,968 908
========= ========= ========= =========
Nine months ended September 30,
---------------------------------------------------
1997 1996
---------------------------------------------------
No. of No. of
Amount Properties Amount Properties
----------- ---------- --------- ----------
(Dollars in thousands)
Balance at beginning of period ..... $ 103,704 825 $ 166,556 1,070
Properties acquired through
foreclosure or deed-in-lieu
thereof ........................ 139,416 1,149 78,818 716
Acquired in connection with
acquisitions of discount loans . 21,963 196 2,314 7
Sales .............................. (121,415) (1,064) (126,353) (885)
Change in allowance ................ 5,689 -- (6,367) --
--------- --------- --------- ---------
Balance at end of period ........... $ 149,357 1,106 $ 114,968 908
========= ========= ========= =========
</TABLE>
The following table sets forth the amount of time that the Company had held its
real estate owned at the dates indicated.
September 30, December 31,
1997 1996
--------------- -----------------
(Dollars in thousands)
One to two months....................... $ 49,775 $ 17,695
Three to four months.................... 46,566 15,291
Five to six months...................... 17,752 14,348
Seven to twelve months.................. 18,217 13,004
Over twelve months...................... 17,047 43,366
--------------- ---------------
$ 149,357 $ 103,704
=============== ===============
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 $55.9 million
at September 30, 1997, as compared to $24.9 million at December 31, 1996
primarily as a result of additional funding under existing commitments.
In the near term, the Company does not intend,
37
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
except for commitments outstanding, to originate new loans in which it
participates in the residual profits in underlying real estate.
The Company's investment in the Hotel decreased to $1.3 million at
September 30, 1997 from $16.1 million at December 31, 1996 primarily as a result
of the Company's sale of a 69% partnership interest in the Hotel on July 15,
1997 for a minimal gain.
DEFERRED TAX ASSET. At September 30, 1997 the deferred tax asset, net
of deferred tax liabilities, amounted to $14.6 million, an increase of $8.7
million from the $5.9 million deferred tax asset at December 31, 1996. At
September 30, 1997, the gross deferred tax asset amounted to $24.5 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, $9.1 million of valuation allowance reserves, $3.2 million of
profit sharing expense and $1.5 million of contingency reserves, and the gross
deferred tax liability amounted to $9.9 million and consisted of primarily of
$3.2 million of deferred interest income on the discount loan portfolio, $1.8
million related to hedging transactions and $2.1 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 September 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 September 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.
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED. 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. The excess of purchase price over net assets acquired
related to this transaction amounted to $10.9 million at September 30, 1997 and
is being amortized on a straight-line basis over a period of 15 years.
DEPOSITS. Deposits increased $51.2 million from December 31, 1996. The
increase in deposits during 1997 was primarily the result of a $130.5 million
increase in brokered deposits obtained through national investment banking firms
which solicit deposits from their customers, which amounted to $1.35 billion at
September 30, 1997, as compared to $1.22 billion at December 31, 1996, offset by
a $98.0 million decrease in deposits obtained 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 $442.6 million at September 30, 1997, as compared to $540.6 million
at December 31, 1996. At September 30, 1997 the Company had $187.5 million of
certificates of deposit in amounts of $100,000 or more, including $87.0 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 $71.5 million to $3.1 million from December
31, 1996 to September 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 $142.7 million
from December 31, 1996 to September 30, 1997 primarily as a result of $141.2
million in borrowings under new lines of credits established at OFS which have a
one-year term and interest rates which float in accordance with a designated
prime rate (see "Liquidity, Commitments and Off-Balance Sheet Risks") and the
issuance of $2.1 million in short-term notes payable. Notes, debentures and
other
38
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
interest-bearing obligations also consist of $100.0 million of 12% Debentures
issued by the Bank in June 1995 and due June 2005, and $125.0 million of 11.875%
Notes issued by the Company in September 1996 and due September 2003.
COMPANY-OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY. In August
1997, Ocwen Capital Trust I, a wholly owned subsidiary of Ocwen, issued $125.0
million of 10 7/8% Capital Securities. Proceeds from issuance of the Capital
Securities were invested in 10 7/8% Junior Subordinated Debentures issued by
Ocwen. The Junior Subordinated Debentures, which represent the sole assets of
the Trust, will mature on August 1, 2027. Intercompany transactions between
Ocwen Capital Trust I and the Company, including the Junior Subordinated
Debentures, are eliminated in the consolidated financial statements of the
Company.
Holders of the Capital Securities will be entitled to receive
cumulative cash distributions accruing from the date of original issuance and
payable semi-annually in arrears on February 1 and August 1 of each year,
commencing on February 1, 1998, at an annual rate of 10 7/8% of the liquidation
amount of $1,000 per Capital Security. Payment of distributions out of moneys
held by Ocwen Capital Trust I, and payments on liquidation of Ocwen Capital
Trust I or the redemption of Capital Securities, are guaranteed by the Company
to the extent Ocwen Capital Trust I has funds available. If the Company does not
make principal or interest payments on the Junior Subordinated Debentures, Ocwen
Capital Trust I will not have sufficient funds to make distributions on the
Capital Securities, in which event the guarantee shall not apply to such
distributions until Ocwen Capital Trust I has sufficient funds available
therefor. Through September 30, 1997, the Company had accrued $1.9 million of
distributions payable to holders of the Capital Securities.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $214.4 million
or 105% from December 31, 1996 to September 30, 1997. The increase in
stockholders' equity during this period was primarily attributable to $142.0
million of net proceeds resulting from the sale of 3,450,000 shares of common
stock, net income of $56.0 million and an increase of $14.4 million in the
unrealized gain on equity securities and securities available for sale. See the
Consolidated Statements of Changes in Stockholders' Equity in the Interim
Consolidated Financial Statements included in Item 1 hereof.
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
September 30, 1997, the Company had entered into interest rate exchange
agreements with an aggregate notional amount of $39.2 million. Interest rate
exchange agreements had the effect of decreasing the Company's net interest
income by $40,000 and $0 during the three months ended September 30, 1997 and
1996, respectively, and by $154,000 and $0 during the nine months ended
September 30, 1997 and 1996, respectively.
39
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 September 30, 1997, the
Company had entered into U.S. Treasury futures (short) contracts with an
aggregate notional amount of $313.2 million. The Company had no outstanding
Eurodollar futures contracts at September 30, 1997. Futures contracts had the
effect of increasing the Company's net interest income by $2,000 during the
three months ended September 30, 1997 and decreasing the Company's net interest
income by $159,000 during the three months ended September 30, 1996. Futures
contracts had the effect of decreasing the Company's net interest income by $1.8
million and $540,000 during the nine months ended September 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
September 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 first scheduled to adjust and not in the period in which they mature,
(ii) fixed-rate mortgage-related securities reflect estimated prepayments, which
were estimated based on analyses of broker estimates, the results of a
prepayment model utilized by the Company and empirical data, (iii)
non-performing discount loans reflect the estimated timing of resolutions which
result in repayment to the Company, (iv) fixed-rate loans reflect scheduled
contractual amortization, with no estimated prepayments, (v) NOW and money
market checking deposits and savings deposits, which do not have contractual
maturities, reflect estimated levels of attrition, which are based on detailed
studies of each such category of deposit by the Company, and (vi) escrow
deposits and other non-interest bearing checking accounts, which amounted to
$107.3 million at September 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.
40
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
September 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 .................... $ 90,313 $ -- $ -- $ -- $ 90,313
Securities available for sale ... 30,501 49,123 72,763 112,336 264,723
Loans available for sale (1) .... 6,806 52,239 117,662 13,305 190,012
Investment securities, net ...... -- -- -- 54,042 54,042
Loan portfolio, net (1) ......... 186,466 21,721 62,435 121,901 392,523
Discount loan portfolio, net .... 141,150 370,079 380,108 579,914 1,471,251
---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets ... 455,236 493,162 632,968 881,498 2,462,864
---------- ---------- ---------- ---------- ----------
Rate-Sensitive Liabilities:
NOW and money market checking
deposits ...................... 5,427 1,085 2,174 4,181 12,867
Savings deposits ................ 200 249 493 876 1,818
Certificates of deposit ......... 322,562 411,127 694,847 420,465 1,849,001
---------- ---------- ---------- ---------- ----------
Total interest-bearing
deposits ...................... 328,189 412,461 697,514 425,522 1,863,686
Securities sold under
agreements to repurchase ...... 3,075 -- -- -- 3,075
Notes, debentures and other
interest bearing obligations .. 143,287 -- -- 225,000 368,287
---------- ---------- ---------- ---------- ----------
Total rate-sensitive liabilities 474,551 412,461 697,514 650,522 2,235,048
Interest rate sensitivity gap
before off-balance sheet
financial instruments ......... (19,315) 80,701 (64,546) 230,976 227,816
Off-Balance Sheet Financial
Instruments:
Futures contracts and interest
rate swap ..................... 341,835 (60,136) (52,213) (229,486) --
---------- ---------- ---------- ---------- ----------
Interest rate sensitivity gap ..... $ 322,520 $ 20,565 $ (116,759) $ 1,490 $ 227,816
========== ========== ========== ========== ==========
Cumulative interest rate
sensitivity gap ............... $ 322,520 $ 343,085 $ 226,326 $ 227,816
========== ========== ========== ==========
Cumulative interest rate
sensitivity gap as a
percentage of total rate-
sensitive assets .............. 13.10% 13.93% 9.19% 9.25%
========== ========= ========== ==========
</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.
41
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth at September 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 6.51% (16.38)%
+300 3.60 (8.82)
+200 5.75 (2.05)
+100 2.82 1.12
0 - -
-100 (3.03) (6.01)
-200 (5.96) (12.06)
-300 (9.30) (13.70)
-400 (12.66) (15.66)
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 primarily 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 offset 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 September 30, 1997 the Company had $1.85 billion of
certificates of deposit, including $1.36 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 September 30, 1998 and 1999 and thereafter amounted
to $733.7 million, $431.6 million and $683.7 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
42
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 an unsecured $10.0 million line of credit
with the Bank of New York, 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 September 30, 1997,
the Company had no FHLB advances outstanding, it was eligible to borrow up to an
aggregate of $636.9 million from the FHLB of New York (subject to the
availability of acceptable collateral) and had $41.1 million of single-family
residential loans, $10.4 million of multi-family residential loans and $32.9
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 $108.2 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 $141.2 million was outstanding to OFS under these lines of
credit at September 30, 1997, which have interest rates which float in
accordance with a designated prime rate.
During November 1997, the Company obtained $8.0 million and $30.0
million in lines of credit on behalf of the Company and OFS, respectively.
Additionally, the Company is currently exploring obtaining approximately $400.0
million, and $500.0 million in lines of credit on behalf of OFS and the Bank,
respectively. 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 $67.8 million
and $188.5 million during the nine months ended September 30, 1997 and 1996,
respectively. During the foregoing periods cash flows from operating activities
were provided primarily by net income, the 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 $400.7
million and $228.2 million during the nine months ended September 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 and proceeds from sales of
securities available for sale and real estate owned. 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 $386.6 million and $194.6
million during the nine months ended September 30, 1997 and 1996, respectively.
During the foregoing periods, cash flows from financing activities were provided
primarily by proceeds from the issuance of common stock, the issuance of notes
and other interest bearing obligations, the issuance of the Capital Securities,
and 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 6.09% during the nine months ended September 30,
1997.
At September 30, 1997, the Company had $236.6 million of unfunded
commitments related to the purchase and origination 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 September 30, 1997, see Note 8 to the Interim
Consolidated Financial Statements included in Item 1 hereof.
43
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 5 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 7 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 7 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 SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 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.
44
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During July 1997, the Company issued 1,876 shares of Common Stock
to directors of the Company as compensation pursuant to the 1996
Directors Stock Plan. These shares were issued in reliance on the
private offering exemption from registration set forth in Section
4(2) of the Securities Act. In addition to the foregoing, the
Company issued 1,223 shares of Common Stock as gifts to employees
of the Company and their spouses on July 29, 1997 in order to
satisfy a minimum shareholder requirement in order for the Common
Stock to be listed on the NYSE.
(d) On August 6, 1997, Ocwen Capital Trust I (the "Trust") commenced a
public offering of $125.0 million of 10 7/8% Capital Securities
("Capital Securities"), Liquidation Amount $1,000 per capital
Security (Registration Statement on Forms S-1, File Nos. 333-28889
and 333-28889-01). The offering closed on August 12, 1997. The
managing underwriters of the offering were Lehman Brothers,
Friedman, Billings, Ramsey & Co., Inc. and Morgan Stanley Dean
Witter. The registration statement registered an aggregate of
$125.0 million of Capital Securities and $125.0 million of Capital
Securities were sold in the offering. Total expenses of the
offering were estimated to be $4,322,500, including $4,062,500 of
underwriters discounts and commissions ($32.50 per Capital
Security). The total net proceeds to the Trust were $120,677,500.
The proceeds were used to purchase $125.0 million of $10 7/8%
Junior Subordinated Debentures from Ocwen Financial Corporation.
Ocwen Financial Corporation used the proceeds of the Debentures for
the purchase of $113.0 million of discount single-family loans and
$12.0 million of mortgage-backed securities.
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 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 I (included as
Exhibit A to Exhibit 4.4)
4.6 Form of Indenture relating to 10 7/8% Junior Subordinated
Debentures due 2007 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
Securities of Ocwen Capital Trust I (i)
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.
(b) Reports on Form 8-K.
(1) 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 months ended June 30, 1997.
(2) A Form 8-K was filed by the Company on October 29, 1997 which
contained a news release announcing the Company's financial results
for the three and nine month periods ended September 30, 1997.
45
<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: November 14, 1997
46
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM OCWEN FINANCIAL
CORPORATION'S CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND STATMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000873860
<NAME> OCWEN
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 15,641
<INT-BEARING-DEPOSITS> 7,469
<FED-FUNDS-SOLD> 82,844
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 264,723
<INVESTMENTS-CARRYING> 54,042
<INVESTMENTS-MARKET> 54,042
<LOANS> 2,053,786<F1>
<ALLOWANCE> 23,071<F2>
<TOTAL-ASSETS> 2,956,300
<DEPOSITS> 1,970,952
<SHORT-TERM> 3,075
<LIABILITIES-OTHER> 69,556
<LONG-TERM> 368,287<F3>
0
0
<COMMON> 605
<OTHER-SE> 417,439
<TOTAL-LIABILITIES-AND-EQUITY> 2,956,300
<INTEREST-LOAN> 165,722<F4>
<INTEREST-INVEST> 25,777
<INTEREST-OTHER> 7,296
<INTEREST-TOTAL> 198,795
<INTEREST-DEPOSIT> 92,321
<INTEREST-EXPENSE> 115,976
<INTEREST-INCOME-NET> 82,819
<LOAN-LOSSES> 21,739
<SECURITIES-GAINS> 31,081
<EXPENSE-OTHER> 86,845<F5>
<INCOME-PRETAX> 70,525
<INCOME-PRE-EXTRAORDINARY> 70,525
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,998
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 11.48
<LOANS-NON> 1,119,261
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,061
<CHARGE-OFFS> 14,064
<RECOVERIES> 335
<ALLOWANCE-CLOSE> 23,071
<ALLOWANCE-DOMESTIC> 23,071
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> TAG 17 INCLUDES LOANS AVAILABLE FOR SALE OF $190,012, LOAN PORTFOLIO OF
$392,523, AND DISCOUNT LOAN PORTFOLIO OF $1,471,251.
<F2> TAG 18 INCLUDES ALLOWANCE FOR LOAN LOSSES ON LOAN PORTFOLIO OF $4,734, AND
ON DISCOUNT LOAN PORTFOLIO OF $18,337.
<F3> TAG 23 INCLUDES $141,188 IN LINES OF CREDIT WHICH HAVE A ONE YEAR TERM.
<F4> TAG 29 INCLUDES INTEREST INCOME ON LOANS AVAILABLE FOR SALE OF $11,091,
LOANS OF $37,991 AND DISCOUNT LOANS OF $116,840.
<F5> TAG 38 INCLUDES NON-INTEREST EXPENSE OF $84,995 AND DISTRIBUTIONS ON
COMPANY-OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUST
HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY OF $1,850.
</FN>
</TABLE>
