UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
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) 682-8000
-----------------------
(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 as of August 11,
1998: 60,771,897
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OCWEN FINANCIAL CORPORATION
FORM 10-Q
I N D E X
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements (Unaudited)......... 3
Consolidated Statements of Financial Condition
at June 30, 1998 and December 31, 1997........................ 3
Consolidated Statements of Operations for the three and six
months ended June 30, 1998 and 1997........................... 4
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1998 and the year
ended December 31, 1997....................................... 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997........................... 6
Notes to Consolidated Financial Statements.................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 51
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......... 52
Item 6. Exhibits and Reports on Form 8-K.............................. 52
Signature.............................................................. 54
2
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PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions ................................ $ 16,160 $ 12,243
Interest earning deposits ........................................................ 19,870 140,001
Federal funds sold and repurchase agreements ..................................... 138,000 --
Securities available for sale, at market value ................................... 589,283 476,796
Loans available for sale, at lower of cost or market ............................. 338,359 177,041
Investment securities, net ....................................................... 87,378 13,295
Loan portfolio, net .............................................................. 280,951 266,299
Discount loan portfolio, net ..................................................... 1,421,506 1,434,176
Investments in low-income housing tax credit interests ........................... 132,983 128,614
Investment in joint ventures ..................................................... 1,056 1,056
Real estate owned, net ........................................................... 151,607 167,265
Investment in real estate ........................................................ 22,453 65,972
Premises and equipment, net ...................................................... 38,207 21,542
Income taxes receivable .......................................................... 8,254 --
Deferred tax asset ............................................................... 63,858 45,148
Excess of purchase price over net assets acquired ................................ 36,372 15,560
Principal, interest and dividends receivable ..................................... 23,329 17,284
Escrow advances on loans ......................................................... 58,041 47,888
Other assets ..................................................................... 77,912 38,985
----------- -----------
$ 3,505,579 $ 3,069,165
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ...................................................................... $ 2,144,377 $ 1,982,822
Securities sold under agreements to repurchase ................................ 133,970 108,250
Obligations outstanding under lines of credit ................................. 321,457 118,304
Notes, debentures and other interest bearing obligations ...................... 225,469 226,975
Accrued interest payable ...................................................... 32,640 32,238
Income taxes payable .......................................................... -- 3,132
Accrued expenses, payables and other liabilities .............................. 94,233 51,709
----------- -----------
Total liabilities ........................................................... 2,952,146 2,523,430
----------- -----------
Company-obligated, mandatorily redeemable securities of subsidiary trust holding
solely junior subordinated debentures of the Company .......................... 125,000 125,000
Minority interest ................................................................ 1,134 1,043
Commitments and contingencies (Note 9)
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; 60,771,897 and
60,565,835 shares issued and outstanding at June 30, 1998 and December 31,
1997, respectively .......................................................... 608 606
Additional paid-in capital .................................................... 165,992 164,751
Retained earnings ............................................................. 243,795 259,349
Unrealized gain (loss) on securities available for sale, net of taxes ......... 18,441 (5,014)
Foreign currency translation adjustment, net of taxes ......................... (1,537) --
----------- -----------
Total stockholders' equity .................................................. 427,299 419,692
----------- -----------
$ 3,505,579 $ 3,069,165
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
3
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<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Six Months
-------------------------- ---------------------------
For the periods ended June 30, 1998 1997 1998 1997
- ------------------------------------------------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Federal funds sold and repurchase agreements............ $ 1,758 $ 795 $ 2,437 $ 2,453
Securities available for sale........................... 4,565 6,509 8,526 14,682
Securities held for trading............................. -- -- -- 248
Loans available for sale................................ 25,291 3,973 34,794 6,824
Loans................................................... 11,655 10,674 17,917 21,366
Discount loans.......................................... 42,281 44,246 79,078 74,470
Investment securities and other......................... 1,532 745 2,017 1,426
---------- ---------- ---------- ----------
87,082 66,942 144,769 121,469
---------- ---------- ---------- ----------
Interest expense:
Deposits................................................ 28,677 31,371 56,522 61,264
Securities sold under agreements to repurchase.......... 2,416 204 3,701 477
Advances from the Federal Home Loan Bank................ -- 145 100 428
Obligations outstanding under lines of credit........... 15,103 -- 19,623 --
Notes, debentures and other interest bearing obligations 6,734 7,148 13,486 13,863
---------- ---------- ---------- ----------
52,930 38,868 93,432 76,032
---------- ---------- ---------- ----------
Net interest income before provision for loan losses.... 34,152 28,074 51,337 45,437
Provision for loan losses............................... 9,675 7,909 11,929 17,651
---------- ---------- ---------- ----------
Net interest income after provision for loan losses..... 24,477 20,165 39,408 27,786
---------- ---------- ---------- ----------
Non-interest income:
Servicing fees and other charges........................ 13,488 4,845 23,260 10,081
Gains on sales of interest earning assets, net......... 33,828 23,365 62,565 40,143
Impairment loss on AAA-rated agency IOs................. (77,645) -- (77,645) --
Gain on real estate owned, net.......................... 10,521 4,629 11,547 3,835
Other income............................................ 10,286 450 16,157 581
---------- ---------- ---------- ----------
(9,522) 33,289 35,884 54,640
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and employee benefits...................... 29,766 19,676 51,247 34,599
Occupancy and equipment................................. 8,553 3,960 15,010 6,789
Net operating loss on investments in real estate and
certain low-income housing tax credit interests....... 1,046 104 2,292 1,197
Other operating expenses................................ 16,406 7,340 21,275 11,192
---------- ---------- ---------- ----------
55,771 31,080 89,824 53,777
---------- ---------- ---------- ----------
Distributions on Company-obligated, mandatorily
redeemable securities of subsidiary trust holding
solely junior subordinated debentures .................. 3,398 -- 6,797 --
Equity in earnings of investment in joint venture......... -- 1,301 -- 15,674
---------- ---------- ---------- ----------
(Loss) income before income taxes....................... (44,214) 23,675 (21,329) 44,323
Income tax benefit (expense).............................. 6,383 (5,126) 5,810 (8,733)
Minority interest in net (income) loss of consolidated
subsidiary............................................ (68) 243 (35) 243
---------- ---------- ---------- ----------
Net (loss) income....................................... $ (37,899) $ 18,792 $ (15,554) $ 35,833
========== ========== ========== ==========
(Loss) income per share:
Basic .................................................. $ (0.62) $ 0.35 $ (0.26) $ 0.67
========== ========== ========== ==========
Diluted................................................. $ (0.62) $ 0.35 $ (0.25) $ 0.66
========== ========== ========== ==========
Weighted average common shares outstanding:
Basic .................................................. 60,713,593 53,599,022 60,682,432 53,599,014
========== ========== ========== ==========
Diluted................................................. 61,326,784 54,127,521 61,336,494 54,137,127
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
4
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<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
For the six months ended June 30, 1998 and the year ended December 31, 1997
Unrealized
gain (loss) Notes
on receivable
securities Foreign on exercise
Common Stock Additional available currency of common
------------------- paid-in Retained for sale, translation stock
Shares Amount capital earnings net of taxes adjustments options Total
---------- ------ --------- ---------- ------------ ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 .. 53,488,340 $ 535 $ 22,990 $ 180,417 $ 3,486 $ -- $(3,832) $203,596
Net income ..................... -- -- -- 78,932 -- -- -- 78,932
Repurchase of common stock
options .................... -- -- (3,208) -- -- -- -- (3,208)
Exercise of common stock
options .................... 171,297 2 3,035 -- -- -- -- 3,037
Issuance of common stock ....... 6,906,198 69 141,934 -- -- -- -- 142,003
Repayment of notes receivable
on exercise of common stock
options, net of advances ... -- -- -- -- -- -- 3,832 3,832
Change in unrealized gain (loss)
on securities available for
sale, net of taxes ......... -- -- -- -- (8,500) -- -- (8,500)
---------- ----- --------- ---------- -------- -------- ------- --------
Balances at December 31, 1997 .. 60,565,835 606 164,751 259,349 (5,014) -- -- 419,692
Net loss ....................... -- -- -- (15,554) -- -- -- (15,554)
Repurchase of common stock
options .................... -- -- (14,107) -- -- -- -- (14,107)
Exercise of common stock
options .................... 206,062 2 15,348 -- -- -- -- 15,350
Change in unrealized gain (loss)
on securities available for
sale, net of taxes ......... -- -- -- -- 23,455 -- -- 23,455
Foreign currency translation
Adjustment, net of taxes ... -- -- -- -- -- (1,537) -- (1,537)
---------- ----- --------- ---------- -------- -------- ------- --------
Balances at June 30, 1998 ...... 60,771,897 $ 608 $ 165,992 $ 243,795 $ 18,441 $ (1,537) $ -- $427,299
========== ===== ========= ========== ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements.
5
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<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the six months ended June 30, 1998 1997
- ----------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income .............................................................. $ (15,554) $ 35,833
Adjustments to reconcile net income to net cash (used) provided by operating
activities:
Net cash provided from trading activities ...................................... 55,657 106,833
Proceeds from sales of loans available for sale ................................ 943,947 187,848
Purchases of loans available for sale .......................................... (763,013) (62,504)
Origination of loans available for sale ........................................ (399,221) (126,502)
Principal payments received on loans available for sale ........................ 52,464 6,251
Premium amortization (discount accretion), net ................................. 75,508 23,310
Depreciation and amortization .................................................. 6,703 11,339
Provision for loan losses ...................................................... 11,929 17,651
Gains on sales of interest earning assets, net ................................. (62,565) (40,143)
Impairment loss on AAA-rated agency IOs ........................................ 77,645 --
Provision for real estate owned, net ........................................... 5,871 2,246
Gain on sale of real estate owned, net ......................................... (23,382) (10,466)
Gain on sale of low-income housing tax credit interests ........................ (4,746) --
(Increase) decrease in principal, interest and dividends receivable ............ (6,045) 3,510
(Increase) decrease in income taxes receivable ................................. (11,386) 6,236
Increase in deferred tax asset ................................................. (33,466) (4,925)
Increase in escrow advances .................................................... (10,153) (5,759)
Increase in other assets ....................................................... (63,287) (14,465)
Increase (decrease) in accrued expenses, interest payable and other liabilities 42,926 (7,858)
--------- ---------
Net cash (used) provided by operating activities .................................. (120,168) 128,435
========= =========
Cash flows from investing activities:
Proceeds from sales of securities available for sale ........................... 91,230 162,412
Purchases of securities available for sale ..................................... (453,449) (107,374)
Maturities of and principal payments received on securities available for sale . 148,621 11,930
Purchase of securities held for investment ..................................... (74,084) (29,920)
Acquisition of subsidiaries .................................................... (21,477) (6,750)
Purchase of low income housing tax credit interests ............................ (23,030) (16,200)
Proceeds from sale of low income housing tax credit interests .................. 21,927 --
Proceeds from sales of discount loans .......................................... 318,222 221,966
Proceeds from sales of loans held for investment ............................... -- 3,594
Purchase and originations of loans held for investment, net of undisbursed loan
funds ....................................................................... (104,351) (99,851)
Purchase of discount loans ..................................................... (587,608) (707,209)
Decrease in real estate held for investment .................................... 43,519 --
Decrease in investment in joint ventures ....................................... -- 40,321
Principal payments received on loans held for investment ....................... 90,102 69,394
Principal payments received on discount loans .................................. 175,840 159,144
Proceeds from sales of real estate owned ....................................... 155,050 85,604
Purchase of real estate owned in connection with discount loan purchases ....... (7,769) (1,425)
Additions to premises and equipment ............................................ (20,954) (5,718)
--------- ---------
Net cash used by investing activities ............................................. (248,211) (220,082)
========= =========
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(Continued on next page)
6
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the six months ended June 30, 1998 1997
- --------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits ......................................................... $ 161,555 $ 278,861
Increase (decrease) in securities sold under agreements to repurchase ........ 25,720 (74,546)
Repayment of short-term notes ................................................ (1,506) --
Proceeds from issuance of obligations under lines of credit, net of repayments 203,153 61,399
Payments on advances from Federal Home Loan Bank ............................. -- (399)
Loans made to executive officers, net of repayments .......................... -- 994
Exercise of common stock options ............................................. 15,350 1,736
Repurchase of common stock options ........................................... (14,107) (1,870)
--------- ---------
Net cash provided by financing activities ....................................... 390,165 266,175
--------- ---------
Net increase in cash and cash equivalents ....................................... 21,786 174,528
Cash and cash equivalents at beginning of period ................................ 152,244 52,219
--------- ---------
Cash and cash equivalents at end of period ...................................... $ 174,030 $ 226,747
========= =========
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions ............................ $ 16,160 $ 6,911
Interest earning deposits .................................................... 19,870 29,992
Federal funds sold and repurchase agreements ................................. 138,000 189,844
--------- ---------
$ 174,030 $ 226,747
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................... $ 93,031 $ 77,512
========= =========
Income taxes ............................................................... $ 34,425 $ 7,354
========= =========
Supplemental schedule of non-cash investing and financing activities:
Real estate owned acquired through foreclosure ............................... $ 106,030 $ 90,153
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
7
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<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Dollars in thousands, except per 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 UK plc ("Ocwen UK"). Ocwen also owns 97.8% of
Ocwen Financial Services ("OFS"), with the remaining 2.2% owned by the owners
(and their spouses) of Admiral Home Loan ("Admiral") and reported in the
consolidated financial statements as a minority interest. All significant
intercompany transactions and balances have been eliminated in consolidation.
The consolidated financial statements of the Company's foreign
subsidiary, Ocwen UK, and its equity investee, Kensington Mortgage Company, have
been prepared in accordance with accounting principles generally accepted in the
United Kingdom ("UK GAAP") and comply with the significant accounting policies
described hereunder. UK GAAP varies in certain significant respects from
generally accepted accounting principles in the United States ("U.S. GAAP"). The
principal adjustment made to conform to U.S. GAAP was to recognize a gain on
sale of interest earning assets in connection with the securitization of single
family subprime residential mortgage loans and record the residual security
retained at fair value.
In the opinion of management, the accompanying financial statements
contain all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the Company's financial condition at June 30, 1998 and
December 31, 1997, the results of its operations for the three and six months
ended June 30, 1998 and 1997, its cash flows for the six months ended June 30,
1998 and 1997, and its changes in stockholders' equity for the year ended
December 31, 1997 and the six months ended June 30, 1998. The results of
operations and other data for the three and six month periods ended June 30,
1998 are not necessarily indicative of the results that may be expected for any
other interim periods or the entire year ending December 31, 1998. 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, 1997.
Certain reclassifications have been made to the prior period's consolidated
financial statements to conform to the June 30, 1998 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
In February 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128 simplifies the
standards found in APB No. 15 for computing earnings per share ("EPS") and makes
them comparable to international standards. Under SFAS No. 128, the Company is
required to present both basic and diluted EPS on the face of its statements of
operations. Basic EPS, which replaces primary EPS required by APB No. 15 for
entities with complex capital structures, excludes common stock equivalents and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
gives effect to all dilutive potential common shares that were outstanding
during the period. SFAS No. 128 is effective for financial statements for both
interim and annual periods ending after December 15, 1997 with earlier
application not permitted. The Company adopted SFAS No. 128 effective December
31, 1997. All prior period EPS data has been restated.
8
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Dollars in thousands, except per share data)
================================================================================
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires the inclusion of comprehensive income, either in
a separate statement for comprehensive income, or as part of a combined
statement of income and comprehensive income in a full-set of general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances, excluding those resulting from investments by and distributions
to owners. SFAS No. 130 requires that comprehensive income be presented
beginning with net income, adding the elements of comprehensive income not
included in the determination of net income, to arrive at comprehensive income.
SFAS No. 130 also requires that an enterprise display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial position.
SFAS No. 130 is effective for the Company's fiscal year beginning January 1,
1998. SFAS No. 130 requires the presentation of information already contained in
the Company's financial statements and therefore did not have an impact on the
Company's financial position or results of operation upon adoption.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the reporting of information about operating segments by public
business enterprises in their annual and interim financial reports issued to
shareholders. SFAS No. 131 requires that a public business enterprise report
financial and descriptive information, including profit or loss, certain
specific revenue and expense items, and segment assets, about its reportable
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. SFAS No. 131
is a disclosure requirement and therefore did not have an effect on the
Company's financial position or results of operations upon adoption.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
The accounting for changes in the fair value of a derivative (that is,
gains and losses) depends on the intended use of the derivative and the
resulting designation. For a derivative designated as hedging the exposure to
changes in the fair value of a recognized asset or liability or a firm
commitment (referred to as a fair value hedge), the gain or loss is recognized
in earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. The effect of that
accounting is to reflect in earnings the extent to which the hedge is not
effective in achieving offsetting changes in fair value. For a derivative
designated as hedging the exposure to variable cash flows of a forecasted
transaction (referred to as a cash flow hedge), the effective portion of the
derivative's gain or loss is initially reported as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. The ineffective
portion of the gain or loss is reported in earnings immediately. For a
derivative designated as hedging the foreign currency exposure of a net
investment in a foreign operation, the gain or loss is reported in other
comprehensive income (outside earnings) as part of the cumulative translation
adjustment. The accounting for a fair value hedge described above applies to a
derivative designated as a hedge of the foreign currency exposure of an
unrecognized firm commitment or an available-for-sale security. Similarly, the
accounting for a cash flow hedge described above applies to a derivative
designated as a hedge of the foreign currency exposure of a
foreign-currency-denominated forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in earnings
in the period of change.
9
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Dollars in thousands, except per share data)
================================================================================
Under SFAS No. 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of SFAS No. 133 should be as
of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the provisions
of SFAS No. 133. Earlier application of SFAS No. 133 is encouraged but is
permitted only as of the beginning of any fiscal quarter that begins after
issuance of SFAS No. 133. The Company has not yet adopted SFAS No. 133 nor has
it determined the impact on the results of operations, financial position or
cash flows as a result of implementing SFAS No. 133.
NOTE 3 ACQUISITION AND DISPOSITION TRANSACTIONS
On April 24, 1998, the Company, through its wholly owned subsidiary
Ocwen UK, acquired substantially all of the assets, and certain liabilities, of
the United Kingdom ("UK") operations of Cityscape Financial Corp. ("Cityscape
UK"). As consummated, the Company acquired Cityscape UK's mortgage loan
portfolio and its residential subprime mortgage loan origination and servicing
businesses for $421,326 ((British pound)249.6 million) and assumed $34,303
((British pound)20.3 million) of Cityscape UK's liabilities. The excess of
purchase price over net assets acquired related to this transaction, which
amounted to $13,413, net of accumulated amortization of $160 at June 30, 1998,
is being amortized on a straight-line basis over a period of 15 years.
On February 25, 1998, the Company purchased 36.07% of the total
outstanding common stock of Kensington Mortgage Company ("Kensington"), a
leading originator of nonconforming residential mortgages in the UK for $45,858
((British pound)27.8 million). This investment is accounted for under the equity
method and is included in investment securities. The excess of the purchase
price over the net investment which amounted to $38,485 ((British pound)23.4
million) net of accumulated amortization of $855 ((British pound)519,000 ) at
June 30, 1998, is being amortized on a straight-line basis over a period of 15
years.
On January 20, 1998, the Company acquired DTS Communications, Inc.
("DTS"), a real estate technology company located in San Diego, California, for
a purchase price of $13,025 in cash, common stock of the Company and repayment
of certain indebtedness. DTS has developed technology tools to automate real
estate transactions. DTS has been recognized by Microsoft Corporation for the
Microsoft(R) component-based architecture to facilitate electronic data
interchange. The common stock of the Company issued in the acquisition was
acquired from affiliates of the Company at the same price per share as was used
to calculate the number of shares issued in the acquisition. The excess of
purchase price over net assets acquired related to this transaction, which
amounted to $7,824, net of accumulated amortization of $240 at June 30, 1998, is
being amortized on a straight-line basis over a period of 15 years.
The Company's investment in joint venture includes an investment in
BCFL, L.L.C. ("BCFL"), a limited liability corporation formed in January 1997
between the Company and BlackRock Capital Finance L.P. ("BlackRock"). The
Company owns a 10% interest in BCFL which was formed to acquire multifamily
loans. At June 30, 1998, the Company's 10% investment, which is accounted for
under the cost method, amounted to $1,056.
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(R) Windows(R) based, client/server
architecture and feature real-time processing, designed to be year 2000
compliant, a scaleable database platform and strong workflow capabilities. The
aggregate purchase price was $9,718, including $4,815 which is contingent on
AMOS, Inc. meeting certain software development performance criteria. The excess
of purchase price over net assets acquired related to this transaction, which
amounted to $4,736, net of accumulated amortization of $214 at June 30, 1998, is
being amortized on a straight-line basis over a period of 15 years.
10
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Dollars in thousands, except per share data)
================================================================================
On December 12, 1997, BCBF, L.L.C., (the "LLC"), a limited liability
company formed in March 1996 between the Company and BlackRock distributed all
of its assets to the Company and its other 50% investor, BlackRock.
Simultaneously, the Company acquired BlackRock's portion of the distributed
assets. The Company's equity in earnings of the LLC of $0 and $15,674 for the
six months ended June 30, 1998 and 1997, respectively, 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 Bank. Equity in earnings for the six months
ended June 30, 1997 includes the recapture of $2,641 of valuation allowances
established in 1996 by the Company on its equity investment in the joint venture
as a result of the resolution and securitization of loans during the first
quarter of 1997. The Bank has recognized 50% of the loan servicing fees not
eliminated in consolidation in servicing fees and other charges.
Set forth below is the statement of operations of the LLC for the
periods indicated.
BCBF, L.L.C.
STATEMENTS OF OPERATIONS
For the For the
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
------------- -------------
Interest income .......................... $ 1,869 $ 5,354
Interest expense ......................... -- --
-------- --------
Net interest income.................... 1,869 5,354
-------- --------
Non-interest income:
Gain on sale of loans held for sale ... -- 18,412
(Loss) gain on real estate owned, net.. (206) 1,337
Loan fees ............................. 1 23
-------- --------
(205) 19,772
-------- --------
Operating expenses:
Loan servicing fees ................... 753 1,429
-------- --------
Net income ............................... $ 911 $ 23,697
======== ========
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.
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 are 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
11
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Dollars in thousands, except per share data)
================================================================================
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. Therefore, 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 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.
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 COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances,
excluding those resulting from investments by and distributions to owners. SFAS
No. 130 requires that comprehensive income be presented beginning with net
income, adding the elements of comprehensive income not included in the
determination of net income, to arrive at comprehensive income. Comprehensive
income for the three months ended June 30, 1998 and 1997 amounted to a loss of
$21,140 and income of $19,204, respectively, and for the six months ended June
30, 1998 and 1997 amounted to income of $6,364 and $ 39,407, respectively.
12
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Dollars in thousands, except per share data)
================================================================================
NOTE 6 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company uses derivative financial instruments for the purpose of
reducing its exposure to adverse fluctuations in interest and foreign currency
exchange rates. While these hedging instruments are subject to fluctuations in
value, such fluctuations are generally offset by the change in value of the
underlying exposures being hedged.
INTEREST RATE MANAGEMENT
In managing its interest rate risk, the Company on occasion enters into
interest rate swap agreements ("interest swaps"). Under interest 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 interest 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 interest swaps is amortized (i.e., reduced) monthly
based upon estimated prepayment rates of the mortgages underlying the securities
being hedged. The terms of the outstanding interest swaps at June 30, 1998 and
December 31, 1997 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>
JUNE 30, 1998 ...... 1998 $32,650 1-Month 6.18% 5.65% 56
DECEMBER 31, 1997... 1998 $36,860 1-Month 6.18% 5.69% (94)
</TABLE>
The 1-month LIBOR was 5.66% and 5.72% on June 30, 1998 and December 31,
1997, 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
-------- ------------------ ----------
JUNE 30, 1998:
U.S. Treasury futures.......... 1998 $ 90,100 $ 505
DECEMBER 31, 1997:
U.S. Treasury futures.......... 1998 $194,500 $1,996
The fair value of the interest rate swaps and interest rate futures
contracts represent the estimated amount that the Company would receive or pay
to terminate these agreements taking into account current interest rates. Market
quotes are available for these agreements. The fair values are recorded in the
Consolidated Statements of Financial Condition offsetting the item being hedged.
FOREIGN CURRENCY MANAGEMENT
The Company enters into foreign currency derivatives to hedge its
equity investments denominated in a foreign currency.
13
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Dollars in thousands, except per share data)
================================================================================
The Company has determined that the local currency of its foreign
subsidiary, Ocwen UK, is the functional currency. In accordance with SFAS No.
52, "Foreign Currency Translation", assets and liabilities denominated in a
foreign currency are translated into U.S. dollars at the current rate of
exchange existing at the Balance Sheet date and revenues and expenses are
translated at average monthly rates.
On April 22, 1998, the Company sold short foreign currency futures
contracts ("currency futures") to hedge its foreign currency exposure related to
its equity investment in Ocwen UK. Under the terms of the currency futures, the
Company has the right to receive $66,728 and pay (British pound)40 million. The
value of the currency futures is based on quoted market prices.
The Company also has an equity investment in a foreign entity,
Kensington, which is translated into U.S. dollars at the current rate of
exchange existing at the Balance Sheet date. The Company's 36.07% share of
Kensington's profits and losses for the period are reflected in the Consolidated
Statements of Operations at the average monthly exchange rate.
On February 25, 1998, the Company entered into a foreign currency swap
agreement ("currency swap") with a AAA-rated counterparty to hedge its equity
investment in Kensington. Under the terms of the currency swap, the Company will
swap (British pound)27.5 million for $43,546 in five years based on the exchange
rate on the date the contract became effective. The discount on the currency
swap representing the difference between the contracted forward rate and the
spot rate at the date of inception is amortized over the life of the currency
swap on a straight-line basis. The value of the currency swap is calculated as
the notional amount of the currency swap multiplied by the difference between
the spot rate at the date of inception and the spot rate at the statement of
financial condition date.
The resulting translation adjustments, the unamortized discount on the
currency swap and the values of the hedging financial instruments are reported
as translation adjustments and included as a component of other comprehensive
income.
The following table sets forth the terms and values of these financial
instruments at June 30, 1998. No such financial instruments were held at
December 31, 1997:
<TABLE>
<CAPTION>
Notional Amount
---------------------------------------- Contract Unamortized
Maturity Pay Receive Rate Discount Fair Value
------------- --------------------------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Currency swap........... 2003 (British pound)27.5 million $43,546 1.5835 $ 1,650 $ 45
</TABLE>
<TABLE>
<CAPTION>
Notional Amount
---------------------------------------- Number of Contract
Maturity Pay Receive Contracts Rate Fair Value
------------- -------------------------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
British pound
Currency futures...... Sept98 (British pound)40 million $66,728 624 162.50 $ 1,432
</TABLE>
Because interest rate futures and foreign currency 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 counter party to the interest and currency swaps and controls this risk
through credit monitoring procedures. The notional principal amount does not
represent the Company's exposure to credit loss.
14
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Dollars in thousands, except per share data)
================================================================================
NOTE 7 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 stock split was effected 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 interim consolidated financial statements to the number of
shares and per share amounts have been adjusted retroactively for the stock
split.
NOTE 8 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 June 30, 1998, 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 June 30, 1998, 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 June 30, 1998 that management
believes have changed the institution's category.
15
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Dollars in thousands, except per share data)
================================================================================
The following tables summarize the Bank's actual and required
regulatory capital at June 30, 1998:
<TABLE>
<CAPTION>
To Be Well
Minimum Capitalized for Agreed Upon
for Capital Prompt Corrective Capital
Actual Adequacy Purposes Action Provisions Requirements
---------------------- --------------------- --------------------- ------------
Ratio Amount Ratio Amount Ratio Amount Ratio
------- ----------- ------- ----------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Stockholders' equity, and ratio to
total assets........................ 9.72% $ 256,973
Net unrealized loss on certain
available for sale securities....... (2,106)
Excess mortgage servicing rights
and deferred tax assets............. (428)
-----------
Tangible capital, and ratio to
adjusted total assets............... 9.64% $ 254,439 1.50% $ 39,599
=========== ===========
Tier 1 (core) capital, and ratio to
adjusted total assets............... 9.64% $ 254,439 3.00% $ 79,198 5.00% $ 131,996 9.00%
=========== =========== ===========
Tier 1 capital, and ratio to
risk-weighted assets................ 11.45% $ 254,439 6.00% $ 133,367
=========== ===========
Allowance for loan and lease losses... 23,497
Subordinated debentures............... 100,000
-----------
Tier 2 capital........................ 123,497
Low-level recourse deduction.......... (19,889)
-----------
Total risk-based capital, and ratio
to risk-weighted assets............. 16.11% $ 358,047 8.00% $ 177,823 10.00% $ 222,279 13.00%
=========== =========== ===========
Total regulatory assets............... $ 2,642,455
===========
Adjusted total assets................. $ 2,639,921
===========
Risk-weighted assets.................. $ 2,222,790
===========
</TABLE>
The OTS has promulgated a regulation governing capital distributions.
The Bank is considered to be a Tier 1 association under this regulation because
it met or exceeded its fully phased-in capital requirements at June 30, 1998. 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.
In connection with an examination of the Bank in late 1996 and early
1997, the staff of the OTS expressed concern about many of the Bank's
non-traditional operations, which generally are deemed by the OTS to involve
higher risk, certain of the Bank's accounting policies and the adequacy of the
Bank's capital in light of the Bank's lending and investment strategies. The
activities which were of concern to the OTS included the Bank's subprime single
family residential lending activities, the Bank's origination of acquisition,
development and construction loans with terms which provide for shared
participation in the results of the underlying real estate, the Bank's discount
loan activities, which involve significantly higher investment in nonperforming
and classified assets than the majority of the
16
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Dollars in thousands, except per share data)
================================================================================
savings and loan industry, and the Bank's investment in subordinated classes of
mortgage-related securities issued in connection with the Bank's asset
securitization activities and otherwise.
Following the above-referenced examination, the Bank committed to the
OTS to maintain a core capital (leverage) ratio and a total risk-based capital
ratio of at least 9% and 13%, respectively. The Bank continues to be in
compliance with this commitment as well as the regulatory capital requirements
of general applicability (as indicated above). Based on discussions with the
OTS, the Bank believes that this commitment does not affect its status as a
"well-capitalized" institution, assuming the Bank's continued compliance with
the regulatory capital requirements required to be maintained by it pursuant to
such commitment.
NOTE 9 COMMITMENTS AND CONTINGENCIES
At June 30, 1998 the Company had commitments to (i) purchase $3,727 of
loans secured by small commercial properties, (ii) originate $104,756 of
subprime loans secured by single family residential properties, (iii) fund
$29,489 of loans secured by multi-family residential buildings, (iv) fund $4,135
of loans secured by office buildings and (v) fund $1,447 of loans secured by
hotel properties. In addition, the Company through the Bank had commitments
under outstanding letters of credit in the amount of $11,705 at June 30, 1998.
The Company, through its investment in subordinate securities and REMIC
residuals which had a book value of $188,642 at June 30, 1998, supports senior
classes of mortgage-related securities having an outstanding principal balance
of $3,409,915. On July 27, 1998, the Company entered into a commitment to sell
its entire portfolio of AAA-rated agency interest-only and inverse interest-only
securities (together, "IOs") for $137,546, which represents book value.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
GENERAL
The Company's business activities currently consist primarily of its
single family, small commercial and large commercial discount loan acquisition
and resolution activities, commercial real estate lending, subprime single
family residential lending, mortgage loans serviced for others and investments
in low-income housing tax credit interests.
The consistency of the operating results of the Company can be
significantly affected by inter-period variations in: (i) the amount of assets
acquired, particularly discount loans; (ii) the amount of resolutions of
discount loans, particularly large multi-family residential and commercial real
estate loans; (iii) the amount of multi-family residential and commercial real
estate loans which mature or are prepaid, particularly loans with terms pursuant
to which the Company participates in the profits of the underlying real estate;
and (iv) sales by the Company of loans and/or securities acquired from the
Company's securitization of loans.
The Company continuously evaluates opportunities to expand its business
in order to enhance shareholder value. To that end, the Company has, like many
other companies in the financial services industry, from time to time considered
and explored a variety of potential material transactions and participated in
discussions regarding such transactions with third parties, and the Company will
likely continue to do so in the future. The Company cannot predict whether or
when any such transaction may be consummated or the form that such a transaction
may take.
The Company is a registered savings and loan holding company subject to
regulation by the OTS. Likewise, 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 Federal Home Loan Bank ("FHLB") of New
York, one of the 12 regional banks which comprise the FHLB System.
At June 30, 1998, the only significant subsidiaries of the Company,
other than the Bank, were IMI, OFS, Ocwen Capital Trust I and Ocwen UK. 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, as of June 30, 1998, IMI owned 8.1% or 1,540,000 shares of the
outstanding common stock of Ocwen Asset Investment Corp. ("OAC"), as well as
8.7% or 1,808,733 units of Ocwen Partnership, L.P. ("OPLP"), the operating
partnership formed to undertake the business of OAC and, through subsidiaries,
also owns non-residential real estate properties as well as residential units in
cooperative buildings. 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 subprime single family residential loans, and of assuming all of the
Bank's subprime 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.
HIGHLIGHTS FOR THE QUARTER ENDED JUNE 30, 1998
On April 24, 1998, the Company, through its wholly-owned subsidiary
Ocwen UK, acquired the mortgage loan portfolio and residential subprime mortgage
loan origination and servicing businesses from Cityscape UK for $421.3 million
((British pound)249.6 million) and assumed $34.3 million ((British pound)20.3
million) of its liabilities. See Note 3 to the Interim Consolidated Financial
statement included in Item 1 hereof.
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
On May 12, 1998, the Company established a wholly-owned subsidiary,
Ocwen Technology Xchange, Inc. ("OTX"), to supply its advanced mortgage loan
servicing, resolution and work flow technology to the mortgage and real estate
industries. OTX has two subsidiaries which were previously acquired by the
Company: Amos, Inc., a developer of mortgage loan servicing and origination
software and workflow technology, acquired in October 1997, and DTS
Communications, Inc., a leading real estate technology company, acquired in
January 1998.
On June 29, 1998, the Company completed the securitization of 4,522
subprime single family residential mortgage loans with an aggregate unpaid
principal balance of $382.7 million. The Company recorded a net gain of $9.7
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 the related residual security.
On June 29, 1998, the Company, as part of a larger transaction
involving the Company, Black Rock Finance LP and Residential Funding
Corporation, completed the securitization of 1,155 single family residential
mortgage discount loans with an aggregate unpaid principal balance of $98.3
million. The Company recorded a net gain of $12.2 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 the related
subordinate security.
On June 30, 1998, the Company completed the securitization of 14,179 UK
subprime single family residential mortgage loans with an aggregate unpaid
principal balance of (British pound)218.1 million ($363.8 million), the largest
such securitization in the history of the UK. The Company recorded a net gain of
(British pound)5.5 million ($9.1 million) on the sale of (British pound)222.0
million ($370.3 million) senior classes of securities in connection with this
transaction. The Company continues to service the loans for a fee and has
retained the related residual security.
For the three months ended June 30, 1998, the Company purchased
discount loans with a total unpaid principal balance of approximately $585.8
million, including $217.7 million of single family residential discount loans
from Union Bank of Switzerland. Combined purchases and originations of subprime
single family loans for the same period amounted to approximately $658.0 million
of unpaid principal balance, including $421.3 million purchased in connection
with the acquisition of Cityscape UK.
RECENT DEVELOPMENTS
On July 27, 1998, the Company sold its entire portfolio of AAA-rated
agency IOs for $137.5 million, which represents book value. A $77.6 million
pre-tax ($62.4 million after-tax) impairment loss was previously charged to
earnings in the second quarter of 1998 as a result of the Company's decision to
discontinue this investment activity and write-down the book value of the IOs.
On July 28, 1998, the Company announced that it has engaged an
investment bank to identify potential strategic partners who can enable the
Company to expand its franchise both domestically and internationally. Further,
on July 30, 1998 in response to investor inquiries, Willliam C. Erbey, Chairman
and Chief Executive Officer stated that "Our capital and businesses have never
been stronger. We see vast opportunities to further deploy our services in new
and untapped markets. It is for this reason, and this reason only, that we are
considering strategic alliances to complement our strengths. Affiliations could
take on many different forms only one of which is a merger. However, a merger
would only occur if the transaction was clearly in the best interest of Ocwen's
employees, customers and shareholders."
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At or For the Three Months Ended June 30,
---------------------------------------------
1998 1997 Change
--------------- ------------ -------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Net interest income .............................. $ 34,152 $ 28,074 22%
Provision for loan losses ........................ 9,675 7,909 22
Non-interest income excluding impairment loss .... 68,123 33,289 105
Impairment loss on AAA-rated agency IOs .......... (77,645) -- --
Non-interest expense ............................. 55,771 31,080 79
Equity in earnings of investment in joint ventures -- 1,301 (100)
Net (loss) income ................................ (37,899) 18,792 (302)
PER COMMON SHARE (1)
(Loss) income per share:
Basic ......................................... $ (0.62) $ 0.35 (277)%
Diluted ....................................... (0.62) 0.35 (277)
Stock price:
High .......................................... $ 28.38 $ 16.44 73%
Low ........................................... 22.31 12.75 75
Close ......................................... 26.88 16.31 65
AVERAGE BALANCES
Interest-earning assets .......................... $ 3,401,335 $ 2,334,115 46%
Interest-bearing liabilities ..................... 3,181,946 2,345,476 36
Stockholders' equity ............................. 434,598 232,758 87
KEY RATIOS
Interest rate spread:
Yield on interest-earning assets .............. 10.24% 11.47% (11)%
Cost of interest-bearing liabilities .......... 6.65 6.63 --
Interest rate spread .......................... 3.59 4.84 (26)
Annualized return on average assets (2) (3) ...... (3.80) 2.75 (238)
Annualized return on average equity (3) .......... (34.88) 32.29 (208)
Efficiency ratio(4) .............................. 226.44 49.60 357
Core (leverage) capital ratio .................... 9.64 9.40 3
Risk-based capital ratio ......................... 16.11 13.81 17
</TABLE>
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
At or For the Six Months Ended June 30,
----------------------------------------------
1998 1997 Change
---------- ---------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
FOR THE PERIOD:
Net interest income.................................. $ 51,337 $ 45,437 13%
Provision for loan losses............................ 11,929 17,651 (32)
Non-interest income excluding impairment loss........ 113,529 54,640 108
Impairment loss on AAA-rated agency IOs ............. (77,645) -- --
Non-interest expense................................. 89,824 53,777 67
Equity in earnings of investment in joint ventures... -- 15,674 (100)
Net (loss) income.................................... (15,554) 35,833 (143)
PER COMMON SHARE (1):
(Loss) income per share:
Basic.............................................. $ (0.26) $ 0.67 (139)%
Diluted............................................ (0.25) 0.66 (138)
Stock Price:
High............................................... $ 30.75 $ 17.38 77%
Low................................................ 22.25 12.63 76
Close.............................................. 26.88 16.31 65
AVERAGE BALANCES:
Interest-earning assets.............................. $ 3,015,879 $ 2,251,951 34%
Interest-bearing liabilities......................... 2,793,556 2,302,046 (21)
Stockholders' equity................................. 430,544 222,386 94
KEY RATIOS:
Interest rate spread:
Yield on interest-earning assets................... 9.60% 10.79% (11)%
Cost of interest-bearing liabilities............... 6.69 6.61 1
Interest rate spread............................ 2.91 4.18 (30)
Annualized return on average assets (2)(3)........... (0.86) 2.68 (132)
Annualized return on average equity (3).............. (7.23) 32.23 (122)
Efficiency ratio (4)................................. 102.98 46.46 122
Core (leverage) capital ratio........................ 9.64 9.40 3
Risk-based capital ratio............................. 16.11 13.81 17
</TABLE>
(1) Retroactively adjusted for the 2-for-1 stock split approved by the
Company's Board of Directors on October 29, 1997.
(2) Includes the Company's pro rata share of average assets held by its 50%
joint venture for the three and six months ended June 30, 1997.
(3) Exclusive of the impairment loss of $77,645 ($62,368 after tax), the
annualized return on average assets would have been 2.45% and 2.58% for the
three and six months ended June 30, 1998, respectively, and the annualized
return on average equity would have been 22.52% and 21.75% for the three
and six months ended June 30, 1998, respectively.
(4) Before provision for loan losses, and including equity in earnings of
investment in joint venture for the three and six months ended June 30,
1997. Exclusive of the pre-tax impairment loss of $77,645, the efficiency
ratio would have been 54.53% and 54.48% for the three and six months ended
June 30, 1998, respectively.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
SECOND QUARTER SUMMARY
The Company recorded a net loss of $37.9 million for the three months
ended June 30, 1998 as compared to a net income of $18.8 million for the same
period in 1997. Diluted loss per share was $0.62 for the second quarter of 1998
as compared to diluted income per share of $0.35 for the second quarter of 1997.
The net loss for the second quarter of 1998 includes a $62.4 million after-tax
charge against earnings related to the Company's decision to immediately
discontinue its investments in AAA-rated agency IOs. Excluding the IO-related
charge, the Company would have reported net income of $24.5 million or $0.40 per
diluted share for the 1998 second quarter.
The $6.1 million or 22% increase in net interest income during the
second quarter of 1998 as compared to the second quarter of 1997 is primarily
due to a $20.1 million or 30% increase in interest income as a result of a $1.07
billion increase in average balance of interest-earning assets, offset by a
$14.0 million or 36% increase in interest expense as a result of an $836.5
million or 36% increase in the average balance of interest-bearing liabilities.
The $1.8 million increase in the provision for loan losses for the
three months ended June 30, 1998 as compared to the same period in 1997 is due
primarily to an additional $2.1 million of general reserves established on
discount loans.
Exclusive of the impairment loss of $77.6 million, non-interest income
increased by $34.8 million or 105% primarily as a result of a $10.5 million
increase in gains on sales of interest earning assets, a $5.9 million increase
in gains on real estate owned, an $8.6 million increase in servicing fees and
other charges (as a result of a 184.8% increase in the average balance of loans
serviced for others) and a $9.8 million increase in other income.
On December 12, 1997, the LLC distributed all of its remaining assets
to its partners. As a result, no equity in earnings of investment in joint
venture was recorded during the second quarter of 1998. During the second
quarter of 1997, the Company recorded $1.3 million of income related to its
investment in joint venture.
Non-interest expense, which includes $3.5 million and $11.3 million of
operating expenses related to OTX and Ocwen UK, respectively, increased $24.7
million or 79% during the three months ended June 30, 1998 as compared to the
same period in 1997 primarily as a result of (i) a $10.1 million increase in
compensation and benefits, due to an 83% increase in the average number of
employees, (ii) a $4.6 million increase in occupancy and equipment expense, and
(iii) a $9.1 million increase in other operating expenses.
Distributions on the 10 7/8% Capital Securities issued in August 1997
amounted to $3.4 million for the second quarter of 1998 as compared to $0 for
the same period in 1997.
Income tax benefit was recorded at a rate of 14.4% for the second
quarter of 1998 as compared to income tax expense of 21.7% for the comparable
period in the prior year. The Company estimates that its effective tax rate for
1998 will approximate 11.5% before the use of a net operating loss carry-forward
which resulted in a $3.4 million increase in tax benefit for the first half of
1998.
RESULTS OF OPERATIONS: THREE AND SIX MONTHS ENDED JUNE 30, 1998 VERSUS THREE AND
SIX MONTHS ENDED JUNE 30, 1997
NET INCOME SUMMARY BY BUSINESS ACTIVITY. The Company continues to
engage in significant discount loan acquisition and resolution activities and a
variety of other mortgage lending activities, which generally reflect the
Company's desire to focus on business lines which leverage its core competency,
the servicing and management of servicing intensive assets. The following table
presents the estimated contribution by business activity to the Company's net
income for the periods indicated.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Three Months Six Months
-------------------------------------- --------------------------------------
1998 1997 1998 1997
For the periods ended June 30, ---------------- ----------------- ---------------- -----------------
(Dollars in thousands) Amount % Amount % Amount % Amount %
- --------------------------------------------- -------- --- ---------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Discount Loans:
Single family residential loans .......... $ 5,524 23 $ 5,072 27 $ 22,519 48 $ 12,324 34
Large commercial real estate loans ....... 10,434 43 6,813 36 13,297 29 9,804 27
Small commercial real estate loans ....... 2,649 11 588 3 6,018 13 1,142 3
Investment in low-income housing tax
credits................................... 535 2 2,161 12 5,285 11 3,760 11
Commercial real estate lending .............. 5,661 23 1,466 8 5,318 11 2,068 6
Subprime single family residential lending(1) 1,092 4 (198) (1) 2,364 5 744 2
Mortgage loan servicing (1) ................. 2,600 11 38 -- 4,128 9 1,108 3
Investment securities ....................... (2,044) (8) 1,761 9 (9,748) (21) 3,405 10
OTX ......................................... (3,147) (14) -- -- (4,250) (9) -- --
Other ....................................... 1,165 5 1,091 6 1,883 4 1,478 4
-------- --- -------- --- -------- --- -------- ---
24,469 100% 18,792 100% 46,814 100% 35,833 100%
=== === === ===
Impairment loss on AAA-rated agency IOs ..... (62,368) -- (62,368) --
-------- -------- -------- --------
$(37,899) $ 18,792 $(15,554) $ 35,833
======== ======== ======== ========
</TABLE>
(1) Includes net income from foreign operations derived from Ocwen UK of $7.1
million resulting from its subprime single family residential lending and
mortgage loan servicing activities for the three and six months ended June
30, 1998.
The Company's discount loan activities include asset acquisition,
servicing and resolution of single family residential, large commercial and
small commercial loans and the related real estate owned. Investment in
low-income housing tax credits includes the Company's investments, primarily
through limited partnerships, in qualified low-income rental housing for the
purpose of obtaining Federal income tax credits pursuant to Section 42 of the
Internal Revenue Code ("Code"). Low-income housing tax credits and benefits of
$4.3 million and $2.9 million for the quarters ended June 30, 1998 and 1997,
respectively, and $9.0 million and $6.5 million for the six months ended June
30, 1998 and 1997, respectively, are included as credits against income tax
expense. Commercial lending includes the Company's origination of multi-family
and commercial real estate loans held for investment. Subprime single family
lending includes the Company's acquisition and origination of single family
residential loans to nonconforming borrowers which are recorded as available for
sale and the Company's historical loan portfolio of single family residential
loans held for investment. Mortgage loan servicing includes the Company's
fee-for-services business of providing loan servicing, including asset
management and resolution services, to third-party owners of nonperforming,
underperforming and subprime assets. Investment securities includes the results
of the securities portfolio, whether available for sale, trading or investment,
other than REMIC residuals and subordinate interests related to the Company's
securitization activities which have been included in the related business
activity.
Interest income and expense have been allocated to each business
segment for the investment of funds raised or funding of investments made at an
interest rate based upon the Treasury swap yield curve taking into consideration
the actual duration of such liabilities or assets. Allocations of non-interest
expense generated by corporate support services were made to each business
segment based upon management's estimate of time and effort spent in the
respective activity. As such, the resulting net income amounts represent
estimates of the contribution of each business activity to the Company.
NET INTEREST INCOME. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received from its interest-earning assets and the interest
expense paid on its interest-bearing liabilities. Net interest income is
determined by an institution's net interest spread (i.e. the difference between
the yield earned on its interest-earning assets and the rates paid on its
interest-bearing liabilities), the relative amount of interest-earning assets
and interest-bearing liabilities and the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities.
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resultant average yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest rate spread
and net interest margin. Information is based on daily balances during the
indicated periods.
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------------------------------------------------------------
1998 1997
----------------------------------------- ----------------------------------------
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.......................... $ 127,444 $ 1,758 5.52% $ 63,192 $ 795 5.03%
Securities available for sale (1)...... 589,879 4,565 3.10 308,267 6,509 8.45
Loans available for sale (2)........... 998,282 25,291 10.13 135,801 3,973 11.70
Investment securities and other........ 93,100 1,532 6.58 29,113 745 10.24
Loan portfolio (2)..................... 285,609 11,655 16.32 447,591 10,674 9.54
Discount loan portfolio................ 1,307,021 42,281 12.94 1,350,151 44,246 13.11
----------- ---------- ----------- ----------
Total interest-earning assets, interest
income.............................. 3,401,335 87,082 10.24 2,334,115 66,942 11.47
---------- ----------
Non-interest earning cash.............. 25,264 12,204
Allowance for loan losses.............. (24,143) (21,441)
Investments in low-income housing
tax credit interests................ 113,851 100,779
Investment in joint ventures........... 1,056 30,128
Real estate owned, net................. 176,613 102,527
Other assets........................... 298,926 174,003
----------- -----------
Total assets........................ $ 3,992,902 $ 2,732,315
=========== ===========
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits....... $ 26,884 $ 257 3.82 $ 42,600 $ 496 4.66
Savings deposits....................... 1,743 10 2.29 2,037 12 2.36
Certificates of deposit................ 1,843,357 28,410 6.16 2,030,734 30,863 6.08
----------- ---------- ----------- ----------
Total interest-bearing deposits..... 1,871,984 28,677 6.13 2,075,371 31,371 6.05
Notes, debentures and other............ 226,373 6,734 11.90 245,523 7,148 11.65
Obligations outstanding under
lines of credit..................... 924,218 15,103 6.54 -- -- --
Securities sold under agreements to
repurchase.......................... 159,371 2,416 6.06 14,272 204 5.72
Federal Home Loan Bank advances........ -- -- -- 10,310 145 5.63
----------- ---------- ----------- ----------
Total interest-bearing liabilities,
interest expense.................. 3,181,946 52,930 6.65 2,345,476 38,868 6.63
---------- ----------
Non-interest bearing deposits.......... 19,440 28,147
Escrow deposits........................ 142,986 72,006
Other liabilities...................... 213,932 53,928
----------- -----------
Total liabilities................... 3,558,304 2,499,557
Stockholders' equity................... 434,598 232,758
----------- -----------
Total liabilities and stockholders'
equity............................ $ 3,992,902 $ 2,732,315
=========== ===========
Net interest income before provision
for loan losses..................... $ 34,152 $ 28,074
========== ==========
Net interest rate spread............... 3.59% 4.84%
===== =====
Net interest margin.................... 4.02% 4.81%
===== =====
Ratio of interest-earning assets to
interest-bearing liabilities........ 107% 100%
==== ====
</TABLE>
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Six months ended June 30,
----------------------------------------------------------------------------------
1998 1997
------------------------------------------ ------------------------------------
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 ......................... $ 102,164 $ 2,437 4.77% $ 97,765 $ 2,453 5.02%
Securities available for trading ...... -- -- -- 6,589 248 7.53
Securities available for sale (1) .... 559,602 8,526 3.05 323,640 14,682 9.07
Loans available for sale (2) ......... 668,838 34,794 10.40 127,823 6,824 10.68
Investment securities and other ....... 58,796 2,017 6.86 26,306 1,426 10.84
Loan portfolio (2) .................... 283,412 17,917 12.64 435,642 21,366 9.81
Discount loan portfolio ............... 1,343,067 79,078 11.78 1,234,186 74,470 12.07
----------- ----------- ----------- -----------
Total interest-earning assets, interest
income ............................. 3,015,879 144,769 9.60 2,251,951 121,469 10.79
----------- -----------
Non-interest earning cash ............. 22,744 11,781
Allowance for loan losses ............. (25,026) (18,897)
Investments in low-income housing tax
credit interests ................... 122,775 95,588
Investment in joint ventures .......... 1,056 46,882
Real estate owned, net ................ 174,283 107,377
Other assets .......................... 311,765 176,624
----------- -----------
Total assets ....................... $ 3,623,476 $ 2,671,306
=========== ===========
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits ...... $ 22,018 $ 613 5.57 $ 33,275 $ 723 4.35
Savings deposits ...................... 1,739 20 2.30 2,328 27 2.32
Certificates of deposit ............... 1,804,089 55,889 6.20 1,997,377 60,514 6.06
----------- ----------- ----------- -----------
Total interest-bearing deposits .... 1,827,846 56,522 6.18 2,032,980 61,264 6.03
Notes, debentures and other ........... 226,626 13,486 11.90 235,547 13,863 11.77
Obligations outstanding under
lines of credit .................... 604,214 19,623 6.50 -- -- --
Securities sold under agreements to
repurchase ......................... 131,130 3,701 5.64 17,603 477 5.42
Federal Home Loan Bank advances ....... 3,740 100 5.35 15,916 428 5.38
----------- ----------- ----------- -----------
Total interest-bearing liabilities,
interest expense ................. 2,793,556 93,432 6.69 2,302,046 76,032 6.61
----------- -----------
Non-interest bearing deposits ......... 21,022 20,765
Escrow deposits ....................... 126,283 71,860
Other liabilities ..................... 252,071 54,249
----------- -----------
Total liabilities .................. 3,192,932 2,448,920
Stockholders' equity .................. 430,544 222,386
----------- -----------
Total liabilities and stockholders'
equity ........................... 3,623,476 2,671,306
=========== ===========
Net interest income before Provision .. $ 51,337 $ 45,437
for loan losses .................... =========== ===========
Net interest rate spread .............. 2.91% 4.18%
==== =====
Net interest margin ................... 3.40% 4.04%
==== =====
Ratio of interest-earning assets to
interest-bearing liabilities ....... 108% 98%
=== ==
</TABLE>
(1) The average balances of loans available for sale and loan portfolio include
non-performing loans, interest on which is recognized on a cash basis.
(2) Excludes effect of unrealized gains or losses on securities available for
sale.
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior rate), (ii) changes
in rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Three months Six months
-------------------------------- --------------------------------
1998 vs 1997 1998 vs 1997
For the periods ended June 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 ...................... $ 83 $ 880 $ 963 $ (124) $ 108 $ (16)
Securities held for trading ....... -- -- -- -- (248) (248)
Securities available for sale ..... (5,666) 3,722 (1,944) (13,140) 6,984 (6,156)
Loans available for sale .......... (602) 21,920 21,318 (179) 28,149 27,970
Loans ............................. 5,770 (4,789) 981 5,198 (8,647) (3,449)
Discount loans .................... (565) (1,400) (1,965) (1,837) 6,445 4,608
Investment securities and other ... (348) 1,135 787 (672) 1,263 591
-------- -------- -------- -------- -------- --------
Total interest-earning assets ... (1,328) 21,468 20,140 (10,754) 34,054 23,300
-------- -------- -------- -------- -------- --------
Interest-Bearing Liabilities:
Interest-bearing demand deposits .. (78) (161) (239) 172 (282) (110)
Savings deposits .................. -- (2) (2) -- (7) (7)
Certificate of deposit ............ 430 (2,883) (2,453) 1,338 (5,963) (4,625)
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits . 352 (3,046) (2,694) 1,510 (6,252) (4,742)
Notes, debentures and other
interest-bearing obligations .... 153 (567) (414) 1,598 (1,975) (377)
Securities sold under agreements to
repurchase ...................... 13 2,199 2,212 21 3,203 3,224
Obligations outstanding under lines
of credit ....................... -- 15,103 15,103 -- 19,623 19,623
Federal Home Loan Bank
advances ........................ (73) (72) (145) (2) (326) (328)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities. 445 13,617 14,062 3,127 14,273 17,400
-------- -------- -------- -------- -------- --------
Increase in net interest income ...... $ (1,773) $ 7,851 $ 6,078 $(13,881) $ 19,781 $ 5,900
======== ======== ======== ======== ======== ========
</TABLE>
The Company's net interest income of $34.2 million increased $6.1
million or 22% during the three months ended June 30, 1998 as compared to the
comparable period in the prior year. Interest income increased $20.1 million or
30% due to a $1.07 billion or 46% increase in the Company's average
interest-earning assets, offset by a 123 basis point decline in the weighted
average yield earned. Of the $1.07 billion increase in average interest earning
assets, $862.5 million and $281.6 million relate to increases in loans available
for sale and securities available for sale, respectively, offset by a $162.0
million decrease in loan portfolio. Interest expense increased $14.1 million or
36% due to an $836.5 million or 36% increase in the Company's average
interest-bearing liabilities. Of the $836.7 million net increase in the average
balance of interest-bearing liabilities, $924.2 million and $145.1 million
relate to increases in borrowings under lines of credit and securities sold
under agreements to repurchase, respectively, offset by a $187.4 million decline
in certificates of deposit.
The Company's net interest income of $51.3 million for the six months
ended June 30, 1998, increased $5.9 million or 13% as compared to the same
period in the prior year. The increase resulted from a $763.9 million increase
in average interest earnings assets, offset by a 119 basis point decline in the
weighted average yield earned and a $491,000 increase in average
interest-bearing liabilities.
26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
INTEREST INCOME. Interest income on loans available for sale increased
$21.3 million or 537% during the second quarter of 1998 as compared to the same
period in 1997 primarily as a result of a $862.5 million increase in the average
balance offset by a 157 basis point decrease in the weighted average yield
earned. The $862.5 million increase in loans available for sale is primarily as
a result of $292.8 million purchased from the U.S. operations of Cityscape and
$421.3 million purchased in connection with the acquisition of the UK operations
of Cityscape. For the first six months of 1998, interest income on loans
available for sale increased $28.0 million or 410% as compared to 1997 due to an
increase in the average balance of loans available for sale of $541.0 million or
423% which was offset in part by a 28 basis point decrease in the weighted
average yield earned. The decrease of 123 and 119 basis points in weighted
average yields for the three and six months ended June 30, 1998, respectively,
as compared to comparable periods in 1997 is primarily due to an increase in
nonperforming subprime single-family residential mortgage loans during the
second quarter of 1998.
Interest income on the loan portfolio increased by $981,000 or 9% in
the three months ended June 30, 1998 versus the three months ended June 30, 1997
primarily due to a 678 basis point increase in the weighted average yield earned
offset by a $162 million or 36% decrease in the average balance of the loan
portfolio. For the six months ended June 30, 1998, interest income on the loan
portfolio decreased $3.4 million or 16% over that of the same period in 1997 as
a result of a $152.2 million or a 35% decrease in the average balance of the
loan portfolio which was offset in part by a 283 basis point increase in the
weighted average yield earned on the portfolio. The increases in the average
yield earned during 1998 are primarily due to $4.7 million of additional
interest received during the second quarter of 1998 in connection with the
payoff of nonresidential loans.
Interest income on the discount loan portfolio decreased by $2.0
million or 4% in the three months ended June 30, 1998 as compared to the same
period in 1997 primarily as a result of a $43.1 million or 3% decrease in the
average balance of the discount loan portfolio. For the six months ended June
30, 1998, and compared to the same period in 1997, interest income on the
discount loan portfolio increased $4.6 million or 6% due to a $108.9 million or
9% increase in the average balance of the discount loan portfolio which was
offset in part by a 29 basis point decrease in the weighted average yield
earned. The yield on the overall discount loan portfolio may 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 non-paying loans.
Interest income on securities available for sale decreased by $1.9
million or 30% during the second quarter of 1998 as compared to the same period
in 1997 primarily due to a 535 basis point decline in the weighted average yield
earned, which was offset by a $281.6 million or 91% increase in the average
balance. For the six months ended June 30, 1998 interest income on securities
available for sale decreased $6.2 million as a result of a 602 basis point
decline in the weighted average yield earned which was offset by a $236.0
million increase in the average balance. The decrease in the weighted average
yield during 1998 as compared to 1997 is primarily related to IOs and subprime
residual securities as a result of declining interest rates and the resulting
increase in prepayment speeds, a $4.2 million write-down of cost basis of
certain subprime residual securities during the second quarter of 1998, an $8.5
million write-down of cost basis of certain IOs during the first quarter of 1998
(which have been sold as part of the IO sale), net of the reversal of $4.5
million of reserves during the first quarter of 1998.
INTEREST EXPENSE. Interest expense of $52.9 million for the second
quarter of 1998 increased by $14.1 million or 36% over the comparable period in
the prior year as a result of an $836.5 million or 36% increase in the average
balance of interest-bearing liabilities. Of the $836.5 million net increase in
the average balance of interest-bearing liabilities, $924.2 million and $145.1
million related to increases in borrowings under lines of credit and securities
sold under agreements to repurchase, respectively, offset by a $187.4 million
decline in certificates of deposit. The increase in borrowing under lines of
credit is primarily due to the Company's use of lines of credit at OFS and Ocwen
UK to fund the subprime single-family residential loan growth. For the first six
months of 1998, interest expense amounted to $93.4 million, a $17.4 million or
23% increase over the same period of the prior year.
For additional information regarding lines of credit, see "Changes in
Financial Condition - Obligations Outstanding Under Lines of Credit" and
"Liquidity, Commitments and Off-Balance Sheet Risks."
27
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
PROVISION FOR LOAN LOSSES. Provision 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 portfolio composition, asset
classifications, historical loss experience, current economic conditions and
other relevant factors.
The following table sets forth the components of the Company's
provision for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Six Months
For the periods ended June 30, -------------------------------- -------------------------------
(Dollars in thousands) 1998 1997 1998 1997
- ----------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Discount loans........................... $ 9,562 $ 7,769 $ 11,485 $ 16,165
Loan portfolio........................... 113 140 444 1,486
------------- ------------- ------------- -------------
Total................................. $ 9,675 $ 7,909 $ 11,929 $ 17,651
============= ============= ============= =============
</TABLE>
The increase in loan loss provision for discount loans during the
second quarter of 1998 as compared to the second quarter of 1997 is due
primarily to an additional $2.1 million of general reserves established on
discount loans. The decline in the loan loss provision for discount loans during
the six months ended June 30, 1998 as compared to the same period in the prior
year is due primarily to (1) the recapture during the first quarter of 1998 of
previously established provisions in connection with the securitization of
single family residential discount loans during the first quarter of 1998,
offset by the additional $2.1 million of general reserves established during the
second quarter of 1998 as discussed above, and (2) the inclusion in provision
for the first quarter of 1997 of $2.0 million of additional reserves that were
provided in connection with the unsecuritized discount loans remaining from the
first quarter 1997 securitization. No similar charges were taken in 1998. The
decline in the loan loss provision for the loan portfolio is primarily due to a
one-time charge of $1.1 million in the second quarter of 1997 to reserve for
losses on a specific loan.
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 1998. 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. 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 Six Months
For the periods ended June 30, -------------------------------- -------------------------------
(Dollars in thousands) 1998 1997 1998 1997
- ----------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Servicing fees and other charges.............. $ 13,488 $ 4,845 $ 23,260 $ 10,081
Gains on sales of interest-earning assets, net 33,828 23,365 62,565 40,143
Impairment loss on AAA-rated agency IOs....... (77,645) -- (77,645) --
Gain on real estate owned, net................ 10,521 4,629 11,547 3,835
Other income.................................. 10,286 450 16,157 581
------------ ------------ ----------- -----------
Total...................................... $ (9,522) $ 33,289 $ 35,884 $ 54,640
============ ============ =========== ===========
</TABLE>
The $13.2 million increase in servicing fees and other charges during
the first six months of 1998 was due to an increase in loan servicing and
related fees as a result of the Company's increase in loans (primarily subprime
and non-performing) serviced for others. The average unpaid principal balance of
loans serviced for others amounted to $7.12 and $6.63 billion during the three
and six months ended June 30, 1998, as compared to $2.50 and $2.27 billion
during the three and six months ended June 30, 1997.
28
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the Company's loans serviced for others at June
30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Discount Loans Subprime Loans Other Loans Total
--------------------- ---------------------- -------------------- ---------------------
No. of No. of No. of No. of
Amount Loans Amount Loans Amount Loans Amount Loans
---------- ------- ---------- ------ -------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans securitized (1). $ 913,215 15,265 $1,746,595 43,464 $ -- -- $2,659,810 58,729
Loans serviced
for third parties.... 1,679,177 23,760 3,198,910 40,637 635,263 2,192 5,513,350 66,589
---------- ------- ---------- ------ -------- ----- ---------- ------
$2,592,392 39,025 $4,945,505 84,101 $635,263 2,192 $8,173,160 125,318
========== ====== ========== ====== ======== ===== ========== =======
</TABLE>
- ----------------
(1) Consists of loans securitized by the Company and now held by a third-party
securitization entity (in which the Company retains a subordinate and/or
residual interest).
Net gains on sales of interest-earning assets in the second quarter of
1998 were primarily comprised of $31.0 million of net gains recognized in
connection with the securitization of single family discount and single family
subprime residential mortgage loans, as presented in the table below, including
a $9.1 million gain recognized in connection with the securitization of 14,179
UK subprime single family residential mortgage loans with an aggregate principal
balance of (British pound)218.1 million ($363.8 million). Additionally the
Company recognized a $2.8 million gain on the sale of small commercial discount
loans. Net gains on sales of interest-earning assets in the second quarter of
1997 were primarily comprised of $21.0 million of net gains in connection with
the securitization of single family discount and single family subprime
residential mortgage loans, as presented in the table below, and additionally,
the Company recorded a $2.6 million gain on the sale of mortgage-related
securities to OAC.
Gains on sale of interest-earning assets (as well as other assets, such
as real estate owned, as discussed below) generally are dependent on various
factors which are not necessarily within the control of the Company, including
market (both for mortgages and securitizations) and economic conditions and
government fiscal and monetary policies, prevailing interest and currency
exchange rates and credit, prepayment, basis and asset/liability risks. As a
result, there can be no assurance that the gains on sale of interest-earning
assets (and other assets) reported by the Company in prior periods will be
reported in future periods or that there will not be substantial inter-period
variations in the results from such activities.
The following table sets forth the Company's net gains recognized in
connection with the securitization of loans during the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
Loans Securitized Book Value
- -------------------------------------------------------------------------------- of Securities
Type of Loans Principal No. of Loans Retained Net Gain
- -------------------------------------------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
For the Three Months Ended June 30, 1998:
Single family discount................... $ 98,345 1,155 $ 4,831 $ 12,219
Single family subprime................... 746,517 18,701 61,250 18,808
----------- ----------- ----------- -----------
$ 844,862 19,856 $ 66,081 $ 31,027
=========== =========== =========== ===========
For the Three Months Ended June 30, 1997:
Single family discount................... $ 170,641 1,783 $ 6,704 $ 17,200
Single family subprime................... 104,845 896 7,132 4,462
----------- ----------- ----------- -----------
$ 275,486 2,679 $ 13,836 $ 21,662
=========== =========== =========== ===========
</TABLE>
29
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Loans Securitized Book Value
- -------------------------------------------------------------------------------- of Securities
Type of Loans Principal No. of Loans Retained Net Gain
- -------------------------------------------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
For the Six Months Ended June 30, 1998:
Single family discount................... $ 325,894 4,932 $ 20,205 $ 28,917
Single family subprime................... 907,917 20,140 71,112 26,740
----------- ----------- ----------- -----------
$ 1,233,811 25,072 $ 91,317 $ 55,657
=========== =========== =========== ===========
For the Six Months Ended June 30, 1997:
Single family discount................... $ 215,396 2,664 $ 9,657 $ 26,700
Single family subprime................... 104,845 896 7,132 4,462
----------- ----------- ----------- -----------
$ 320,241 3,560 $ 16,789 $ 31,162
=========== =========== =========== ===========
</TABLE>
The Company's securitization activities also result in subordinated
and/or residual securities which the Company retains, which have a carrying
value of $207.8 million at June 30, 1998 and which are included in securities
available for sale at fair value. See "Changes in Financial Condition -
Securities Available for Sale."
Impairment loss on AAA-rated agency IOs amounted to $77.6 million, or
$62.4 million after tax, for the second quarter and first six months of 1998.
This charge resulted from the Company's decision to discontinue this activity
and write-down the book value of the IO portfolio. On July 27, 1998 the Company
sold the entire AAA-rated agency IO portfolio at book value.
The following table sets forth the results of the Company's investment
in real estate owned (which does not include investments in real estate), which
were primarily related to the discount loan portfolio, during the periods
indicated:
<TABLE>
<CAPTION>
Three months Six months
For the periods ended June 30, ----------------------------- ------------------------------
(Dollars in thousands) 1998 1997 1998 1997
- ------------------------------------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Gains on sales(1)......................... $ 14,619 $ 6,568 $ 23,382 $ 10,466
Provision for loss in fair value.......... (1,645) 90 (5,879) (2,247)
Rental income (carrying costs), net....... (2,453) (2,029) (5,956) (4,384)
------------ ----------- ------------ -----------
Gain (loss) on real estate owned, net.. $ 10,521 $ 4,629 $ 11,547 $ 3,835
=========== =========== =========== ===========
</TABLE>
- -----------------
(1) The increase in gains on sales during 1998 is primarily the result of
increased volume. The Company sold 779 and 1,389 properties during the
three and six months ended June 30, 1998, respectively, as compared to 223
and 756 during the three and six months ended June 30, 1997, respectively.
For additional information relating to the Company's real estate owned,
see "Changes in Financial Condition-Real Estate Owned."
Other income of $10.3 million for the first quarter of 1998 includes
$2.9 million of gains on sales of investments in real estate, $2.7 million of
brokerage commissions earned in connection with the origination of loans by
Ocwen UK and $1.5 million of management fees received from OAC. Included in
other income for the six months ended June 30, 1998 was a $4.7 million gain
recognized in connection with the sale of investments in two low-income housing
tax credit projects which occurred in the first quarter of 1998. See "Changes in
Financial Condition-Investments in Low-Income Housing Tax Credit Interests."
30
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 Six months
For the periods ended June 30, ----------------------------- ------------------------------
(Dollars in thousands) 1998 1997 1998 1997
- -------------------------------------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Compensation and employee benefits........ $ 29,766 $ 19,676 $ 51,247 $ 34,599
Occupancy and equipment................... 8,553 3,960 15,010 6,789
Net operating loss on investments in real
estate and certain low-income housing
tax credit interests................... 1,046 104 2,292 1,197
Other operating expense................... 16,406 7,340 21,275 11,192
----------- ----------- ----------- -----------
Total.................................. $ 55,771 $ 31,080 $ 89,824 $ 53,777
=========== =========== =========== ===========
</TABLE>
Non-interest expense of $55.8 million for the second quarter of 1998
increased $24.7 million or 79% as compared to the second quarter of 1997 and
includes $11.3 million and $3.5 million related to Ocwen UK and OTX,
respectively.
The increase in compensation and employee benefits during the three and
six months ended June 30, 1998 reflects an increase in the average number of
employees from 664 and 638 during the three and six months ended June 30, 1997
to 1,510 and 1,329 during the three and six months ended June 30, 1998.
The increase in occupancy and equipment expenses during the three and
six months ended June 30, 1998, as compared to the same period in the prior year
was primarily due to increases in rent and other occupancy related expenses,
data processing expenses and general office and equipment expenses, all largely
attributable to the increase in leased corporate and loan production office
space and the increase in employees discussed above.
The $9.1 million increase in other operating expenses during the three
months ended June 30, 1998 as compared to the comparable period in the prior
year is due primarily to a $5.8 million increase in loan expenses, a $2.2
million increase in professional fees and a $1.4 million increase in marketing
expenses, primarily related to Ocwen UK.
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 issued $125.0 million of 10 7/8%
Capital Securities. Cash distributions on the Capital Securities are 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. For the three months ended June 30, 1998, the
Company has recorded $3.4 million of distributions to holders of the Capital
Securities.
EQUITY IN EARNINGS OF INVESTMENT IN JOINT VENTURES. On December 12,
1997, the LLC distributed all of its remaining assets to its partners. As a
result, no equity in earnings of investment in joint venture was recorded during
the six months ended June 30, 1998. During the second quarter of 1997, the
Company recorded $1.3 million of income, which consisted primarily of net
interest income, related to its investment in joint venture. The Company's 50%
share of the income from the joint venture for the six months of 1997 amounted
to $15.7 million and consisted primarily of $2.7 million of net interest income
and a $9.2 million of net gain related to the securitization of single-family
residential loans in the first quarter.
The Company's earnings from the LLC 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. See Note 3 to the Interim Consolidated
Financial Statements included in Item 1 hereof.
INCOME TAX EXPENSE. Income tax benefit (expense) amounted to $6.4
million and $(5.1) million during the second quarter of 1998 and 1997,
respectively, and $5.8 million and $(8.7) million for the first six months of
1998 and 1997, respectively. The Company's income taxes reflect an expected tax
rate of 11.52% for 1998 and a $3.4 million tax benefit resulting from the use of
prior year net operating loss carryforwards. This compares to an effective tax
rate of 21.4% for 1997. The Company's expected tax rate is less than its
statutory tax rate primarily due to tax credits of $4.3
31
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
million and $2.9 million for the second quarter of 1998 and 1997, respectively,
and $9.0 million and $6.5 million for the first six months of 1998 and 1997,
respectively, resulting from investments in low-income housing tax credit
interests. No valuation allowance was required at June 30, 1998 because it is
expected that losses and tax credits will be utilized to offset taxable income
and tax expense. See "Changes in Financial Condition-Investments in Low Income
Housing Tax Credit Interests".
MINORITY INTEREST. Minority interest in net loss of consolidated
subsidiary represents the loss attributable to the 2.2% interest in OFS owned by
the shareholders (and their spouses) of Admiral. See Note 1 to the Interim
Consolidated Financial Statements included in Item 1 hereof.
CHANGES IN FINANCIAL CONDITION
GENERAL. From December 31, 1997 to June 30, 1998 total assets increased
by $436.4 million or 14%. This increase was primarily due to a $161.3 million
increase in the loans available for sale, a $112.5 million increase in
securities available for sale, and a $74.1 million increase in investment
securities. Total liabilities increased by $428.7 million from December 31, 1997
to June 30, 1998 primarily due to a $203.2 million increase in obligations
outstanding under lines of credit, a $161.6 million increase in deposits and a
$25.7 million increase in securities sold under agreements to repurchase.
SECURITIES AVAILABLE FOR SALE. At June 30, 1998, securities available
for sale amounted to $589.3 million or 16.8% of the Company's total assets.
Securities available for sale are carried at market value with unrealized gains
or losses reported as a separate component of stockholders' equity net of
deferred taxes. Unrealized losses on securities that reflect a decline in value
which is other than temporary are charged to earnings. Securities available for
sale at June 30, 1998 included an aggregate of $26.5 million of unrealized gains
($18.4 million unrealized gain net of deferred taxes) as compared to $11.7
million of unrealized losses ($5.0 million unrealized loss net of deferred
taxes) at December 31, 1997.
The following table sets forth the carrying value (which represents
market value) of the Company's securities available for sale at the dates
indicated.
June 30, December 31,
1998 1997
--------- ---------
(Dollars in Thousands)
Mortgage-related securities:
Single family residential:
CMOs (AAA-rated) ..................... $ 174,662 $ 160,451
Interest-only:
FHLMC .............................. 58,554 64,745
FNMA ............................... 82,372 59,715
GNMA ............................... 25,022 29,766
AAA-rated .......................... 10,223 13,863
Subordinates ......................... 180,023 67,830
REMIC residuals ...................... 13,035 15,693
Swap contracts ....................... 56 (94)
--------- ---------
543,947 411,969
--------- ---------
Multi-family residential and commercial:
Interest-only:
AAA-rated .......................... 3,369 1,030
Non-investment grade ............... 3,477
Subordinates ......................... 14,763 14,048
--------- ---------
18,132 18,555
--------- ---------
Marketable equity securities:
Common stocks ....................... 27,204 46,272
--------- ---------
Total .............................. $ 589,283 $ 476,796
========= =========
32
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Common stocks are comprised primarily of the Company's investment in
OAC. At June 30, 1998 and December 31, 1997, the Company, through IMI, owned
1,540,000 and 1,715,000 shares of the issued and outstanding shares of OAC,
valued at $25.5 million and $35.2 million, respectively.
The Company's securities available for sale of $589.3 million at June
30, 1998 increased by $112.5 million or 24% from December 31, 1997 due primarily
to $453.4 million of purchases which was offset by $91.2 million of sales,
$148.6 million of maturities and principal repayments, $67.9 million of net
premium amortization and $77.6 million of write-downs as a result of the
impairment loss on AAA-rated agency IOs.
At June 30, 1998, the carrying value of the Company's investment in IOs
amounted to $179.5 million or 31% of total securities available for sale and
includes $38.4 million of zero coupon securities and $3.4 million of commercial
IOs. IOs exhibit considerably more price volatility than mortgages or ordinary
mortgage pass-through securities, due in part to the uncertain cash flows that
result from changes in the prepayment rates of the underlying mortgage
collateral. Increased prepayments of the underlying mortgage collateral
resulting from 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 book value
of the portfolio of AAA-rated agency IOs at June 30, 1998 reflects a write-down
of $77.6 million in the second quarter of 1998 as a result of the Company's
decision to discontinue this investment activity. On July 27, 1998, the entire
portfolio of AAA-rated agency IOs was sold at book value. At June 30, 1998, all
of the Company's IO securities were either issued by FHLMC, GNMA, or FNMA or
were rated AAA by national rating agencies. At June 30, 1998, unrealized gains
on the Company's portfolio of IO securities amounted to $881,000, excluding
deferred taxes.
At June 30, 1998 the carrying value of the Company's investment in
subordinated and residual interests amounted to $194.8 million or 34% of total
securities available for sale and supported senior classes of securities having
an outstanding principal balance of $3.41 billion. Because of their subordinate
position, subordinated and residual classes of mortgage-related securities
provide protection to and involve more risk than the senior classes.
Specifically, when cash flow is impaired, debt service goes first to the holders
of senior classes. In addition, incoming cash flows also may be held in a
reserve fund to meet any future repayments until the holders of senior classes
have been paid and, when appropriate, until a specified level of funds has been
contributed to the reserve fund. Further, subordinated and residual interests
exhibit considerably more price volatility than mortgages or ordinary mortgage
pass-through securities, due in part to the uncertain cash flows that result
from changes in the prepayment rates of the underlying mortgages. Lastly,
subordinated and residual interests involve substantially more credit risk than
the senior classes of the mortgage-related securities to which such interests
relate and generally are not as liquid as the senior classes.
The Company generally retains subordinate securities and REMIC residual
securities, which are certificated, related to its securitization of loans.
Subordinate securities and REMIC residual securities retained represent the
present value of the right to the excess cash flows generated by the securitized
loans that represent the difference between (a) principal and interest at the
stated rate paid by borrowers and (b) the sum of (i) principal and coupon
interest paid to third-party investors who hold the more senior classes, (ii)
trustee fees, (iii) third-party credit enhancement fees (if applicable), (iv)
stipulated servicing fees and (v) estimated loan portfolio losses. The Company's
right to receive this excess cash flow may begin after certain reserve
requirements have been met, which are specific to each securitization and may be
used as a means of credit enhancement. The Company determines the present value
of anticipated cash flows at the time each securitization transaction closes,
utilizing valuation assumptions appropriate for each particular transaction.
The significant valuation assumptions are related to the anticipated
average lives of the loans sold, the anticipated prepayment speeds and the
anticipated credit losses related thereto. In order to determine the present
value of this excess cash flow, the Company currently applies a discount rate of
18% to the projected cash flows.
The annual prepayment rate of the securitized loans is a function of
full and partial prepayments and defaults. The Company makes assumptions as to
the prepayment rates of the underlying loans, which the Company believes are
reasonable, in estimating fair values of the subordinate securities and REMIC
residual securities
33
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
retained. During the second quarter of 1998, the Company utilized proprietary
prepayment curves generated by the Company (reaching an approximate maximum
annual rate of 40%).
In its estimates of annual loss rates, the Company utilizes assumptions
that it believes are reasonable. The Company estimates annual losses of between
0.225% and 1.52% of the underlying loans.
The Company periodically assesses the carrying value of its subordinate
securities and REMIC residual securities retained, as well as the servicing
assets for impairment. There can be no assurance that the Company's estimates
used to determine the gain on securitized loan sales, subordinate securities and
REMIC residual securities retained and servicing assets valuations will remain
appropriate for the life of each securitization. If actual loan prepayments or
defaults exceed the Company's estimates, the carrying value of the Company's
subordinate securities and REMIC residual securities retained and/or servicing
assets may be decreased or the Company may increase its allowance for possible
credit losses on loans sold through a charge against earnings during the period
management recognizes the disparity. Other factors may also result in a
write-down of the Company's subordinate securities and REMIC residual securities
retained in subsequent periods.
The Company does not intend to purchase subordinated or residual
classes of mortgage-related securities created by unaffiliated parties. The
Company is likely, however, to retain subordinated or residual classes resulting
from the securitization of assets held by it directly, although it is intended
that any such securities held by the Bank will be distributed to the Company as
a dividend, subject to the Bank's ability to declare such dividends under
applicable limitations. Five such securities with an aggregate book value of
$40.6 million were distributed to the Company from the Bank in the form of a
dividend during January 1998. At June 30, 1998, the Bank held two subordinate
securities with a carrying value and book value of $22.6 million and $19.9
million, respectively.
LOANS AVAILABLE FOR SALE. The Company's loans available for sale at
June 30, 1998, which are carried at the lower of cost or fair value, increased
by $161.3 million or 91% from December 31, 1997 and consist primarily of single
family residential loans to subprime borrowers. The Company generally intends to
sell or securitize its single family residential loans to subprime borrowers
and, as a result, all of such loans were classified as available for sale at
June 30, 1998 and December 31, 1997. The Company's single family residential
lending activities to subprime borrowers is conducted by OFS and Ocwen UK.
The following table sets forth the composition of the Company's loans
available for sale by type of loan at the dates indicated.
June 30, December 31,
1998 1997
-------- --------
(Dollars in thousands)
Single family residential loans ........... $337,989 $176,554
Consumer loans ............................ 370 487
-------- --------
$338,359 $177,041
======== ========
The following table sets forth the activity in the Company's net loans
available for sale during the periods indicated.
<TABLE>
<CAPTION>
Three months Six months
For the periods ended June 30, ----------------------------- ------------------------------
(Dollars in thousands) 1998 1997 1998 1997
- --------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of period............ $ 493,106 $ 88,511 $ 177,041 $ 126,366
Purchases (1):
Single family residential.............. 441,293 24,837 763,013 62,504
Originations (1):
Single family residential.............. 216,699 98,338 399,221 126,502
Sales (2)................................. (777,117) (102,362) (943,276) (187,848)
Increase (decrease) in lower of cost or
market reserve......................... (752) (600) (1,079) (442)
Loans transferred to loan portfolio....... -- -- -- (13,694)
Principal repayments, net of capitalized
interest............................... (32,814) (3,292) (53,817) (6,251)
Transfer to real estate owned............. (2,056) (1,805) (2,744) (3,510)
----------- ----------- ----------- -----------
Net increase (decrease) in loans....... (154,747) 15,116 161,318 (22,739)
----------- ----------- ----------- -----------
Balance at end of period.................. $ 338,359 $ 103,627 $ 338,359 $ 103,627
=========== =========== =========== ===========
</TABLE>
(1) During the first six months of 1998 and 1997 the Company purchased and
originated $1.16 billion and $189.0 million, respectively, of single
family residential loans to subprime borrowers. Purchases of single
family residential loans during the three months ended June 30, 1998
include $421.3 million purchased in connection with the
34
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
acquisition of the UK operations of Cityscape Financial Corp. The
Company also securitized $746.5 million of subprime loans, including
$363.8 million by Ocwen UK, during the three months ended June 30, 1998
for an aggregate gain of $18.8 million.
(2) Included in sales for the three months ended June 30, 1998 is the
securitization of 4,522 subprime single family residential mortgage
loans with an aggregate unpaid principal balance of $382.7 million.
Also included in sales for the second quarter of 1998 is the
securitization of 14,179 of UK subprime single family residential
mortgage loans with an unpaid principal balance of $363.8 million
((British pound)218.1 million).
The following table presents a summary of the Company's non-performing
loans (loans which were past due 90 days or more) in the loans available for
sale portfolio at the dates indicated:
June 30, December 31,
1998 1997
------- -------
(Dollars in thousands)
Non-performing loans:
Single family .......................... $80,325 $13,509
Consumer ............................... 46 25
------- -------
$80,371 $13,534
======= =======
Non-performing loans as a percentage of:
Total loans available for sale.......... 23.75% 7.64%
Total assets............................ 2.29% 0.44%
Non-performing loans available for sale consist primarily of subprime
single family residential loans, reflecting the higher risks of default
associated with such loans. Although subprime loans generally have higher levels
of default than prime loans, the Company believes that the borrower's equity in
the security property and the Company's expertise in the area of resolution of
nonperforming loans will make its subprime borrower loan program successful.
INVESTMENT SECURITIES. Investment securities increased by $74.1 million
from December 31, 1997 to June 30, 1998 primarily as a result of the Company's
$45.8 million investment to acquire 36.07% of the outstanding common stock of
Kensington Mortgage Company, a leading originator of nonconforming residential
mortgages in the UK, and a $27.1 million additional investment in OPLP in
exchange for an additional 1,648,733 limited partnership units. The additional
investment in OPLP increases the Company's ownership to 1,808,733 units or 8.7%.
See Note 1 to the Interim Consolidated Financial Statements included in Item 1
hereof and "Changes in Financial Condition - Securities Available for Sale."
DISCOUNT LOAN PORTFOLIO. At June 30, 1998, the Company's net discount
loan portfolio amounted to $1.42 billion or 41% of the Company's total assets.
The following table sets forth the composition of the Company's discount loan
portfolio by type of loan at the dates indicated.
June 30, December 31,
1998 1997
------------ ------------
(Dollars in thousands)
Single family residential loans........ $ 735,838 $ 900,817
Multi-family residential loans......... 258,628 191,302
Commercial real estate loans (1)....... 758,518 701,035
Other loans............................ 7,785 1,865
------------ ------------
Total discount loans................ 1,760,768 1,795,019
Unaccreted discount (2)................ (316,410) (337,350)
Allowance for loan losses.............. (22,852) (23,493)
------------ ------------
Discount loans, net................. $ 1,421,506 $ 1,434,176
============ ============
(1) The balance at June 30, 1998 consisted of $352.3 million of loans
secured by office buildings, $132.2 million of loans secured by hotels,
$143.3 million of loans secured by retail properties or shopping
centers and $130.7 million of loans secured by other properties. The
balance at December 31, 1997 consisted of $363.7 million of loans
secured by office buildings, $98.9 million of loans secured by hotels,
$106.8 million of loans secured by retail properties or shopping
centers and $131.6 million of loans secured by other properties.
35
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
(2) The balance at June 30, 1998 consisted of $165.4 million on single
family residential loans, $28.0 million on multi-family residential
loans, $120.4 million on commercial real estate loans and $2.6 million
on other loans. The balance at December 31, 1997 consisted of $170.7
million on single family residential loans, $46.0 million on
multi-family residential loans, $120.5 million on commercial real
estate loans and $0.2 million on other loans.
The following tables set forth the activity in the Company's gross
discount loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three months ended June 30,
--------------------------------------------------------
1998 1997
-------------------------- --------------------------
No. of No. of
Balance Loans Balance Loans
----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ......... $ 1,504,878 8,571 $ 1,562,385 12,202
Acquisitions(1) ........................ 585,755 4,138 399,473 1,543
Resolutions and repayments(2) .......... (130,265) (590) (134,224) (532)
Loans transferred to real estate owned . (84,404) (636) (68,912) (352)
Sales(3) ............................... (115,196) (1,168) (168,295) (1,751)
----------- ----------- ----------- -----------
Balance at end of period ............... $ 1,760,768 10,315 $ 1,590,427 11,110
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------------------------------
1998 1997
-------------------------- --------------------------
No. of No. of
Balance Loans Balance Loans
----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ......... $ 1,795,020 12,980 $ 1,314,399 5,460
Acquisitions(1) ........................ 676,305 4,710 842,351 9,754
Resolutions and repayments(2) .......... (205,791) (1,087) (197,777) (726)
Loans transferred to real estate owned.. (149,207) (1,323) (120,498) (744)
Sales(3) ............................... (355,559) (4,965) (248,048) (2,634)
----------- ----------- ----------- -----------
Balance at end of period ............... $ 1,760,768 10,315 $ 1,590,427 11,110
=========== =========== =========== ===========
</TABLE>
(1) During the three months ended June 30, 1998, acquisitions consisted of
$293.9 million of single family residential loans, $145.5 million of
multi-family residential loans and $146.3 million of commercial real
estate and land loans. During the first six months of 1998,
acquisitions consisted of $335.3 million of single family residential
loans, $148.5 million of multi-family residential loans and $192.5
million of commercial real estate and land loans. Included in
acquisitions for the first six months of 1997 are the Bank's
approximate one-half allocated share of 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.
(2) Resolutions and repayments consists of loans which were resolved in a
manner which resulted in partial or full repayment of the loan to the
Company, as well as principal payments on loans which have been brought
current in accordance with their original or modified terms (whether
pursuant to forbearance agreements or otherwise) or on other loans
which have not been resolved.
(3) Included in sales for the three months ended June 30, 1998 is the
securitization of 1,155 discount single family residential mortgage
loans with an aggregate unpaid principal balance of $98.3 million.
36
<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>
June 30, 1998 December 31, 1997
---------------------- ----------------------
Principal % of Principal % of
Amount Loans Amount Loans
---------- ------- ---------- ------
<S> <C> <C> <C> <C>
Loans without Forbearance Agreements:
Current....................................... $ 825,438 46.88% $ 670,115 37.33%
Past due 31 to 89 days........................ 53,295 3.02 21,098 1.18
Past due 90 days or more...................... 566,413 32.17 638,319 35.56
Acquired and servicing not yet transferred.... 80,647 4.58 28,053 1.56
---------- ------ ---------- ------
Subtotal.................................... 1,525,793 86.65 1,357,585 75.63
---------- ------ ---------- ------
Loans with Forbearance Agreements:
Current....................................... 1,908 0.11 3,140 0.18
Past due 31 to 89 days........................ 1,740 0.10 1,688 0.09
Past due 90 days or more (1).................. 231,327 13.14 432,606 24.10
---------- ------ ---------- ------
Subtotal.................................... 234,975 13.35 437,434 24.37
---------- ------ ---------- ------
Total............................................ $1,760,768 100.00% $1,795,019 100.00%
========== ====== ========== ======
</TABLE>
(1) Includes $219.9 million of loans which were less than 90 days past due
under the terms of the forbearance agreements at June 30, 1998, of
which $200.0 million were current and $19.9 million were past due 31 to
89 days.
For discussion and analysis regarding the allowance for loan losses on
discount loans, see "Changes in Financial Condition - Allowance for Losses"
below.
LOAN PORTFOLIO. The following table sets forth the composition of the
Company's loan portfolio by type of loan at the dates indicated.
June 30, December 31,
1998 1997
--------- ---------
(Dollars in thousands)
Single family residential loans ...... $ 37,638 $ 46,226
Multi-family residential loans ....... 71,330 71,382
Commercial real estate and land loans:
Hotel ............................. 60,088 89,362
Office buildings .................. 113,816 68,759
Land .............................. 2,541 2,858
Other ............................. 10,739 16,094
--------- ---------
Total ........................... 187,184 177,073
Consumer ............................. 209 244
--------- ---------
Total loans ..................... 296,361 294,925
Undisbursed loan funds ............... (8,671) (22,210)
Unaccreted discount .................. (2,600) (2,721)
Allowance for loan losses ............ (4,139) (3,695)
--------- ---------
Loans, net ...................... $ 280,951 $ 266,299
========= =========
37
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the activity in the Company's gross loan
portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three months Six months
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period ........... $ 305,072 $ 512,494 $ 294,925 $ 501,114
Originations:
Single family residential loans ....... -- -- -- 1,769
Multi-family residential loans ........ 8,500 57 22,271 12,737
Commercial real estate loans and land
loans ............................... 40,945 47,200 59,930 47,200
Commercial non-mortgage and consumer
loans ............................... -- -- -- 1,134
--------- --------- --------- ---------
Total loans originated .............. 49,445 47,257 82,201 62,840
--------- --------- --------- ---------
Purchases ................................ -- 78 -- 78
Sales .................................... -- (2,346) -- (2,346)
Loans transferred from available for sale -- -- -- 13,802
Principal repayments, net of capitalized
interest .............................. (58,156) (50,183) (80,765) (67,835)
Transfer to real estate owned ............ -- -- -- (353)
--------- --------- --------- ---------
Net (decrease) increase in loans .... (8,711) (5,194) 1,436 6,186
--------- --------- --------- ---------
Balance at end of period (1) ............. $ 296,361 $ 507,300 $ 296,361 $ 507,300
========= ========= ========= =========
</TABLE>
(1) The decline in the balance of the gross loan portfolio at June 30, 1998
as compared to June 30, 1997, is primarily due to significant payoffs
of commercial real estate loans secured by hotel and office buildings
during the latter part of 1997 and the second quarter of 1998.
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:
June 30, December 31,
1998 1997
------- -------
(Dollars in Thousands)
Nonperforming loans (1):
Single family residential loans .......... $ 1,358 $ 1,575
Multi-family residential loans ........... 7,583 7,583
------- -------
$ 8,941 $ 9,158
======= =======
Nonperforming loans as a percentage of:
Total loans (2) .......................... 3.18% 3.36%
Total assets ............................. 0.25% 0.30%
Allowance for loan losses as a percentage of:
Total loans (2) .......................... 1.45% 1.37%
Nonperforming loans ...................... 46.29% 40.35%
(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.
38
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
ALLOWANCES FOR LOSSES. The Company uses an internal asset review system
to identify problem assets. The Company's asset classification process, in
accordance with applicable regulations, provides for the classification of
assets into the categories of satisfactory, special mention, substandard,
doubtful or loss. The Company's determination of the level and the allocation of
the allowance for loan losses and, correspondingly, the provisions for such
losses, is based on various judgments, assumptions and projections regarding a
number of factors, including, but not limited to, asset classifications, current
and forecasted economic and market conditions, loan portfolio composition,
historical loan loss experience and industry experience. The allowance for loan
losses is adjusted monthly to reflect management's current assessment of the
effect of these factors on estimated inherent loan losses. While management uses
all information available to it to estimate losses on loans, future changes to
the allowance may become necessary based on changes in economic and market
conditions. The OTS, as part of its examination process, periodically reviews
the adequacy of the Company's allowance for loan losses. Such agency may require
the company to recognize changes to the allowance based on its judgment about
information available to it at the time of examination.
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>
June 30, 1998 December 31, 1997
--------------------------------- ----------------------------------
Gross Gross
Loan Loan
Allowance Balance Percent Allowance Balance Percent
-------- ---------- ---- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Loan portfolio:
Single family................ $ 422 $ 37,638 12.7% $ 512 $ 46,226 15.7%
Multi-family................. 1,814 71,330 24.1% 2,163 71,382 24.2%
Commercial real estate....... 1,892 187,184 63.1% 1,009 177,073 60.0%
Consumer..................... 11 209 0.1% 11 244 0.1%
-------- ---------- ----- -------- ---------- ------
$ 4,139 $ 296,361 100% $ 3,695 $ 294,925 100.0%
======== ========== ===== ======== ========== ======
Discount loan portfolio:
Single family................ $ 11,373 $ 727,840 41.3% $ 15,017 $ 900,817 50.2%
Multi-family................. 2,664 258,628 14.7% 2,616 191,302 10.7%
Commercial real estate....... 8,676 766,515 43.5% 5,860 701,035 39.0%
Other........................ 139 7,785 0.5% -- 1,865 0.1%
-------- ---------- ----- -------- ---------- ------
$ 22,852 $1,760,768 100% $ 23,493 $1,795,019 100.0%
======== ========== ===== ======== ========== ======
</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.
39
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table summarizes activity in the allowance for loan losses related
to the Company's loan portfolio and discount loan portfolio during the six
months ended June 30, 1998.
<TABLE>
<CAPTION>
Balance Balance
December 31, June 30,
1997 Additions Charge-offs Recoveries 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Loan portfolio:
Single family.................. $ 512 $ (90) $ -- $ -- $ 422
Multi-family................... 2,163 (349) -- -- 1,814
Commercial real estate......... 1,009 883 -- -- 1,892
Consumer....................... 11 -- -- -- 11
---------- ---------- ---------- ---------- ----------
$ 3,695 $ 444 $ -- $ -- $ 4,139
========== ========== ========== ========== ==========
Discount loans:
Single family.................. $ 15,017 $ 4,478 $ (8,261) $ 139 $ 11,373
Multi-family................... 2,616 1,862 (1,814) -- 2,664
Commercial real estate......... 5,860 5,005 (2,188) -- 8,676
Other........................ -- 140 (1) -- 139
---------- ---------- ----------- ---------- ----------
$ 23,493 $ 11,485 $ (12,264) $ 139 $ 22,852
========== ========== =========== ========== ==========
</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 Code
by a state tax credit allocating agency. At June 30, 1998 the Company had $132.9
million of investments in low-income housing tax credit interests as compared to
$128.6 million at December 31, 1997. On March 31, 1998, the Company completed
the sale of its investment in two low-income housing tax credit projects which
had a carrying value of $17.2 million for a gain of $4.7 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 $42.4 million at June 30, 1998, 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 $30.0 million at June 30, 1998, are accounted
for under the effective yield method as a reduction of income tax expense.
Low-income housing tax credit partnerships in which the Company invests as both
a limited and, through a subsidiary, general partner amounted to $60.5 million
at June 30, 1998 and are presented on a consolidated basis.
INVESTMENT IN JOINT VENTURES. From time to time the Company and a
co-investor acquire discount loans by means of a co-owned joint venture. At June
30, 1998 and December 31, 1997, the Company's $1.1 million investment in joint
venture, net consisted of a 10% interest in BCFL, a limited liability Company
which was formed by the Bank and BlackRock in January 1997 to acquire discount
multi-family residential loans from HUD. In December 1997, the LLC, the
Company's 50% owned joint venture, distributed its assets to the Company and its
other 50% investor, BlackRock. Simultaneous with the distribution, the Company
acquired BlackRock's portion of the distributed assets.
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.
40
<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:
June 30, December 31,
1998 1997
--------- ---------
(Dollars in thousands)
Discount loan portfolio:
Single family residential.................. $ 82,162 $ 76,409
Multi-family residential................... 23,599 16,741
Commercial real estate..................... 44,266 71,339
--------- ---------
Total.................................... 150,027 164,489
Loan portfolio................................ 317 357
Loans available for sale portfolio............ 1,263 2,419
--------- ---------
$ 151,607 $ 167,265
========= =========
The following table sets forth the activity in the valuation allowance
on real estate owned for the periods indicated.
<TABLE>
<CAPTION>
Three months Six months
For the period ended June 30, ---------------------- -----------------------
(Dollars in thousands) 1998 1997 1998 1997
- ------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning of period............ $ 13,242 $ 7,591 $ 12,346 $ 11,493
Provision for loss in fair value.......... 1,644 (90) 5,878 2,246
Charge-offs and sales..................... (3,682) (1,868) (7,020) (8,106)
--------- -------- -------- --------
Balance at end of period.................. $ 11,204 $ 5,633 $ 11,204 $ 5,633
======== ======== ======== ========
</TABLE>
The following table sets forth the activity in real estate owned during
the periods indicated.
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------------------------------
1998 1997
----------------------- ------------------------
No. of No. of
Amount Properties Amount Properties
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period........... $ 172,693 1,642 $ 98,466 702
Properties acquired through
foreclosure or deed-in-lieu thereof... 62,326 649 52,605 370
Acquired in connection with
acquisitions of discount loans........ 8,137 135 1,070 17
Sales.................................... (93,586) (779) (36,396) (223)
Change in allowance...................... 2,037 -- 1,958 --
--------- ------ --------- -----
Balance at end of period(1).............. $ 151,607 1,647 $ 117,703 866
========= ====== ========= =====
<CAPTION>
Six months ended June 30,
----------------------------------------------------
1998 1997
----------------------- ------------------------
No. of No. of
Amount Properties Amount Properties
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period.......... $ 167,265 1,505 $ 103,704 825
Properties acquired through
foreclosure or deed-in-lieu thereof.. 106,029 1,343 90,258 777
Acquired in connection with
acquisitions of discount loans...... 11,052 188 1,140 20
Sales................................... (133,880) (1,389) (83,259) (756)
Change in allowance..................... 1,141 -- 5,860 --
--------- ------ --------- ----
Balance at end of period(1)............. $ 151,607 1,647 $ 117,703 866
========= ====== ========= ====
</TABLE>
41
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
(1) The increase in the balance of real estate owned at June 30, 1998 as
compared to June 30, 1997 is primarily the result of single family and
multi-family properties acquired through foreclosures on discount
loans.
The following table sets forth the amount of time that the Company had
held its real estate owned at the dates indicated.
June 30, December 31,
1998 1997
--------- ---------
(Dollars in thousands)
One to two months....................... $ 55,576 $ 83,144
Three to four months.................... 20,430 28,912
Five to six months...................... 15,476 20,929
Seven to twelve months.................. 43,627 23,621
Over twelve months...................... 16,498 10,659
--------- ---------
$ 151,607 $ 167,265
========= =========
INVESTMENT IN REAL ESTATE. The Company's investments in real estate
amounted to $22.5 million at June 30, 1998 as compared to $66.0 million at
December 31, 1997, a decrease of $43.5 million.
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 decreased to $13.3 million at June 30, 1998, as compared to $64.3
million at December 31, 1997, primarily as a result of principal repayments.
DEFERRED TAX ASSET. At June 30, 1998 the deferred tax asset, net of
deferred tax liabilities, amounted to $63.9 million, an increase of $18.7
million from the $45.1 million deferred tax asset at December 31, 1997. At June
30, 1998, the gross deferred tax asset amounted to $76.0 million and consisted
primarily of $3.6 million of mark-to-market adjustments and reserves on real
estate owned, $7.7 million of deferred interest expense on the discount loan
portfolio, $12.4 million of loan loss reserves, $3.2 million of profit sharing
expense, $4.6 million related to tax residuals, $5.6 million of gains on loan
foreclosures, $35.6 million of reserves on securities available for sale and
$1.0 million of contingency reserves. The gross deferred tax liability amounted
to $12.1 million and consisted primarily of $ 2.3 million of deferred interest
income on the discount loan portfolio, $8.0 million mark-to market on securities
available for sale and $1.1 million of income from foreign investment. At
December 31, 1997, the gross deferred tax asset amounted to $49.5 million and
consisted primarily of $3.5 million related to tax residuals, $5.6 million of
gains on loan foreclosures, $3.2 million of mark-to-market adjustments and
reserves on real estate owned, $9.8 million of loan loss reserves, $4.0 million
of reserves on securities available for sale, $2.0 million of contingency
reserves, $3.2 million of accrued profit sharing expense, $7.7 million of
deferred interest expense on the discount loan portfolio and $6.7 million
mark-to-market on securities available for sale. The gross deferred tax
liability amounted to $4.4 million and consisted primarily of $2.3 million of
deferred interest income on the discount loan portfolio.
As a result of the Company's earnings history, current tax position and
taxable income projections, management believes that the Company will generate
sufficient taxable income in future years to realize the deferred tax asset
which existed at June 30, 1998. In evaluating the expectation of sufficient
future taxable income, management considered future reversals of temporary
differences and available tax planning strategies that could be implemented, if
required. A valuation allowance was not required at June 30, 1998 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 1997, the
Company consolidated its domestic subprime single family lending operations
within OFS in connection with its acquisition of substantially all of the assets
42
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
of Admiral in May 1997. The excess of purchase price over net assets acquired
related to this transaction amounted to $10.4 million at June 30, 1998 and is
being amortized on a straight-line basis over a period of 15 years.
As part of its plan to market its advanced loan resolution technology
to third parties in the mortgage industry through software licenses, the Company
recently acquired two software technology companies. On November 6, 1997, the
Company acquired AMOS, Inc., a Connecticut based company engaged primarily in
the development of mortgage loan servicing software for an aggregate purchase
price of $9.7 million, including $4.9 million which is contingent on AMOS, Inc.
meeting certain software development performance criteria. Subsequently, on
January 20, 1998, the Company acquired DTS Communications, Inc. ("DTS"), a real
estate technology company located in San Diego, California, for a purchase price
of $13.0 million in cash, common stock of the Company and repayment of certain
indebtedness. DTS has developed technology tools to automate real estate
transactions over the Internet and has been recognized by Microsoft Corporation
for the Microsoft (R) component-based architecture to facilitate electronic data
interchange. The common stock of the Company issued in the acquisition was
acquired from affiliates of the Company at the same price per share as was used
to calculate the number of shares issued in the acquisition. The aggregate
excess of purchase price over net assets acquired related to these transactions
amounted to $12.6 million, net of accumulated amortization at June 30, 1998 and
is being amortized on a straight-line basis over a period of 15 years.
On April 24, 1998, the Company, through its wholly-owned subsidiary
Ocwen UK, acquired substantially all the assets, and certain liabilities, of
Cityscape UK. As consummated, the Company acquired Cityscape UK's mortgage loan
portfolio and it's residential subprime mortgage loan origination and servicing
businesses for $421.3 million ((British pound)249.6 million) and assumed $34.3
million ((British pound)20.3 million) of Cityscape UK's liabilities. The excess
of purchase price transaction, which amounted to $13.4 million net of
accumulated amortization at June 30, 1998, is being amortized on a straight-line
basis over a period of 15 years.
DEPOSITS. Deposits increased $161.6 million or 8% from December 31,
1997 to June 30, 1998. The increase in deposits during the six months ended June
30, 1998 was primarily the result of a $133.3 million increase in brokered
deposits obtained through national investment banking firms which solicit
deposits from their customers, and a $72.8 million increase in escrow deposits,
offset by a $15.2 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 and a $28.9
million decrease in checking and money funds. Brokered deposits obtained through
national investment banking firms amounted to $1.48 billion at June 30, 1998, as
compared to $1.34 billion at December 31,1997. Deposits obtained through direct
solicitation and marketing amounted to $414.6 million at June 30, 1998, as
compared to $429.8 million at December 31, 1997. At June 30, 1998 the Company
had $176.1 million of certificates of deposit in amounts of $100,000 or more,
including $75.7 million of deposits of states and political subdivisions in the
U.S. which are secured or collateralized as required under state law. See
"Liquidity, Commitments and Off-Balance Sheet Risks" below.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under
agreements to repurchase increased $25.7 million to $134.0 million from December
31, 1997 to June 30, 1998. 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 of $225.5 million at June 30,
1998 decreased $1.5 million during the six months ended June 30, 1998 primarily
as a result of repayments of short-term notes payable. Notes, debentures and
other interest-bearing obligations consist of $100.0 million of 12% debentures
issued by the Bank in June 1995 and due June 2005, $125.0 million of 11.875%
Notes issued by the Company in September 1996 and due September 2003 and
$469,000 of short-term notes payable.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit increased by $203.2 million to $321.5 million from
December 31, 1997 to June 30, 1998 primarily as a result of new borrowings to
fund the acquisition and origination of subprime single family loans at OFS and
Ocwen UK. Borrowings under lines of credit have a one-year term and interest
rates which float in accordance with a designated prime rate. During that
one-year period, Ocwen would anticipate securitizing the underlying subprime
single family loans (or refinancing any remaining loans) and then repaying the
corresponding lines of credit. For additional information regarding lines of
credit, see "Liquidity, Commitments and Off-Balance Sheet Risks."
43
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
COMPANY-OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY. In August
1997, Ocwen Capital Trust I 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 the Company. 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.
Through June 30, 1998, the Company had recorded $6.8 million of
distributions to holders of the Capital Securities. See Note 4 to the Interim
Consolidated Financial Statements included in Item 1 hereof.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $7.6 million or 2%
during the six months ended June 30, 1998. The increase in stockholders' equity
during this period was primarily attributable to an increase of $23.5 million in
the unrealized gain on securities available for sale and $1.2 million related to
the exercise of stock options, offset by a net loss for the period of $15.6
million and foreign currency translation adjustment of $1.5 million. See the
Consolidated Statements of Changes in Stockholders' Equity and Note 6 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 to review, among
other things, the sensitivity of the Company's assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, including those attributable to hedging
transactions, purchase and sale activity, and maturities of investments and
borrowings. The Asset/Liability Committee also approves and establishes pricing
and funding decisions with respect to overall asset and liability composition.
The Asset/Liability Committee is authorized to utilize a wide variety
of off-balance sheet financial techniques to assist it in the management of
interest rate risk. These techniques include interest rate exchange agreements,
pursuant to which the parties exchange the difference between fixed-rate and
floating-rate interest payments on a specified principal amount (referred to as
the "notional amount") for a specified period without the exchange of the
underlying principal amount. Interest rate exchange agreements are utilized by
the Company to protect against the decrease in value of a fixed-rate asset or
the increase in borrowing cost from a short-term, fixed-rate liability, such as
reverse repurchase agreements, in an increasing interest-rate environment. At
June 30, 1998, the Company had entered into interest rate exchange agreements
with an aggregate notional amount of $32.7 million. Interest rate exchange
agreements had the effect of decreasing the Company's net interest income by
$32,000 and $41,000 during the three months ended June 30, 1998 and 1997,
respectively and $70,000 and $115,000 during the six months ended June 30, 1998
and 1997, respectively.
On February 25, 1998, the Company entered into a foreign currency swap
with a AAA-rated counterparty to hedge it's 36.07% equity investment in
Kensington Mortgage Company, a leading originator of nonconforming residential
mortgages in the UK. Under the terms of the agreement, the Company will swap
(British pound)27.5 million for $43.5 million in five years based on the
exchange rate on the date the contract became effective. See Note 6 to the
Interim Consolidated Financial Statements included in Item 1 hereof.
The Company also enters into interest rate futures contracts, which are
commitments to either purchase or sell designated financial instruments at a
future date for a specified price and may be settled in cash or through
delivery. Eurodollar futures contracts have been sold by the Company to hedge
the repricing or maturity risk of certain short duration mortgage-related
securities, and U.S. Treasury futures contracts have been sold by the Company to
offset declines in the market value of its fixed-rate loans and certain
fixed-rate mortgage-backed and related securities available for sale in the
event of an increasing interest rate environment. At June 30, 1998, the Company
had entered
44
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
into U.S. Treasury futures (short) contracts with an aggregate notional amount
of $90.1 million. The Company had no outstanding Eurodollar futures contracts at
June 30, 1998. Futures contracts had the effect of decreasing the Company's net
interest income by $0 and $895,000 during the three months ended June 30, 1998
and 1997, respectively and $49,000 and $1.1 million during the six months ended
June 30, 1998 and 1997, respectively. See Note 6 to the Interim Consolidated
Financial Statements included in Item 1 hereof.
On April 22, 1998, the Company sold short foreign currency futures to
hedge its foreign currency exposure related to its equity investment in Ocwen
UK. Under the terms of the currency futures, the Company has the right to
receive $66.7 million and pay (British pound)40 million. The value of the
currency futures is based on quoted market prices. See Note 6 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.
45
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the estimated maturity or repricing of
the Company's interest-earning assets and interest-bearing liabilities at June
30, 1998. 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 $180.3 million at June 30, 1998, are excluded.
Management believes that these assumptions approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of the
Company's assets and liabilities in the table could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which the assumptions are based.
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------------------------------
More than 1
Within 4 to 12 Year to 3 Years
3 Months Months 3 Years and Over Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Interest-earning cash, federal funds
sold and repurchase agreements ............ $ 157,870 $ -- $ -- $ -- $ 157,870
Securities available for sale ............... 80,488 157,396 149,934 201,465 589,283
Loans available for sale (1) ................ 41,036 217,173 40,121 40,029 338,359
Investment securities, net .................. -- -- -- 87,378 87,378
Loan portfolio, net (1) ..................... 90,698 69,550 91,888 28,815 280,951
Discount loan portfolio, net ................ 104,066 420,111 356,809 540,520 1,421,506
---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets ............... 474,158 864,230 638,752 898,207 2,875,347
---------- ---------- ---------- ---------- ----------
Rate-Sensitive Liabilities:
NOW and money market checking deposits ...... 6,932 2,211 4,396 8,097 21,636
Savings deposits ............................ 81 217 428 789 1,515
Certificates of deposit ..................... 228,083 814,311 613,518 285,012 1,940,924
---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits ........... 235,096 816,739 618,342 293,898 1,964,075
Securities sold under agreements
to repurchase ............................. 133,970 -- -- -- 133,970
Obligations outstanding under lines of
credit .................................... 321,457 -- -- -- 321,457
Notes, debentures and other interest bearing
obligations ............................... 469 -- -- 225,000 225,469
---------- ---------- ---------- ---------- ----------
Total rate-sensitive liabilities .......... 690,992 816,739 618,342 518,898 2,644,971
Interest rate sensitivity gap before
off-balance sheet financial instruments ... (216,834) 47,491 20,410 379,309 230,376
Off-Balance Sheet Financial Instruments:
Futures contracts and interest rate swap .... 91,073 (33,782) (19,061) (38,230) --
---------- ---------- ---------- ---------- ----------
Interest rate sensitivity gap .................. (125,761) 13,709 1,349 341,079 $ 230,376
---------- ---------- ---------- ---------- ==========
Cumulative interest rate sensitivity gap ....... $ (125,761) $ (112,052) $ (110,703) $ 230,376
========== ========== ========== ==========
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets ... (4.37)% (3.90)% (3.85)% 8.01%
</TABLE>
(1) Balances have not been reduced for non-performing loans.
46
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, and as required by OTS regulations, the Asset/Liability Committee also
regularly reviews interest rate risk by forecasting the impact of alternative
interest rate environments on net interest income and market value of portfolio
equity ("MVPE"), which is defined as the net present value of an institution's
existing assets, liabilities and off-balance sheet instruments, and evaluating
such impacts against the maximum potential changes in net interest income and
MVPE that is authorized by the Board of Directors of the Bank.
The following table sets forth at June 30, 1998 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 2.07% (38.77)%
+300 3.02 (27.40)
+200 3.40 (15.69)
+100 1.87 (4.23)
0 -- --
-100 (2.87) (3.31)
-200 (7.05) 0.42
-300 (8.62) 7.95
-400 (10.47) 15.88
The negative estimated changes in MVPE for a -100 changes in interest
rates is attributable to the Company's sensitivity to decreases in interest
rates. Such sensitivity stems primarily from the Company's historical
investments in IOs. IOs 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 IOs, 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. Similar
interest rate sensitivity also applies to the subordinate and residual
securities which the Company retains from its securitizations.
As discussed herein, on July 27, 1998 the Company sold its portfolio of
IOs. The following table sets forth at June 30, 1998 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 the IOs were sold
and funds from the sale held as interest-bearing cash, and 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 6.91% (24.28)%
+300 5.95 (18.52)
+200 4.44 (12.62)
+100 2.44 (6.19)
0 -- --
-100 (2.82) 5.40
-200 (5.98) 11.24
-300 (9.46) 17.61
-400 (13.21) 24.45
47
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
See "Results of Operations-Interest Income", and "Changes in Financial
Condition-Securities Available for Sale."
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, lines of
credit and maturities and principal payments on loans and securities and
proceeds from sales thereof. An additional significant source of asset liquidity
stems from the Company's ability to securitize assets such as discount loans and
subprime loans.
Sources of liquidity include certificates of deposit obtained primarily
from wholesale sources. At June 30, 1998 the Company had $1.94 billion of
certificates of deposit, including $1.48 billion of brokered certificates of
deposit obtained through national investment banking firms, all of which are
non-cancelable. At the same date scheduled maturities of certificates of deposit
during the 12 months ending June 30, 1999 and 2000 and thereafter amounted to
$1.04 billion, $353.7 million and $544.8 million, respectively. Brokered and
other wholesale deposits generally are more responsive to changes in interest
rates than core deposits and, thus, are more likely to be withdrawn from the
Company upon maturity as changes in interest rates and other factors are
perceived by investors to make other investments more attractive. Management of
the Company believes that it can adjust the rates paid on certificates of
deposit to retain deposits in changing interest rate environments, and that
brokered and other wholesale deposits can be both a relatively cost-effective
and stable source of funds. There can be no assurance that this will continue to
be the case in the future, however.
Sources of borrowings include FHLB advances, which are required to be
secured by single family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. At June 30, 1998, the
Company was eligible to borrow up to an aggregate of $658.7 million from the
FHLB of New York (subject to the availability of acceptable collateral) and had
$75.7 million of single family residential loans, $10.3 million of multi-family
residential loans and $2.8 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 $232.2 million of unencumbered mortgage-related securities which could be
used to secure such borrowings. At present, the Company has no outstanding FHLB
advances due to the availability of other less costly sources of funding, a
circumstance which the Company evaluates on a regular basis.
The liquidity of the Company at June 30, 1998 includes lines of credit
obtained by OFS subsequent to its assumption of the subprime lending activities
of the Bank and of the acquisition of substantially all of the assets of
Admiral, as follows: (i) a $200 million secured line of credit from Morgan
Stanley Mortgage Capital Inc., of which $100 million was committed, (ii) a $50
million secured line of credit from Texas Commerce Bank National Association,
(iii) a $200 million secured line of credit from Merrill Lynch, of which $100
million was committed, and (iv) a $350 million secured line of credit from
Lehman Commercial Paper, Inc., of which $100 million was committed. An aggregate
of $224.2 million was outstanding to OFS under these lines of credit at June 30,
1998, which have interest rates which float in accordance with a designated
prime rate. In addition, the company has provided a $30.0 million unsecured,
subordinated credit facility to OFS, of which $30 million was outstanding at
June 30, 1998. At present OFS intends to continue to seek appropriate leverage
with respect to its underlying business, and thus, will seek additional lines of
credit as its assets warrant.
In connection with the Company's acquisition of substantially all of
the assets of Cityscape UK, Ocwen UK entered into a Loan Facility Agreement with
Greenwich International Ltd. ("Greenwich") under which Greenwich
48
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
provided a short term facility to finance the acquisition of Cityscape UK's
mortgage loan portfolio (the "Term Loan") and to finance Ocwen UK's further
originations and purchase of subprime mortgage loans (the "Revolving Facility"),
(collectively the "Greenwich Facility"). The Greenwich Facility is secured by
Ocwen UK's loans available for sale. The Revolving Facility is set at a maximum
of $166.8 million ((British pound)100 million) of which $26.9 million ((British
pound)16.1 million) was funded as of June 30, 1998 to finance subprime mortgage
loan originations and bears interest at a rate of the 1-month LIBOR plus 1.50%.
In April 1998, the Term Loan amounting to $380.3 million ((British pound)225.3
million) bearing interest at a rate of LIBOR plus 1.50% was obtained to finance
the Cityscape UK acquisition. During the quarter ended June 30, 1998, $343.4
million ((British pound)205.9 million) of the Term Loan was repaid and $32.6
million ((British pound)19.4 million) remains outstanding at June 30, 1998.
The Company believes that its existing sources of liquidity, including
internally generated funds, will be adequate to fund planned activities for the
foreseeable future, although there can be no assurances in this regard.
Moreover, the Company continues to evaluate other sources of liquidity, such as
lines of credit from unaffiliated parties, which will enhance the management of
its liquidity and the costs thereof.
The Company's operating activities used cash flows of $120.2 million
and provided cash flows of $128.4 million during the six months ended June 30,
1998 and 1997, 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 $248.2
million and $220.1 million during the six months ended June 30, 1998 and 1997,
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 $390.2 million and $266.2
million during the six months ended June 30, 1998 and 1997, respectively. During
the foregoing periods, cash flows from financing activities were provided
primarily by proceeds from the issuance of obligations under lines of credit 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 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet applicable liquidity requirements. The Bank's
liquidity, as measured for regulatory purposes, averaged 6.30% during the six
months ended June 30, 1998.
Management of the Company believes that the Bank's ability to make
capital distributions as a Tier 1 association pursuant to the OTS capital
distribution regulation are limited by the regulatory capital levels which it
has committed to the OTS it would maintain, commencing on June 30, 1997. As a
result of an agreement between the Bank and the OTS to dividend subordinate and
residual mortgage-related securities resulting from securitization activities
conducted by the Bank, which had an aggregate carrying value of $22.6 million at
June 30, 1998, the Bank may be limited in its ability to pay cash dividends to
the Company. See "Regulatory Capital Requirements" below.
At June 30, 1998, the Company had $143.6 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 1998. See Note 9 to the Interim Consolidated
Financial Statements included in Item 1 hereof.
49
<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 and foreign currency risks. See "Asset and Liability
Management" above and Note 6 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 institutions 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.
In addition to regulatory capital requirements of general applicability, a
federally-chartered savings association such as the Bank may be required to meet
individual minimum capital requirements established by the OTS on a case-by-case
basis upon a determination that a savings association's capital is or may become
inadequate in view of its circumstances.
In connection with an examination of the Bank in late 1996 and early
1997, the staff of the OTS expressed concern about many of the Bank's
non-traditional operations, which generally are deemed by the OTS to involve
higher risk, certain of the Bank's accounting policies and the adequacy of the
Bank's capital in light of the Bank's lending and investment strategies. The
activities which were of concern to the OTS included the Bank's subprime single
family residential lending activities, the Bank's origination of acquisition,
development and construction loans with terms which provide for shared
participation in the results of the underlying real estate, the Bank's discount
loan activities, which involve significantly higher investment in nonperforming
and classified assets than the majority of the savings and loan industry, and
the Bank's investment in subordinated classes of mortgage-related securities
issued in connection with the Bank's asset securitization activities and
otherwise.
Following the above-referenced examination, the Bank committed to the
OTS to maintain a core capital (leverage) ratio and a total risk-based capital
ratio of at least 9% and 13%, respectively. The Bank continues to be in
compliance with this commitment as well as the regulatory capital requirements
of general applicability, as indicated in Note 8 to the Interim Consolidated
Financial Statements included in Item 1. Based on discussions with the OTS, the
Bank believes that this commitment does not affect its status as a
"well-capitalized" institution, assuming the Bank's continued compliance with
the regulatory capital requirements required to be maintained by it pursuant to
such commitment.
Although the above individual regulatory capital requirements have been
agreed to by the OTS, there can be no assurance that in the future the OTS will
agree to a decrease in such requirements or will not seek to increase such
requirements or will not impose these or other individual regulatory capital
requirements in a manner which affects the Bank's status as a "well-capitalized"
institution under applicable laws and regulations.
RECENT ACCOUNTING DEVELOPMENTS
For information relating to the effects on the Company of the adoption
of recent accounting standards see Note 2 to the Interim Consolidated Financial
Statements included in Item 1 hereof.
YEAR 2000 DATE CONVERSION
The Company is in the process of coordinating the further
identification, evaluation, and implementation of changes to computer systems
and applications necessary to achieve a year 2000 date conversion with no effect
on customers or disruption to business operations. These actions are necessary
to ensure that the systems and applications will recognize and process the year
2000 and beyond. Major areas of potential business impact have been identified
and dimensioned, and initial conversion efforts are underway. The Company also
is communicating with customers, financial institutions and others with which it
does business to identify and coordinate year 2000 conversion issues. The
Company expects its year 2000 conversion will be completed on a timely basis.
The cost of achieving year 2000 compliance, which will be
50
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
largely incurred through 1998, is estimated to be approximately $1.5 million,
and will be charged to expense as incurred.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT, AND CERTAIN STATEMENTS
CONTAINED IN FUTURE FILINGS BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION (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. THESE 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(S) OR BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "ANTICIPATE," "BELIEVE," "COMMITMENT," "CONSIDER,"
"CONTINUE," "COULD," "ENCOURAGE," "ESTIMATE," "EXPECT," "INTEND," "MAY," "PLAN,"
"PRESENT," "PROPOSE," "PROSPECT," "WILL," FUTURE OR CONDITIONAL VERB TENSES,
SIMILAR TERMS, VARIATIONS ON SUCH TERMS OR NEGATIVES OF SUCH TERMS. ALTHOUGH THE
COMPANY BELIEVES THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, IT CAN GIVE NO
ASSURANCE THAT THOSE RESULTS OR EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH STATEMENTS DUE TO RISKS,
UNCERTAINTIES AND CHANGES WITH RESPECT TO A VARIETY OF FACTORS, INCLUDING, BUT
NOT LIMITED TO, INTERNATIONAL, NATIONAL, REGIONAL OR LOCAL ECONOMIC ENVIRONMENTS
(PARTICULARLY IN THE MARKET AREAS WHERE THE COMPANY OPERATES), GOVERNMENT FISCAL
AND MONETARY POLICIES (PARTICULARLY IN THE MARKET AREAS WHERE THE COMPANY
OPERATES), PREVAILING INTEREST OR CURRENCY EXCHANGE RATES, GOVERNMENT
REGULATIONS AFFECTING FINANCIAL INSTITUTIONS OR REAL ESTATE INVESTMENT TRUSTS
(INCLUDING REGULATORY FEES, CAPITAL REQUIREMENTS AND TAXATION), COMPETITIVE
PRODUCTS AND PRICING, CREDIT, PREPAYMENT, BASIS AND ASSET/LIABILITY RISKS, LOAN
SERVICING EFFECTIVENESS, THE COURSE OF NEGOTIATIONS AND THE ABILITY TO REACH
AGREEMENT WITH RESPECT TO THE MATERIAL TERMS OF ANY PARTICULAR TRANSACTION,
SATISFACTORY DUE DILIGENCE RESULTS, SATISFACTION OR FULFILLMENT OF AGREED UPON
TERMS AND CONDITIONS OF CLOSING OR PERFORMANCE, THE TIMING OF TRANSACTION
CLOSINGS, ACQUISITIONS AND THE INTEGRATION OF ACQUIRED BUSINESSES, SOFTWARE
INTEGRATION, DEVELOPMENT AND LICENSING, THE FINANCIAL AND SECURITIES MARKETS,
THE AVAILABILITY OF AND COSTS ASSOCIATED WITH OBTAINING ADEQUATE AND TIMELY
SOURCES OF LIQUIDITY, DEPENDENCE ON EXISTING SOURCES OF FUNDING, AVAILABILITY OF
DISCOUNT LOANS FOR PURCHASE, THE SIZE AND NATURE OF THE SECONDARY MARKET FOR
MORTGAGE LOANS AND THE MARKET FOR SECURITIZATIONS, GEOGRAPHIC CONCENTRATIONS OF
ASSETS (TEMPORARY OR OTHERWISE), OTHER FACTORS GENERALLY UNDERSTOOD TO AFFECT
THE REAL ESTATE ACQUISITION, MORTGAGE AND LEASING MARKETS AND SECURITIES
INVESTMENTS, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S REPORTS
AND FILINGS WITH THE SEC, INCLUDING ITS REGISTRATION STATEMENTS ON FORM S-1 AND
PERIODIC REPORTS ON FORMS 10-Q, 8-K AND 10-K. THE COMPANY DOES NOT UNDERTAKE,
AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULT(S) 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by this Item appears under the caption "Asset and
Liability Management" included in Item 2 hereof and Note 6 to the Interim
Consolidated Financial Statements included in Item 1 hereof, and is incorporated
herein by reference.
51
<PAGE>
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May 13, 1998, the
following individuals were elected to the Board of Directors:
Votes for Votes Withheld
------------- ------------------
William C. Erbey...................... 44,996,962 37,879
Thomas F. Lewis....................... 44,968,192 66,649
W. C. Martin.......................... 45,002,966 31,875
Howard H. Simon....................... 45,001,966 32,875
Barry N. Wish......................... 45,001,656 33,185
The following proposals were approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Votes Broker
Votes for Against Abstentions Non-Votes
----------- ------- ----------- ---------
<S> <C> <C> <C> <C>
To adopt the Ocwen Financial Corporation 1998 Annual
Incentive Plan.......................................... 39,333,233 268,385 514,071 4,919,152
To adopt the Ocwen Financial Corporation long-term
Incentive Plan.......................................... 38,515,938 569,322 1,030,429 4,919,152
To ratify the appointment by the Board of Directors of
Price Waterhouse LLP as the independent auditors of the
Company for the fiscal year ending December 31, 1998.... 44,990,745 2,506 41,590 --
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C>
(a) Exhibits.
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (1)
4.0 Form of Certificate of Common Stock (1)
4.1 Form of Indenture between the Company and Bank One, Columbus, NA as
Trustee (1)
4.2 Form of Note due 2003 (included in Exhibit 4.1) (1)
4.3 Certificate of Trust of Ocwen Capital Trust I (3)
4.4 Amended and Restated Declaration of Trust of Ocwen Capital Trust I
(3)
4.5 Form of Capital Security of Ocwen Capital Trust I (4)
4.6 Form of Indenture relating to 10 7/8% Junior Subordinated
Debentures due 2027 of the Company (3)
4.7 Form of 10 7/8% Junior Subordinated Debentures due 2027 of the
Company (4)
4.8 Form of Guarantee of the Company relating to the Capital Securities
of Ocwen Capital Trust I (3)
4.9 Form of Indenture between the Bank and The Bank of New York as
Trustee
4.10 Form of Subordinated Debentures due 2005 (5)
10.1 Ocwen Financial Corporation 1991 Non-Qualified Stock Option Plan,
as amended (1)
10.2 Ocwen Financial Corporation 1996 Stock Plan for Directors, as
amended (2)
10.3 Ocwen Financial Corporation 1998 Annual Incentive Plan (6)
10.4 Ocwen Financial Corporation Long-Term Incentive Plan (6)
10.5 Agreement for the Sale and Purchase of the Business of City
Mortgage Corporation Limited and its Subsidiaries and the Entire
Issued Share Capital of City Mortgage Receivables 7 PLC (7)
10.6 Loan Facility Agreement between Ocwen Limited, Greenwich
International, LTD, and Ocwen Financial Corporation (8)
10.7 Form of Master Repurchase Agreement Governing Purchases and Sales
of Mortgage Loans between Lehman Commercial Paper, Inc., and Ocwen
Financial Services, Inc. (8)
27.1 Financial Data Schedule for the three months ended June 30, 1998
</TABLE>
- ----------------------
(1) Incorporated by reference to the similarly described exhibit filed in
connection with the Company's Registration Statement on Form S-1 File No.
333-5153, as amended, declared effective by the Securities and Exchange
Commission ("Commission") on September 25, 1996.
(2) Incorporated by reference to the similarly described exhibit filed with
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996.
(3) 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.
(4) Incorporated by reference to similarly described exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
(5) Incorporated by reference to the similarly described exhibit filed by the
Bank in connection with Amendment No.2 to Offering Circular on Form OC (on
Form S-1) filed on June 7, 1995.
(6) Incorporated by reference to the similarly described exhibit to the
Company's Definitive Proxy Statement with respect to the Company's 1998
Annual Meeting as filed with the Commission on March 31, 1998.
(7) Incorporated by reference to the similarly described exhibit filed with
Cityscape Financial Corporation's Form 8-K, as filed with the Commission
on April 4, 1998.
(8) Incorporated by reference to the similarly described exhibit filed with
the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998.
52
<PAGE>
(b) Reports on Form 8-K.
(1) A Form 8-K was filed by the Company on April 7, 1998 which
contained a news release announcing an agreement to acquire
substantially all of the assets of Cityscape UK.
(2) A Form 8-K was filed by the Company on May 12, 1998 which contained
a news release announcing its financial results for the three
months ended March 31, 1998.
(3) A Form 8-K was filed by the Company on July 2, 1998 which contained
a news release announcing the completion of its first
securitization of UK subprime loans.
(4) A Form 8-K was filed by the Company on July 30, 1998 which
contained a news release announcing its second quarter 1998
results, the write-down and sale of its IO portfolio and its
decision to explore strategic alliance.
(5) A Form 8-K was filed by the Company on July 31, 1998 which
contained a news release expanding on its strategic alliance
rationale.
53
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
OCWEN FINANCIAL CORPORATION
By: /s/ MARK S. ZEIDMAN
---------------------------------------
Mark S. Zeidman,
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as its principal financial officer)
Date: August 14, 1998
54
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OCWEN
FINANCIAL CORPORATION'S CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND
STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000873860
<NAME> OCWEN FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 16,160
<INT-BEARING-DEPOSITS> 19,870
<FED-FUNDS-SOLD> 138,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 589,283
<INVESTMENTS-CARRYING> 87,378
<INVESTMENTS-MARKET> 87,378
<LOANS> 2,040,816 <F1>
<ALLOWANCE> 26,991 <F2>
<TOTAL-ASSETS> 3,505,579
<DEPOSITS> 2,144,377
<SHORT-TERM> 455,427 <F3>
<LIABILITIES-OTHER> 126,873
<LONG-TERM> 225,649
0
0
<COMMON> 608
<OTHER-SE> 426,691
<TOTAL-LIABILITIES-AND-EQUITY> 3,505,579
<INTEREST-LOAN> 131,789 <F4>
<INTEREST-INVEST> 10,543
<INTEREST-OTHER> 2,437
<INTEREST-TOTAL> 144,769
<INTEREST-DEPOSIT> 56,522
<INTEREST-EXPENSE> 93,432
<INTEREST-INCOME-NET> 51,337
<LOAN-LOSSES> 11,929
<SECURITIES-GAINS> (21,988)<F5>
<EXPENSE-OTHER> 96,621 <F6>
<INCOME-PRETAX> (21,329)
<INCOME-PRE-EXTRAORDINARY> (21,329)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,554)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.25)
<YIELD-ACTUAL> 9.60
<LOANS-NON> 729,425
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 27,188
<CHARGE-OFFS> 12,264
<RECOVERIES> 139
<ALLOWANCE-CLOSE> 26,991
<ALLOWANCE-DOMESTIC> 26,991
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> Tag 18 includes Loans Available for Sale of $338,359, Loan Portfolio of
$280,951, and Discount Loan Portfolio of $1,421,506.
<F2> Tag 19 includes Allowance for Loan Losses on Loan Portfolio of $4,139,
and on Discount Loan Portfolio of $22,852.
<F3> Tag 22 includes Securities sold under agreements to repurchase of
$133,970, and Obligations outstanding under lines of credit of $321,457.
<F4> Tag 30 includes Interest Income on Loans Available for Sale of $34,794,
Loans of $17,917, and Discount Loans of $79,078.
<F5> Tag 38 includes Gains on sale of securities of $55,657 and an impairment
loss on AAA-rated agency IQs of $77,645.
<F6> Tag 39 includes Non-interest expense of $89,824 and Distributions on
Company-obligated Mandatorily Redeemable Securities of Subsidiary Trust
Holding Solely Junior Subordinated Debentures of the Company of $6,797.
</FN>
</TABLE>
