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 September 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
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(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 November 6,
1998: 60,796,432
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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 September 30, 1998 and December 31, 1997 ..................... 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1998 and 1997 ........................ 4
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1998 and the year
ended December 31, 1997 ......................................... 5
Consolidated Statements of Cash Flows for the nine
months ended September 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 ...... 54
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................ 54
Signature ................................................................ 56
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)
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<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Assets:
Cash and amounts due from depository institutions ............................... $ 22,374 $ 12,243
Interest earning deposits ....................................................... 22,489 140,001
Federal funds sold and repurchase agreements .................................... 213,000 --
Securities available for sale, at market value .................................. 712,850 476,796
Loans available for sale, at lower of cost or market ............................ 337,336 177,041
Investment securities, net ...................................................... 88,430 13,295
Loan portfolio, net ............................................................. 224,741 266,299
Discount loan portfolio, net .................................................... 1,094,590 1,434,176
Investments in low-income housing tax credit interests .......................... 133,682 128,614
Investment in joint ventures .................................................... 1,206 1,056
Real estate owned, net .......................................................... 169,720 167,265
Investment in real estate ....................................................... 17,271 65,972
Premises and equipment, net ..................................................... 41,636 21,542
Income taxes receivable ......................................................... 34,701 --
Deferred tax asset .............................................................. 42,581 45,148
Excess of purchase price over net assets acquired ............................... 34,430 15,560
Principal, interest and dividends receivable .................................... 18,395 17,284
Escrow advances on loans ........................................................ 53,280 47,888
Other assets .................................................................... 128,016 38,985
----------- -----------
$ 3,390,728 $ 3,069,165
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ..................................................................... $ 2,076,537 $ 1,982,822
Securities sold under agreements to repurchase ............................... 60,798 108,250
Obligations outstanding under lines of credit ................................ 333,803 118,304
Notes, debentures and other interest bearing obligations ..................... 225,317 226,975
Accrued interest payable ..................................................... 43,887 32,238
Income taxes payable ......................................................... -- 3,132
Accrued expenses, payables and other liabilities ............................. 80,159 51,709
----------- -----------
Total liabilities .......................................................... 2,820,501 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 ............................................................... 1,136 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; 60,796,432 and
60,565,835 shares issued and outstanding at September 30, 1998 and December
31, 1997, respectively ..................................................... 608 606
Additional paid-in capital ................................................... 166,193 164,751
Retained earnings ............................................................ 268,726 259,349
Unrealized gain (loss) on securities available for sale, net of taxes ........ 11,073 (5,014)
Foreign currency translation adjustment, net of taxes ........................ (2,509) --
----------- -----------
Total stockholders' equity ................................................. 444,091 419,692
----------- -----------
$ 3,390,728 $ 3,069,165
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
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<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
Three Months Nine Months
---------------------------- ----------------------------
For the periods ended September 30, 1998 1997 1998 1997
- ---------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Federal funds sold and repurchase agreements ........... $ 2,508 $ 4,844 $ 4,944 $ 7,296
Securities available for sale .......................... 8,982 8,725 25,655 23,407
Securities held for trading ............................ -- -- -- 248
Loans available for sale ............................... 11,390 4,267 46,185 11,091
Loans .................................................. 13,771 16,425 31,688 37,791
Discount loans ......................................... 50,274 42,370 129,352 116,840
Investment securities and other ........................ 1,617 695 3,633 2,122
------------ ------------ ------------ ------------
88,542 77,326 241,457 198,795
------------ ------------ ------------ ------------
Interest expense:
Deposits ............................................... 31,146 31,057 87,668 92,321
Securities sold under agreements to repurchase ......... 1,168 56 4,869 533
Advances from the Federal Home Loan Bank ............... 6 8 106 436
Obligations outstanding under lines of credit .......... 8,767 2,025 28,390 2,298
Notes, debentures and other interest bearing obligations 6,772 6,798 20,258 20,388
------------ ------------ ------------ ------------
47,859 39,944 141,291 115,976
------------ ------------ ------------ ------------
Net interest income before provision for loan losses ... 40,683 37,382 100,166 82,819
Provision for loan losses ................................ 1,806 4,088 13,734 21,739
------------ ------------ ------------ ------------
Net interest income after provision for loan losses .... 38,877 33,294 86,432 61,080
------------ ------------ ------------ ------------
Non-interest income:
Servicing fees and other charges ....................... 15,348 7,321 39,044 17,510
Gains on interest earning assets, net .................. 24,170 5,999 908 46,142
Gains on real estate owned, net ........................ 1,216 4,793 12,763 8,628
Other income ........................................... 17,123 7,318 33,316 7,898
------------ ------------ ------------ ------------
57,857 25,431 86,031 80,178
------------ ------------ ------------ ------------
Non-interest expense:
Compensation and employee benefits ..................... 32,474 20,471 83,721 55,069
Occupancy and equipment ................................ 9,485 5,029 24,495 11,818
Net operating loss on investments in real estate and
Certain low-income housing tax credit interests ...... 2,696 622 4,988 1,819
Other operating expenses ............................... 20,861 5,097 42,573 16,397
------------ ------------ ------------ ------------
65,516 31,219 155,777 85,103
------------ ------------ ------------ ------------
Distributions on Company-obligated, mandatorily
redeemable securities of subsidiary trust holding
solely junior subordinated debentures .................. 3,398 1,850 10,195 1,850
Equity in earnings of investment in joint venture ........ -- 546 -- 16,220
------------ ------------ ------------ ------------
Income before income taxes ............................. 27,820 26,202 6,491 70,525
Income tax (expense) benefit ............................. (2,922) (6,179) 2,888 (14,911)
Minority interest in net (income) loss of consolidated
subsidiary ............................................. 33 142 (2) 384
------------ ------------ ------------ ------------
Net income ............................................. $ 24,931 $ 20,165 $ 9,377 $ 55,998
============ ============ ============ ============
Income per share:
Basic .................................................. $ 0.41 $ 0.35 $ 0.15 $ 1.02
============ ============ ============ ============
Diluted ................................................ $ 0.41 $ 0.35 $ 0.15 $ 1.01
============ ============ ============ ============
Weighted average common shares outstanding:
Basic .................................................. 60,785,467 57,004,218 60,716,777 54,734,082
============ ============ ============ ============
Diluted ................................................ 61,074,499 57,749,958 61,249,163 55,341,404
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
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<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 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 ..................... -- -- -- -- -- -- 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 income ..................... -- -- -- 9,377 -- -- -- 9,377
Repurchase of common stock
options ..................... -- -- (6,334) -- -- -- -- (6,334)
Exercise of common stock
options ..................... 228,358 2 7,720 -- -- -- -- 7,722
Repurchases of common stock..... (318,311) (3) (7,769) -- -- -- -- (7,772)
Issuance of common stock ....... 320,550 3 7,825 -- -- -- -- 7,828
Change in unrealized gain (loss)
on securities available for
sale, net of taxes........... -- -- -- -- 16,087 -- -- 16,087
Foreign currency translation
adjustment, net of taxes..... -- -- -- -- -- (2,509) -- (2,509)
----------- ------- --------- --------- -------- -------- -------- ---------
Balances at September 30, 1998.. 60,796,432 $ 608 $ 166,193 $ 268,726 $ 11,073 $ (2,509) $ -- $ 444,091
=========== ======= ========= ========= ======== ======== ======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
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<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the nine months ended September 30, 1998 1997
- ------------------------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................................. $ 9,377 $ 55,998
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Net cash provided from trading activities .............................................. 88,164 112,905
Proceeds from sales of loans available for sale ........................................ 1,198,872 301,773
Purchases of loans available for sale .................................................. (778,987) (86,606)
Origination of loans available for sale ................................................ (661,664) (297,254)
Principal payments received on loans available for sale ................................ 70,463 11,975
Premium amortization, net .............................................................. 70,011 33,678
Depreciation and amortization .......................................................... 13,513 13,073
Provision for loan losses .............................................................. 13,734 21,739
Gains on interest earning assets, net .................................................. (908) (46,142)
Provision for real estate owned, net ................................................... 12,561 4,725
Gain on sale of real estate owned, net ................................................. (33,910) (19,637)
Gain on sale of low-income housing tax credit interests ................................ (6,867) (6,298)
(Increase) decrease in principal, interest and dividends receivable .................... (1,111) 1,688
Increase in income taxes receivable .................................................... (37,833) (5,761)
Increase in deferred tax asset ......................................................... (4,102) (8,789)
Increase in escrow advances ............................................................ (5,392) (14,771)
Increase in other assets ............................................................... (119,477) (14,258)
Increase in accrued expenses, interest payable and other liabilities ................... 44,516 9,724
----------- -----------
Net cash (used) provided by operating activities ......................................... (129,040) 67,762
=========== ===========
Cash flows from investing activities:
Proceeds from sales of securities available for sale ................................... 269,828 215,033
Purchases of securities available for sale ............................................. (864,280) (193,244)
Maturities of and principal payments received on securities available for sale ......... 231,554 30,065
Purchase of securities held for investment ............................................. (77,715) (29,920)
Acquisition of subsidiaries ............................................................ (21,477) (6,750)
Purchase of low-income housing tax credit interests .................................... (34,397) (23,525)
Proceeds from sale of low-income housing tax credit interests .......................... 33,828 22,026
Proceeds from sales of discount loans .................................................. 497,650 221,966
Proceeds from sales of loans held for investment ....................................... -- 2,384
Purchase and originations of loans held for investment, net of undisbursed loan funds... (160,046) (103,161)
Purchase of discount loans ............................................................. (730,163) (1,107,494)
Decrease (increase) in real estate held for investment ................................. 48,701 (16,211)
(Increase) decrease in investment in joint ventures .................................... (150) 43,978
Principal payments received on loans held for investment ............................... 202,648 137,699
Principal payments received on discount loans .......................................... 399,065 305,466
Proceeds from sales of real estate owned ............................................... 224,967 130,617
Purchase of real estate owned in connection with discount loan purchases ............... (14,850) (21,963)
Additions to premises and equipment .................................................... (27,635) (9,259)
Other, net ............................................................................. -- 1,636
----------- -----------
Net cash used by investing activities .................................................... (22,472) (400,657)
=========== ===========
(Continued on next page)
6
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<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the nine months ended September 30, 1998 1997
- --------------------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits ......................................................... 93,715 51,210
Decrease in securities sold under agreements to repurchase ................... (47,452) (71,471)
Repayment of notes, debentures and other interest-bearing obligations ........ (1,658) --
Proceeds from issuance of obligations under lines of credit, net of repayments 215,499 142,714
Payments on advances from Federal Home Loan Bank ............................. -- (399)
Repayments of loans made to executive officers ............................... -- 2,133
Exercise of common stock options ............................................. 3,305 1,737
Proceeds from issuance of capital trust securities ........................... -- 125,000
Payment of capital trust securities issuance costs ........................... -- (4,322)
Issuance of shares of common stock, net ...................................... 7,828 141,898
Repurchase of common stock ................................................... (7,772) 0
Repurchase of common stock options ........................................... (6,334) (1,870)
----------- ---------
Net cash provided by financing activities ....................................... 257,131 386,630
----------- ---------
Net increase in cash and cash equivalents ....................................... 105,619 53,735
Cash and cash equivalents at beginning of period ................................ 152,244 52,219
----------- ---------
Cash and cash equivalents at end of period ...................................... $ 257,863 $ 105,954
=========== =========
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions ............................ $ 22,374 $ 15,641
Interest earning deposits .................................................... 22,489 7,469
Federal funds sold and repurchase agreements ................................. 213,000 82,844
----------- ---------
$ 257,863 $ 105,954
=========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................... $ 129,642 $ 105,597
=========== =========
Income taxes ............................................................... $ 34,363 $ 29,461
=========== =========
Supplemental schedule of non-cash investing and financing activities:
Real estate owned acquired through foreclosure ............................... $ 182,574 $ 139,416
=========== =========
Exchange of discount loans and loans available for sale of securities ........ $ 1,668,364 $ 442,442
=========== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
7
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OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 ("OCN" or the "Company") and its subsidiaries. OCN 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"), Ocwen UK plc ("Ocwen UK") and Ocwen Technology Xchange,
Inc. ("OTX"). OCN 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, Norland Capital Group plc, doing
business as Kensington Mortgage Company ("Kensington"), a leading originator of
nonconforming residential mortgages in the UK, have been prepared in accordance
with accounting principles generally accepted in the United Kingdom ("UK GAAP").
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 consolidated financial
statements contain all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the Company's financial condition at
September 30, 1998 and December 31, 1997, the results of its operations for the
three and nine months ended September 30, 1998 and 1997, its cash flows for the
nine months ended September 30, 1998 and 1997, and its changes in stockholders'
equity for the year ended December 31, 1997 and the nine months ended September
30, 1998. The results of operations and other data for the three and nine month
periods ended September 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 September 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 CURRENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." SFAS No. 128 simplifies the standards found in Accounting Principles
Board Opinion ("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 have been restated.
8
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OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 and hedging activities and supersedes and
amends a number of existing standards. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial condition. The gain or loss recognition is determined on the intended
use and resulting designation of the financial instruments as follows:
o Gains or losses on derivative instruments not designated as hedging
instruments are recognized in the period of change in fair value.
o Gains or losses on derivative instruments designated as hedging the
exposure to changes in the fair value of a recognized asset, liability
or firm commitment are recognized in earnings in the period of the fair
value change, together with the offsetting fair value loss or gain on
the hedged item.
o Gains or losses on derivative instruments designated as hedging
exposure to variable cash flows arising from a forecasted transaction
are initially reported, to the extent the fair value change is offset
by the change in the forecasted cash flows, as a component of other
comprehensive income. The portion of the change in fair value in excess
of the offsetting change in forecasted cash flows is reported in
earnings in the period of the change.
o Gains or losses on derivative instruments designated as foreign
currency hedges of net investments in foreign operations are reported
in other comprehensive income as part of the foreign currency
translation adjustment.
SFAS No. 133 precludes the use of nonderivative financial instruments
as hedging instruments, except that nonderivative financial instruments
denominated in a foreign currency may be designated as a hedge of the foreign
currency exposure of an unrecognized firm commitment denominated in a foreign
currency or a net investment in a foreign operation.
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
9
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OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
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.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" as an amendment of SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." SFAS No. 65 establishes
accounting and reporting standards for certain activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise. SFAS No. 65,
as amended by SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", requires that after the
securitization of a mortgage loan held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed security as a trading
security. SFAS No. 134 further amends SFAS No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. SFAS No. 134 conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a nonmortgage banking enterprise.
SFAS No. 134 is effective for the first fiscal quarter beginning after December
15, 1998. Early application is encouraged and is permitted as of October 1998.
The Company adopted SFAS No. 134 effective October 31, 1998 and this will be
reflected in the financial statements of the Company for periods ending
thereafter. The adoption of SFAS No. 134 did not have a material impact on the
Company's financial position or results of operation upon adoption.
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 ((pound)249.6 million) and assumed $34,303 ((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 $13,892
((pound)8.2 million), net of accumulated amortization of $384 ((pound)227,000)
at September 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 for $45,858 ((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 $36,988 ((pound)22.4 million) net of accumulated amortization
of $1,497 ((pound)908,000) at September 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 $7,715, net of accumulated amortization of
10
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
$374 at September 30, 1998, is being amortized on a straight-line basis over a
period of 15 years. DTS is a wholly-owned subsidiary of OTX.
On November 6, 1997, the Company acquired AMOS, Inc. ("AMOS"), a
Connecticut based company engaged primarily in the development of mortgage loan
servicing software. AMOS' products are Microsoft(R) Windows(R) based, have
client/server architecture and feature real-time processing, are designed to be
year 2000 compliant, feature a scaleable database platform and have strong
workflow capabilities. The aggregate purchase price was $9,718, including $4,815
which is contingent on AMOS meeting certain software development performance
criteria. The excess of purchase price over net assets acquired related to this
transaction, which amounted to $5,324, net of accumulated amortization of $296
at September 30, 1998, is being amortized on a straight-line basis over a period
of 15 years. AMOS is a wholly owned subsidiary of OTX.
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 September 30, 1998, the Company's 10% investment, which is accounted
for under the cost method, amounted to $1,206.
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 $16.2 million for
the nine months ended September 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. 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 Nine Months
Ended Ended
September 30, September 30,
1997 1997
-------- --------
(In Thousands)
Interest income ............................. $ 1,264 $ 7,742
Interest expense ............................ -- --
-------- --------
Net interest income ..................... 1,264 7,742
-------- --------
Non-interest income:
Gain (loss) on sale of loans held for sale (187) 17,101
(Loss) gain on real estate owned, net .... (612) 725
Loan fees ................................ -- 23
-------- --------
(799) 17,849
-------- --------
Operating expenses:
Loan servicing fees ...................... 208 1,636
Other loan expenses ...................... 13 14
-------- --------
221 1,650
-------- --------
Net income .................................. $ 244 $ 23,941
======== ========
11
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
In March, 1997, as part of a larger transaction involving the Company
and an affiliate of BlackRock, the LLC securitized 1,196 loans with an unpaid
principal balance of $51,714 and past due interest of $14,209, and a net book
value of $40,454. Proceeds from sales of such securities by the LLC amounted to
$58,866.
NOTE 4 CAPITAL TRUST SECURITIES
In August 1997, Ocwen Capital Trust I, a wholly-owned subsidiary of
OCN, issued $125.0 million of 10 7/8% Capital Trust Securities (the "Capital
Trust Securities"). Proceeds from issuance of the Capital Trust Securities were
invested in 10 7/8% Junior Subordinated Debentures issued by OCN. The Junior
Subordinated Debentures, which represent the sole assets of Ocwen Capital Trust
I, will mature on August 1, 2027.
Holders of the Capital Trust 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 Trust 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 Trust Securities are guaranteed by
the Company to the extent Ocwen Capital Trust I has funds available therefore.
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 Trust 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
Trust Securities will also be deferred and, subject to certain exceptions, the
Company may not, and may not permit any subsidiary of the Company to, (i)
declare or pay any dividends or distributions on, or redeem, purchase, acquire,
or make a liquidation payment with respect to, the Company's capital stock or
(ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities that rank PARI PASSU with or junior to
the Junior Subordinated Debentures. During an extension period, interest on the
Junior Subordinated Debentures will continue to accrue at the rate of 10 7/8%
per annum, compounded semi-annually.
The Junior Subordinated Debentures are redeemable prior to maturity at
the option of the Company, subject to the receipt of any necessary prior
regulatory approval, (i) in whole or in part on or after August 1, 2007 at a
redemption price equal to 105.438% of the principal amount thereof on August 1,
2007 declining ratably on each August 1 thereafter to 100% on or after August 1,
2017, plus accrued interest thereon, or (ii) at any time, in whole (but not in
part), upon the occurrence and continuation of a special event (defined as a tax
event, regulatory capital event or an investment company event) at a redemption
price equal to the greater of (a) 100% of the principal amount thereof or (b)
the sum of the present values of the principal amount and premium payable with
respect to an optional redemption of such Junior Subordinated Debentures on
August 1, 2007, together with scheduled payments of interest from the prepayment
date to August 1, 2007, discounted to the prepayment date on a semi-annual basis
at the adjusted Treasury rate plus accrued interest thereon to the date of
prepayment. The Capital Trust 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 Trust Securities are presented
as a separate caption between liabilities and stockholders' equity in the
consolidated statement of financial
12
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
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 Trust 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 in the future.
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 September 30, 1998 and 1997 amounted to
$16,591 and $31,038, respectively, and for the nine months ended September 30,
1998 and 1997 amounted to $22,955 and $70,445, respectively.
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 September 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>
SEPTEMBER 30, 1998....... 1998 $ 30,730 1-Month 6.18% 5.65% $ (12)
DECEMBER 31, 1997........ 1998 $ 36,860 1-Month 6.18% 5.69% $ (94)
</TABLE>
The 1-month LIBOR was 5.38% and 5.72% on September 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.
13
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
Terms and other information on interest rate futures contracts sold
short were as follows at the dates indicated:
Maturity Notional Principal Fair Value
-------- ------------------ ----------
SEPTEMBER 30, 1998:
U.S. Treasury futures........... 1998 $ 8,900 $ 679
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 in Ocwen UK and Kensington. It is the Company's policy to
periodically adjust the amount of foreign currency derivative contracts it has
entered into in response to changes in its recorded equity investments in these
foreign entities.
The Company has determined that the local currency of its foreign
subsidiary, Ocwen UK and its equity investment in Kensington, 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 statement of financial
condition date and revenues and expenses are translated at average monthly
rates.
On April 22, 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 $46,313 and pay (pound)28.33 million. The fair
value of the currency futures is based on quoted market prices.
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 (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 financial statement
date. On August 6, 1998, the Company sold short foreign currency futures
contracts to further hedge its foreign currency exposure related to its equity
investment in Kensington. Under the terms of the currency futures, the Company
has the right to receive $410 and pay (pounds) 250,000. The fair value of the
currency futures is based on quoted market prices.
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 stockholders' equity.
14
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
The following table sets forth the terms and values of these financial
instruments at September 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 (pound) 27.5 million $ 43,546 1.5835 $ 1,562 $ 3,064
British pound currency
futures 1998 (pound) 250,000 $ 410 1.6394 n/a $ 13
1999 (pound) 28.3 million $ 46,313 1.6394 n/a $ 1,497
</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.
Recently the European Union announced that commencing on January 1,
1999, eleven of the fifteen member countries of the European Union will convert
to a common currency (the "Euro"). At such time transactions will be conducted
using either the Euro or the countries' existing currencies. Although the United
Kingdom is a member of the European Union, it is not one of the participating
countries in the Euro conversion, and the Company currently does not have
transactions or operations in any of the participating countries. At this time,
the Company has determined that the Euro conversion will not have an effect on
the Company's financial condition or results of operations.
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 September 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.
15
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
At September 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 as to components, risk-weightings and other
factors. There are no conditions or events since September 30, 1998 that
management believes have changed the institution's categorization as "well
capitalized."
The following table summarizes the Bank's actual and required
regulatory capital at September 30, 1998:
<TABLE>
<CAPTION>
To Be Well Capital
Minimum Capitalized for Requirements
for Capital Prompt Corrective Committed to
Actual Adequacy Purposes Action Provisions by the Bank
----------------------- ---------------------- --------------------- ------------
Ratio Amount Ratio Amount Ratio Amount Ratio
--------- ---------- --------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Stockholders' equity, and ratio
to total assets .................... 10.22% $ 269,381
Net unrealized loss on certain
available for sale securities ..... (3,096)
Excess mortgage servicing rights
and deferred tax assets ........... (357)
-----------
Tangible capital, and ratio to
adjusted total assets ............. 10.11% $ 265,928 1.50% $ 39,467
=========== =========
Tier 1 (core) capital, and ratio
to adjusted total assets .......... 10.11% $ 265,928 3.00% $ 78,933 5.00% $ 131,555 9.00%
=========== ========= ==========
Tier 1 capital, and ratio to
risk-weighted assets .............. 12.81% $ 265,928 6.00% $ 124,584
=========== ==========
Allowance for loan and lease
losses ............................ 24,055
Subordinated debentures ............. 100,000
-----------
Tier 2 capital ...................... 124,055
Low-level recourse deduction ........ (16,243)
-----------
Total risk-based capital, and
ratio to risk-weighted assets ..... 18.00% $ 373,741 8.00% $ 166,112 10.00% $ 207,640 13.00%
=========== ========= ----------
Total regulatory assets ............. $ 2,634,559
===========
Adjusted total assets ............... $ 2,631,106
===========
Risk-weighted assets ................ $ 2,076,398
===========
</TABLE>
The OTS has promulgated a regulation governing capital distributions.
The Bank is considered to be a Tier 1 association under this regulation because
it met or exceeded its fully phased-in capital requirements at September 30,
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 a committment by it to the
OTS to maintain specified capital levels and to dividend to OCN subordinate
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 than lending activities historically emphasized by savings
institutions, 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.
16
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
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 September 30, 1998 the Company had commitments to (i) purchase
$11,671 of discount loans secured by single family residential properties, (ii)
originate $121,636 of subprime loans secured by single family residential
properties, (iii) fund $32,064 of loans secured by multi-family residential
buildings, (iv) fund $2,535 of loans secured by office buildings and (v) fund
$370 of loans secured by hotel properties. In addition, the Company through the
Bank had commitments under outstanding letters of credit in the amount of
$15,965 at September 30, 1998. The Company, through its investment in
subordinate securities and residuals which had a book value of $206,895 at
September 30, 1998, supports senior classes of mortgage-related securities
having an outstanding principal balance of $3,693,331.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
GENERAL
The Company's primary business activities consist of its single family
residential, multi-family residential, small commercial and large commercial
discount loan acquisition and resolution activities, servicing of residential
and commercial mortgage loans for others, lending, investments in a variety of
mortgage-related securities 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 (v) the volume and frequency of
securities 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 September 30, 1998, the significant subsidiaries of the Company,
other than the Bank, were IMI, OFS, Ocwen Capital Trust I, Ocwen UK and OTX. As
of September 30, 1998, IMI owns subordinate and residual mortgage backed
securities, 8.12% 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 OCN, was
formed for the express purpose of issuing $125.0 million of 10 7/8% Capital
Trust Securities, the proceeds of which were invested in 10 7/8% Junior
Subordinated Debentures issued by OCN.
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 SEPTEMBER 30, 1998
On July 27, 1998, the Company sold its entire portfolio of AAA-rated
agency interest-only securities ("IOs") at a book value of $137.5 million. 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 September 17, 1998, OCN completed the securitization of 2,706 single
family residential mortgage discount loans with an aggregate unpaid principal
balance of $172.9 million. OCN recorded a net gain of $19.2 million on the sale
of the senior classes of securities in connection with this transaction, of
which $7.1 million was received by OCN. OCN continues to service the loans for a
fee and has retained an interest in the related subordinate security valued at
$12.1 million.
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
On September 29, 1998, OCN completed the securitization of 2,205
subprime single family residential mortgage loans with an aggregate unpaid
principal balance of $261.6 million. OCN recorded a net gain of $13.3 million on
the sale of the senior classes of securities in connection with this
transaction, none of which represented cash received by OCN. OCN continues to
service the loans for a fee and has retained an interest in the related residual
security valued at $18.3 million.
For the three months ended September 30, 1998, OCN purchased discount
loans with a total unpaid principal balance of $173.5 million. Combined
purchases and originations of subprime single family loans for the same period
amounted to $278.4 billion of unpaid principal balance of which the US dollar
equivalent of $88.0 million were originated by Ocwen UK.
On September 30, 1998, OCN filed a $250.0 million shelf registration
statement with the Securities and Exchange Commission ("SEC") which allows for
the issuance of up to $250.0 million of common and preferred stock, capital
trust securities, senior and subordinated debt and other securities. At present,
OCN does not have an intention to issue any security thereunder.
RECENT DEVELOPMENTS
In recent months, OCN started to see increasing evidence of slowing
economic growth which may become an economic downturn within the United States
in the foreseeable future. In anticipation of these events, OCN is taking the
following actions:
o Refocusing its resources on its core competencies, namely the
acquisition and management of servicing-intensive assets and the
development of exportable loan-servicing technology for the mortgage
and real estate industries;
o Eliminating approximately 200 positions since August 1998, including
laying off approximately 150 employees with the objective of reducing
OCN's operating expenses and efficiency ratio (the majority of these
positions were related to OCN's discontinuation of its subprime
domestic retail broker network);
o Increasing its liquidity position to maximize OCN's ability to
capitalize upon opportunities that an economic downturn will present;
o Reducing OCN's reliance on gain on sale accounting (for example, OCN
currently anticipates effecting only one US and one UK subprime
securitization during the fourth quarter of 1998).
OCN believes that its core businesses and philosophies of managing
servicing intensive assets, developing advanced technology for the mortgage and
real estate industries and identifying opportunistic investments are
counter-cyclical in nature and that OCN can benefit from an economic downturn.
Additionally, OCN is currently analyzing possible strategic
alternatives with respect to its subprime domestic wholesale operations.
The Company's recent decision to increase its liquidity in order to
improve its ability to capitalize on opportunities that an economic downturn may
present is likely to have a negative impact on the Company's near term return on
assets and return on equity. Whether this impact will be material, when it will
evidence itself and what will be the duration of such an impact is dependent on
a variety of factors, including, but not limited to, the magnitude by which the
Company increases its liquidity and the duration of the period in which the
Company maintains versus invests liquid assets rather than investment assets.
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 September 30,
----------------------------------------------
1998 1997 Change %
------------ ------------ ------------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C>
Net interest income.................................. $ 40,683 $ 37,382 9
Provision for loan losses............................ (1,806) (4,088) (56)
Non-interest income.................................. 57,857 25,431 128
Non-interest expense................................. (65,516) (31,219) 110
Distributions on Capital Trust Securities............ (3,398) (1,850) 84
Equity in earnings of investment in joint ventures... -- 546 (100)
Income tax expense................................... (2,922) (6,179) (53)
Minority interest.................................... 33 142 (77)
------------ ------------
Net income........................................... $ 24,931 $ 20,165 24
============ ============
PER COMMON SHARE (1):
Income per share:
Basic............................................. $ 0.41 $ 0.35 17
Diluted........................................... 0.41 0.35 17
Stock price:
High ............................................. $ 27.50 $ 22.38 23
Low .............................................. 8.75 16.06 (46)
Close............................................. 8.75 21.06 (59)
AVERAGE BALANCES
Interest-earning assets.............................. $ 2,966,091 $ 2,423,833 22
Interest-bearing liabilities......................... 2,702,114 2,362,201 14
Stockholders' equity................................. 422,898 304,770 39
KEY RATIOS
Interest rate spread:
Yield on interest-earning assets.................. 11.94% 12.76% (6)
Cost of interest-bearing liabilities.............. 7.08 6.76 5
Interest rate spread.............................. 4.86 6.00 (19)
Annualized return on average assets (2).............. 2.74 2.78 (1)
Annualized return on average equity.................. 23.58 26.47 (11)
Efficiency ratio(4).................................. 66.49 49.27 (35)
Core (leverage) capital ratio........................ 10.11 10.48 (4)
Risk-based capital ratio............................. 18.00 13.99 29
20
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
At or For the Three Months Ended September 30,
----------------------------------------------
1998 1997 Change %
------------ ------------ ------------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C>
FOR THE PERIOD:
Net interest income.................................. $ 100,166 $ 82,819 21
Provision for loan losses............................ (13,734) (21,739) (37)
Non-interest income.................................. 86,031 80,178 7
Non-interest expense................................. (155,777) (85,103) 83
Distributions on Capital Trust Securities............ (10,195) (1,850) 451
Equity in earnings of investment in joint ventures... -- 16,220 (100)
Income tax benefit (expense) ........................ 2,888 (14,911) 119
Minority interest.................................... (2) 384 (101)
------------ -----------
Net income........................................... $ 9,377 $ 55,998 (83)
============ ===========
PER COMMON SHARE (1):
Income per share:
Basic.............................................. $ 0.15 $ 1.02 (85)
Diluted............................................ 0.15 1.01 (85)
Stock Price:
High............................................... $ 30.38 $ 22.38 36
Low................................................ 8.75 12.63 (31)
Close.............................................. 8.75 21.06 (59)
AVERAGE BALANCES:
Interest-earning assets.............................. $ 3,008,093 $ 2,308,516 30
Interest-bearing liabilities......................... 2,780,923 2,322,348 20
Stockholders' equity................................. 427,810 250,077 71
KEY RATIOS:
Interest rate spread:
Yield on interest-earning assets................... 10.70% 11.48% (7)
Cost of interest-bearing liabilities............... 6.77 6.66 2
Interest rate spread............................... 3.93 4.82 (18)
Annualized return on average assets (2)(3)........... 0.34 2.72 (88)
Annualized return on average equity (3).............. 2.92 29.86 (90)
Efficiency ratio (4)................................. 83.66 47.49 76
Core (leverage) capital ratio........................ 10.11 10.48 (4)
Risk-based capital ratio............................. 18.00 13.99 29
</TABLE>
(1) For the periods ended September 30, 1997, retroactively adjusted for the
2-for-1 stock split approved by OCN's Board of Directors on October 29,
1997.
(2) Includes OCN's pro rata share of average assets held by the joint venture
for the three and nine months ended September 30, 1997.
(3) Exclusive of the charge of $77,645 ($62,368 after tax) in the second
quarter of 1998 associated with OCN's IO portfolio, the annualized return
on average assets would have been 3.20% for the nine months ended September
30, 1998 and the annualized return on average equity would have been 27.12%
for the nine months ended September 30, 1998.
(4) Before provision for loan losses, and including equity in earnings of
investment in joint venture for the three and nine months ended September
30, 1997. Exclusive of the $77,645 charge in the second quarter of 1998
associated with OCN's IO portfolio, the efficiency ratio would have been
59.04% for the nine months ended September 30, 1998.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
THIRD QUARTER SUMMARY
The Company recorded net income of $24.9 million for the three months
ended September 30, 1998 as compared to $20.2 million for the three months ended
September 30, 1997. Diluted income per share was $0.41 for the third quarter of
1998 as compared to $0.35 for the third quarter of 1997.
The $3.3 million or 9% increase in net interest income before provision
for loan losses during the third quarter of 1998 as compared to the third
quarter of 1997 is primarily due to a $7.1 million increase in interest income
on loans available for sale and a $7.9 million increase in interest income on
discount loans offset by a $2.7 million decrease in interest income on the loan
portfolio and a $6.7 million increase in interest expense on obligations
outstanding under lines of credit.
The $2.3 million decrease in the provision for loan losses for the
three months ended September 30, 1998 as compared to the same period in 1997 is
due primarily to a decline in the balance of discount loan and loan portfolios.
Non-interest income for the third quarter of 1998 increased by $32.4
million or 128% as compared to the third quarter of 1997 primarily as a result
of an $18.2 million increase in gains on interest earning assets, an $8.0
million increase in servicing fees and other charges and a $9.8 million increase
in other income. The increase in gains on interest earning assets is primarily
due to a $27.1 million increase in net gains earned in connection with the
securitization of loans, offset in part by a $10.9 million charge on certain
available for sale securities. The increase in servicing fees and other charges
reflects an increase in loan servicing and related fees as a result of a 201%
increase in the average balance of loans serviced for others. The $9.8 million
increase in other income is largely the result of $5.0 million of gains on sales
of investments in real estate, the US dollar equivalent of $3.4 million of
income related to the equity in earnings of Kensington and the US dollar
equivalent of $2.9 million of brokerage commissions earned in connection with
Ocwen UK loan originations.
Non-interest expense, which includes $6.0 million and $15.4 million of
operating expenses related to OTX and Ocwen UK, respectively, increased $34.3
million or 110% during the three months ended September 30, 1998 as compared to
the same period in 1997 primarily as a result of (i) a $12.0 million increase in
compensation and benefits, due to a 78% increase in the average number of
employees, (ii) a $4.5 million increase in occupancy and equipment expense, and
(iii) a $15.8 million increase in other operating expenses.
Distributions on the 10 7/8% Capital Trust Securities issued in August
1997 amounted to $3.4 million for the third quarter of 1998 as compared to $1.9
million for the same period in 1997.
Income tax expense was recorded at a rate of 10.5% for the third
quarter of 1998 as compared to 23.6% for the third quarter of 1997. The Company
estimates that its effective tax rate for 1998 will approximate 7.9% before the
use of a net operating loss carry-forward. Such operating loss carry-forward
results in a $3.4 million tax benefit for the nine months ended September 30,
1998.
RESULTS OF OPERATIONS: THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS
THREE AND NINE MONTHS ENDED SEPTEMBER 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 Nine Months
---------------------------- --------------------------------
For the periods ended September 30, 1998 1997 1998 1997
----------- ------------ ----------- ---- -------------
(Dollars in Thousands) Amount % Amount % Amount % Amount %
- -------------------------------------------------------- ------ --- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Discount Loans:
Single family residential loans ..................... 6,056 24 (1,537) (8) 28,575 305 10,787 19
Large commercial real estate loans ................ 11,996 48 10,611 53 25,293 270 20,415 36
Small commercial real estate loans .................. 1,651 7 457 2 7,669 82 1,599 3
Investment in low-income housing tax credits ........... 1,751 7 4,043 20 7,036 75 7,803 14
Commercial real estate lending ......................... 6,928 28 4,045 20 12,246 130 6,113 11
Subprime single family residential lending (1).......... (4,192) (17) (684) (3) (1,828) (19) 60 --
Mortgage loan servicing (2) ............................ 1,582 6 1,473 7 5,710 61 2,581 5
Investment securities .................................. 2,394 10 2,207 11 (69,722) (744) 5,612 10
OTX .................................................... (1,826) (7) -- -- (6,076) (65) -- --
Other .................................................. (1,409) (6) (450) (2) 474 5 1,028 2
-------- --- -------- --- -------- --- -------- ---
$ 24,931 100% $ 20,165 100% $ 9,377 100% $ 55,998 100%
======== === ======== === ======== === ======== ===
</TABLE>
- -------------
(1) Includes the US dollar equivalent of net (loss) income from foreign
operations derived from Ocwen UK of ($2.9) million and $2.9 million for the
three and nine months ended September 30, 1998, respectively. Net (loss)
income for the three and nine months ended September 30, 1998, includes the
US dollar equivalent of ____ and $9.1 million, respectively, of net gains
on securitization.
(2) Includes net income from foreign operations derived from Ocwen UK of
$216,000 and $1.9 million for the three and nine months ended September 30,
1998, respectively.
The Company's discount loan activities include asset acquisition,
servicing and resolution of single family residential, multi-family, 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"). 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
(both in the US and the UK) 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, under-performing and subprime
assets. Investment securities include securities available for sale, trading or
investment, other than 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.
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following is a discussion of the results of operations by business
activity:
o SINGLE FAMILY RESIDENTIAL DISCOUNT LOANS - Net income totaled $6.1 million
for the third quarter of 1998 and a net loss of $1.5 million for the third
quarter of 1997. Included in the third quarter of 1998 is a charge of
approximately $2.0 million on residential subordinate securities and a gain
of $19.2 million earned on the securitization of single family residential
discount mortgage loans with an aggregate unpaid principal balance of
$172.9 million. Of this gain, approximately 37% or $7.1 million was cash.
Asset acquisitions totaled approximately $92.0 million and $386.0 million
for the third quarter of 1998 and 1997, respectively.
o LARGE COMMERCIAL DISCOUNT REAL ESTATE LOANS - Net income increased by $1.4
million or 13% in the third quarter of 1998 to $12 million from the third
quarter of 1997. The increase reflects a gain of $8.5 million earned on the
resolution of four office loans with an unpaid principal balance of $99.0
million. Asset acquisitions in the third quarter of 1998 totaled $43.3
million in unpaid principal balance as compared to $31.9 million in the
third quarter of 1997. Asset acquisitions for the nine months ended
September 30, 1998 and 1997 amounted to $292 million and $242 million,
respectively.
o SMALL COMMERCIAL DISCOUNT REAL ESTATE LOANS - Net income totaled $1.7
million and $457,000 for the third quarter of 1998 and 1997, respectively.
The results for the third quarter of 1998 include a charge of approximately
$1.5 million against certain commercial subordinate securities. Asset
acquisitions in the third quarter of 1998 totaled approximately $38.0
million as compared to $73.0 million in the third quarter of 1997. Asset
acquisitions for the nine months ended September 30, 1998 and 1997 totaled
$125.2 million and $164.1 million, respectively.
o INVESTMENT IN LOW-INCOME HOUSING TAX CREDITS - Net income totaled $1.8
million and $4.0 million for the third quarter of 1998 and 1997
respectively. Net income declined by $2.2 million as a result of a $2.3
million increase in operating losses associated with the real estate and a
decline of $4.0 million associated with the sale of tax credit interests,
offset in part by increases in tax credits and benefits. Low-income housing
tax credits and benefits amounted to $4.6 and $3.8 million for the quarters
ended September 30, 1998 and September 30, 1997, respectively.
o COMMERCIAL REAL ESTATE LENDING - Net income increased by $2.9 million or
71% to $6.9 million in the third quarter of 1998 as compared to the third
quarter of 1997. The increase is primarily attributed to additional
interest received on the payoff of seven loans totaling $7.1 million with
an unpaid principal balance of approximately $65.0 million. The assets of
the division decreased by approximately $160.0 million to $183.4 million
for the nine months ended September 30, 1998 as compared to 1997,
reflecting continuing loan payoffs.
o SUBPRIME SINGLE FAMILY RESIDENTIAL LENDING - The division reported a net
loss of $4.2 million and $684,000 for the third quarter of 1998 and 1997,
respectively. The net loss in the third quarter of 1998 includes a gain of
$13.3 million on the securitization of subprime single family mortgage
loans with an unpaid principal balance of $261.6 million, offset primarily
by a $7.4 million charge on securities available for sale and a write-off
of $2.0 million of goodwill at OFS. The goodwill write-off was recorded in
connection with the decision to close the Company's domestic retail branch
system. During the third quarter of 1998, the Company purchased and
originated single family residential loans to subprime borrowers with an
unpaid principal balance of $278.4 million, of which Ocwen UK originated
the U.S. dollar equivalent of $88.0 million. This compares to a volume of
$194.9 million during the third quarter of 1997.
o MORTGAGE LOAN SERVICING - Net income totaled $1.6 million and $1.5 million
for the third quarter of 1998 and 1997, respectively. Servicing fees
increased by $8.0 million, reflecting an increase in loans serviced for
others from $5.5 billion at December 31, 1997 to $9.96 billion at September
30, 1998. The unpaid principal balance of loans serviced for others
averaged $9.13 billion and $3.03 billion during the third quarter of 1998
and 1997, respectively. The increase in net income was partially offset by
the increase in expenses associated with establishing a nationwide customer
service and collection facility in Orlando, Florida. At September 30, 1998,
the Company serviced 142,847 loans.
o OTX - The subsidiary reported a net loss of $1.8 million for the third
quarter of 1998. The operating loss was partially offset by $1.3 million of
capitalized software costs in the third quarter of 1998. Positive net
earnings from this subsidiary are not anticipated until 1999.
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
NET INTEREST INCOME. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received from its interest-earning assets and the interest
expense paid on its interest-bearing liabilities. Net interest income is
determined by an institution's net interest spread (i.e. the difference between
the yield earned on its interest-earning assets and the rates paid on its
interest-bearing liabilities), the relative amount of interest-earning assets
and interest-bearing liabilities and the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities.
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resultant average yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest rate spread
and net interest margin. Information is based on daily balances during the
indicated periods.
<TABLE>
<CAPTION>
Three months ended September 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 ........ $ 185,765 $ 2,508 5.40% $ 341,868 $ 4,844 5.67%
Securities available for sale (1) ................... 597,261 8,982 6.02 232,957 8,725 14.98
Loans available for sale (2) ........................ 467,449 11,390 9.75 172,053 4,267 9.92
Investment securities and other ..................... 103,379 1,617 6.26 48,018 695 5.79
Loan portfolio (2) .................................. 255,113 13,771 21.59 412,520 16,425 15.93
Discount loan portfolio ............................. 1,357,124 50,274 14.82 1,216,417 42,370 13.93
----------- ----------- ---------- -----------
Total interest-earning assets, interest income ...... 2,966,091 88,542 11.94 2,423,833 77,326 12.76
----------- ----------- -----------
Non-interest earning cash ........................... 53,347 6,061
Allowance for loan losses ........................... (26,844) (25,866)
Investments in low-income housing tax credit interest 138,716 95,399
Investment in joint ventures ........................ 1,132 25,552
Real estate owned, net .............................. 153,474 139,143
Investment in real estate ........................... 22,615 54,181
Other assets ........................................ 335,604 185,211
----------- ----------
Total assets ........................................ $ 3,644,135 $2,903,514
=========== ==========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits .................... $ 50,912 $ 552 4.34% $ 34,521 $ 282 3.27%
Savings deposits .................................... 1,606 9 2.24 1,933 11 2.28
Certificates of deposit ............................. 1,887,969 30,585 6.48 1,964,058 30,764 6.27
----------- ----------- ---------- -----------
Total interest-bearing deposits ..................... 1,940,487 31,146 6.42 2,000,512 31,057 6.21
Notes, debentures and other ......................... 225,397 6,772 12.02 233,717 6,798 11.63
Obligations outstanding under lines of credit ....... 461,316 8,767 7.60 124,341 2,025 6.51
Securities sold under agreements to repurchase ...... 74,495 1,168 6.27 3,075 56 7.28
Federal Home Loan Bank advances ..................... 419 6 5.73 556 8 5.76
----------- ----------- ----- ---------- -----------
Total interest-bearing liabilities, interest expense 2,702,114 47,859 7.08 2,362,201 39,944 6.76
----------- -----------
Non-interest bearing deposits ....................... 951 37,269
Escrow deposits ..................................... 201,221 80,840
Capital Trust Securities ............................ 125,000 68,548
Other liabilities ................................... 191,951 49,886
----------- ----------
Total liabilities ................................... 3,221,237 2,598,744
Stockholders' equity ................................ 422,898 304,770
----------- ----------
Total liabilities and stockholders' equity .......... $ 3,644,135 $2,903,514
=========== ==========
Net interest income before provision for loan losses $ 40,683 $ 37,382
=========== ===========
Net interest rate spread ............................ 4.86% 6.00%
Net interest margin ................................. 5.49% 6.17%
Ratio of interest-earning assets to interest-
Bearing liabilities ............................. 110% 103%
25
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Nine months ended September 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 ......... $ 130,421 $ 4,944 5.05% $ 179,132 $ 7,296 5.43%
Securities available for trading ..................... -- -- -- 4,393 248 7.53
Securities available for sale (1) .................... 571,862 25,655 5.98 293,393 23,407 10.64
Loans available for sale (2) ......................... 601,708 46,185 10.23 142,194 11,091 10.40
Investment securities and other ...................... 82,370 3,633 5.88 33,388 2,122 8.47
Loan portfolio (2) ................................... 273,979 31,688 15.42 427,749 37,791 11.78
Discount loan portfolio .............................. 1,347,753 129,352 12.80 1,228,267 116,840 12.68
----------- ----------- ---------- -----------
Total interest-earning assets, interest income ..... 3,008,093 241,457 10.70 2,308,516 198,795 11.48
----------- -----------
Non-interest earning cash ............................ 31,826 9,872
Allowance for loan losses ............................ (25,632) (21,274)
Investments in low-income housing tax credit interests 128,089 95,525
Investment in joint ventures ......................... 1,081 39,772
Real estate owned, net ............................... 167,346 117,966
Investment in real estate ............................ 46,521 18,060
Other assets ......................................... 271,620 179,456
----------- ----------
Total assets ....................................... $ 3,628,944 $2,747,893
=========== ==========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits ..................... $ 36,901 $ 1,165 4.21% $ 33,940 $ 1,005 3.95%
Savings deposits ..................................... 1,695 29 2.28 2,197 38 2.31
Certificates of deposit .............................. 1,840,767 86,474 6.26 1,986,270 91,278 6.13
----------- ----------- ---------- -----------
Total interest-bearing deposits .................... 1,879,363 87,668 6.22 2,022,407 92,321 6.09
Notes, debentures and other .......................... 225,790 20,258 11.96 230,160 20,388 11.81
Obligations outstanding under lines of credit ........ 556,581 28,390 6.80 46,225 2,298 6.63
Securities sold under agreements to repurchase ....... 116,556 4,869 5.57 12,760 533 5.57
Federal Home Loan Bank advances ...................... 2,633 106 5.37 10,796 436 5.38
----------- ----------- ---------- -----------
Total interest-bearing liabilities, interest expense 2,780,923 141,291 6.77 2,322,348 115,976 6.66
----------- -----------
Non-interest bearing deposits ........................ 14,546 26,986
Escrow deposits ...................................... 151,749 74,853
Capital Trust Securities ............................. 125,000 22,849
Other liabilities .................................... 128,916 50,780
----------- ----------
Total liabilities .................................. 3,201,134 2,497,816
Stockholders' equity ................................. 427,810 250,077
----------- ----------
Total liabilities and stockholders' equity ......... $ 3,628,944 $2,747,893
=========== ==========
Net interest income before provision for loan losses.. $ 100,166 $ 82,819
=========== ==========
Net interest rate spread ............................. 3.93% 4.82%
Net interest margin .................................. 4.44% 4.78%
Ratio of interest-earning assets to interest-bearing
liabilities ........................................ 108% 99%
(1) Excludes effect of unrealized gains or losses on securities available for sale.
(2) The average balances of loans available for sale and loan portfolio include non-performing loans, interest on which is
recognized on a cash basis.
</TABLE>
26
<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 Nine months
-------------------------------- --------------------------------
1998 vs 1997 1998 vs 1997
For the periods ended September 30, -------------------------------- --------------------------------
(Dollars in Thousands) Increase (decrease) due to Increase (decrease) due to
- ---------------------------------------- -------------------------------- --------------------------------
Rate Volume Total Rate Volume Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold and repurchase ....
agreements ........................ $ (219) $ (2,117) $ (2,336) $ (478) $ (1,874) $ (2,352)
Securities held for trading .......... -- -- -- -- (248) (248)
Securities available for sale ........ (7,482) 7,739 257 (24,220) 26,468 2,248
Loans available for sale ............. (76) 7,199 7,123 (453) 35,547 35,094
Loans ................................ 4,767 (7,421) (2,654) 19,511 (25,614) (6,103)
Discount loans ....................... 2,802 5,102 7,904 1,053 11,459 12,512
Investment securities and other ...... 61 861 922 (1,650) 3,161 1,511
-------- -------- -------- -------- -------- --------
Total interest-earning assets ....... (147) 11,363 11,216 (6,237) 48,899 42,662
-------- -------- -------- -------- -------- --------
Interest-Bearing Liabilities:
Interest-bearing demand deposits ..... 110 160 270 69 91 160
Savings deposits ..................... -- (2) (2) -- (9) (9)
Certificate of deposit ............... 1,034 (1,213) (179) 4,420 (9,224) (4,804)
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits ..... 1,144 (1,055) 89 4,489 (9,142) (4,653)
Notes, debentures and other interest-
bearing obligations ............... 220 (246) (26) 503 (633) (130)
Securities sold under agreements to
repurchase ........................ (9) 1,121 1,112 -- 4,336 4,336
Obligations outstanding under lines of
credit ............................ 391 6,351 6,742 61 26,031 26,092
Federal Home Loan Bank advances ...... 1 (3) (2) (1) (329) (330)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities ... 1,747 6,168 7,915 5,052 20,263 25,315
-------- -------- -------- -------- -------- --------
Increase in net interest income ........ $ (1,894) $ 5,195 $ 3,301 $(11,289) $ 28,636 $ 17,347
======== ======== ======== ======== ======== ========
</TABLE>
The Company's net interest income of $40.7 million increased $3.3
million or 9% during the three months ended September 30, 1998 as compared to
the comparable period in the prior year. Interest income increased $11.2 million
or 15% due to a $542.3 million or 22% increase in the Company's average
interest-earning assets, offset by an 82 basis point decline in the weighted
average yield earned. Of the $542.3 million increase in average interest earning
assets, $364.3 million, $295.4 million, and $140.7 million relate to increases
in securities available for sale, loans available for sale and discount loans,
respectively, offset by a $157.4 million decrease in loan portfolio and a $156.1
million decline in federal funds sold and repurchase agreements. Interest
expense increased $7.9 million or 20% due to a $340.0 million or 14% increase in
the Company's average interest-bearing liabilities and a 32 basis point increase
in the weighed average rate paid. Of the $340.0 million net increase in the
average balance of interest-bearing liabilities, $337.0 million and $71.4
million relate to increases in borrowings under lines of credit and securities
sold under agreements to repurchase, respectively, offset by a $60.0 million
decline in total interest-bearing deposits, primarily certificates of deposit.
27
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The Company's net interest income of $100.1 million for the nine months
ended September 30, 1998, increased $17.3 million or 21% as compared to the same
period in the prior year. The increase resulted from a $699.6 million increase
in average interest earning assets, offset by a 78 basis point decline in the
weighted average yield earned and a $458.6 million increase in average
interest-bearing liabilities.
INTEREST INCOME. Interest income on the discount loan portfolio
increased by $7.9 million or 19% in the three months ended September 30, 1998 as
compared to the same period in 1997 primarily as a result of a $140.7 million or
12% increase in the average balance of the discount loan portfolio and an 89
basis point increase in the average yield earned. For the nine months ended
September 30, 1998, and compared to the same period in 1997, interest income on
the discount loan portfolio increased $12.5 million or 11% due to a $119.5
million or 10% increase in the average balance of the discount loan portfolio
and a 12 basis point increase in the 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 loans available for sale increased $7.1 million or
167% during the third quarter of 1998 as compared to the same period in 1997
primarily as a result of a $295.4 million increase in the average balance (of
which the US dollar equivalent of $129.6 million related to Ocwen U.K.) by a 17
basis point decrease in the average yield earned. For the nine months ended
September 30, 1998, interest income on loans available for sale increased $35.1
million or 316% as compared to 1997 due to an increase in the average balance of
loans available for sale of 323% or $459.5 million (of which $188.6 million
related to Ocwen UK), offset in part by a 17 basis point decrease in the average
yield earned.
Interest income on the loan portfolio decreased by $2.7 million or 16%
in the three months ended September 30, 1998 versus the three months ended
September 30, 1997 primarily due to a $157.4 million or 38% decrease in the
average balance of the loan portfolio which was offset in part by a 566 basis
point increase in the average yield earned. For the nine months ended September
30, 1998, interest income on the loan portfolio decreased $6.1 million or 16%
over that of the same period in 1997 as a result of a $153.8 million or 36%
decrease in the average balance of the loan portfolio which was offset in part
by a 364 basis point increase in the average yield earned on the portfolio. The
increases in the average yields earned during 1998 are primarily due to $7.1
million and $11.8 million of additional interest received during the three and
nine months ended September 30, 1998, respectively, in connection with the
payoff of multifamily loans and nonresidential loans secured by hotel and office
buildings, as compared to $5.5 million and $6.4 million during the three and
nine months ended September 30, 1997, respectively.
Interest income on federal funds sold and repurchase agreements
decreased $2.3 million or 48% during the third quarter of 1998 as compared to
the same period in 1997 primarily as a result of a $156.1 million or 46%
decrease in the average balance and a 27 basis point decline in the average
yield earned. Interest income on federal funds sold and repurchase agreements
decreased $2.3 million or 32% during the nine months ended September 30, 1998 as
compared to the same period in 1997 due to a decrease in the average balance of
$48.7 million or 27% and a 38 basis point decline in the average yield earned.
INTEREST EXPENSE. Interest expense of $47.9 million for the third
quarter of 1998 increased by $7.9 million or 20% over the comparable period in
the prior year as a result of a $340.0 million or 14% increase in the average
balance of interest-bearing liabilities. Of the $340.0 million net increase in
the average balance of interest-bearing liabilities, $337.0 million and $71.4
million related to increases in borrowings under lines of credit and securities
sold under agreements to repurchase, respectively, offset by a $60.0 million
decline in total interest-bearing deposits, primarily 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 growth in
subprime single-family residential loans. The average rate paid on
interest-bearing liabilities was 7.08% and 6.76% in the third quarter of 1998
and 1997, respectively. For the nine months ended September 30, 1998, interest
expense amounted to $141.3 million, a $25.3 million or 22% increase over the
same period of the prior year which resulted from a $458.6 million increase in
average interest-bearing liabilities, primarily obligations outstanding under
lines of credit.
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."
28
<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 Nine Months
For the periods ended September 30, ------------------------- -------------------------
(Dollars in Thousands) 1998 1997 1998 1997
- --------------------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Discount loans......................... $ 2,119 $ 4,245 $ 13,603 $ 20,409
Loan portfolio......................... (313) (157) 131 1,330
---------- --------- ---------- ----------
Total............................... $ 1,806 $ 4,088 $ 13,734 $ 21,739
========== ========= ========== ==========
</TABLE>
The decline in the loan loss provision for discount loans during the
three and nine months ended September 30, 1998 as compared to the same periods
in the prior year is due primarily to a decline in the balance of discount
loans. 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 and a decline in the loan portfolio
balance. At September 30, 1998, OCN had allowances for loan losses of $21.1
million and $4.1 million on its discount loan and loan portfolios, respectively,
which amounted to 1.9% and 1.8% of the respective balances. OCN maintained
reserves of 1.6% and 1.4% on its discount loan and loan portfolios,
respectively, at December 31, 1997.
Although management utilizes its best judgment in providing for
possible loan losses, there can be no assurance that the Company will not change
its provisions for possible loan losses in subsequent periods to a higher or
lower 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 Nine Months
For the periods ended September 30, --------------------------- ---------------------------
(Dollars in Thousands) 1998 1997 1998 1997
- ---------------------------------------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Servicing fees and other charges.............. $ 15,348 $ 7,321 $ 39,044 $ 17,510
Gains on interest-earning assets, net......... 24,170 5,999 908 46,142
Gain on real estate owned, net................ 1,216 4,793 12,763 8,628
Other income.................................. 17,123 7,318 33,316 7,898
----------- ------------ ----------- -----------
Total...................................... $ 57,857 $ 25,431 $ 86,031 $ 80,178
=========== ============ =========== ===========
</TABLE>
The $8.0 million and $21.5 million increase in servicing fees and other
charges during the three and nine months ended September 30, 1998, respectively,
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 $9.13 billion and $7.47 billion during the three and nine months
ended September 30, 1998, respectively, as compared to $3.03 billion and $2.52
billion during the three and nine months ended September 30, 1997, respectively.
29
<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 September 30, 1998 (Dollars in Thousands):
<TABLE>
<CAPTION>
Discount Loans Subprime Loans Other Loans Total
----------------------- ----------------------- ----------------------- -----------------------
Number Number Number Number
Amount of Loans Amount of Loans Amount of Loans Amount of Loans
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans securitized (1) .. $1,052,425 17,426 $1,856,505 43,401 $ -- -- $2,908,930 60,827
Loans serviced for third
parties .............. 1,727,330 22,454 4,444,416 56,537 881,622 3,029 7,053,368 82,020
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$2,779,755 39,880 $6,300,921 99,938 $ 881,622 3,029 $9,962,298 142,847
========== ========== ========== ========== ========== ========== ========== ==========
</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 interest-earning assets in the third quarter of 1998 of
$24.2 million were primarily comprised of $32.5 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,
offset by a $10.9 million charge on certain securities available for sale.
Additionally the Company recognized a $1.9 million gain on the sale of small
commercial discount loans and a $1.6 million gain on the sale of large
commercial discount loans. Net gains on interest-earning assets in the third
quarter of 1997 of $6.0 million were primarily comprised of $5.4 million of net
gains in connection with the securitization of single family subprime
residential mortgage loans, as presented in the table below.
Net gains on interest-earning assets of $908,000 for the nine months
ended September 30, 1998 consisted primarily of $88.2 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, offset by $8.5 million and $77.6 million of charges on the portfolio of
AAA-rated agency IOs in the first and second quarter of 1998, respectively.
Gains on 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 securitization) 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.
At present, OCN believes that the fixed income markets are currently
experiencing significant risk aversion with the resulting negative effects on
liquidity and access to capital for specialty finance lenders, including OCN.
These effects include an increased number of distressed whole loan sales and a
limited buyer base in the marketplace which have resulted in widening spreads on
securitizations and significant depression in whole loan pricing. Partially in
reaction thereto, OCN has decided to reduce its reliance on gain on sale
accounting. OCN completed one single family discount and one US single family
subprime securitization during the third quarter of 1998 (see table below), and
currently anticipates effecting one US and one UK single family subprime
securitization during the fourth quarter of 1998.
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
September 30, 1998:
Single family discount................... $ 172,904 2,706 $ 12,056 $ 19,168
Single family subprime................... 261,649 2,205 18,266 13,339
----------- ----------- ----------- -----------
$ 434,553 4,911 $ 30,322 $ 32,507
=========== =========== =========== ===========
Single family discount................... $ -- -- $ -- $ --
Single family subprime................... 102,201 910 6,988 5,377
----------- ----------- ----------- -----------
$ 102,201 910 $ 6,988 $ 5,377
=========== =========== =========== ===========
30
</TABLE>
<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 Nine Months Ended:
September 30, 1998:
Single family discount................... $ 498,798 7,638 $ 32,261 $ 48,085
Single family subprime................... 1,169,566 22,345 89,378 40,079
----------- ----------- ----------- -----------
$ 1,668,364 29,983 $ 121,639 $ 88,164
=========== =========== =========== ===========
September 30, 1997:
Single family discount................... $ 215,396 $ 2,664 $ 9,657 $ 26,700
Single family subprime................... 207,046 1,806 14,120 9,839
----------- ----------- ----------- -----------
$ 442,442 $ 4,470 $ 23,777 $ 36,539
=========== =========== =========== ===========
</TABLE>
The Company's securitization activities result in subordinated and/or
residual securities which the Company retains, which had a carrying value of
$228.5 million at September 30, 1998 and which are included in securities
available for sale at fair value. See "Changes in Financial Condition -
Securities Available for Sale."
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 Nine Months
For the periods ended September 30, ----------------------------- ------------------------------
(Dollars in Thousands) 1998 1997 1998 1997
- ------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gains on sales............................ $ 10,551 $ 9,171 $ 33,909 $ 19,637
Provision for loss in fair value.......... (6,682) (2,478) (12,561) (4,725)
Carrying costs, net....................... (2,653) (1,900) (8,585) (6,284)
----------- ----------- ----------- -----------
Gain on real estate owned, net......... $ 1,216 $ 4,793 $ 12,763 $ 8,628
=========== =========== =========== ===========
</TABLE>
The increase in gains on sales during 1998 is primarily the result of
increased volume. The Company sold 733 and 2,122 properties during the three and
nine months ended September 30, 1998, respectively, as compared to 299 and 1,039
during the three and nine months ended September 30, 1997, respectively.
The provision for loss in fair value for the third quarter of 1998
includes a general provision of $2.9 million as compared to $0 for the third
quarter of 1997. At September 30, 1998 OCN had valuation allowances on real
estate owned of $14.3 million or 8% of the balance as compared to $12.3 million
and 7% at December 31, 1997.
For additional information relating to the Company's real estate owned,
see "Changes in Financial Condition-Real Estate Owned."
Other income of $17.1 million for the third quarter of 1998 includes
$5.0 million of gains on sales of investments in real estate, the U.S. dollar
equivalent of $2.9 million of brokerage commissions earned in connection with
the origination of loans by Ocwen UK, the U.S. dollar equivalent of $3.4 million
of income related to the equity in earnings of Kensington, $2.3 million of gains
recognized in connection with the sale of investments in three low-income
housing tax credit projects and $1.1 million of management fees received from
OAC. Also, included in other income for the nine months ended September 30, 1998
was a $4.7 million gain recognized in connection with the sale of investments in
two low-income housing tax credit projects during the first quarter of 1998 and
$2.9 million of gains on sales of investments in real estate during the second
quarter of 1998. See "Changes in Financial Condition-Investments in Low-Income
Housing Tax Credit Interests."
NON-INTEREST EXPENSE. The following table sets forth the principal
components of the Company's non-interest expense during the periods indicated.
31
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Three Months Nine Months
For the periods ended September 30, ----------------------------- ------------------------------
(Dollars in Thousands) 1998 1997 1998 1997
- ------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Compensation and employee benefits........ $ 32,474 $ 20,471 $ 83,721 $ 55,069
Occupancy and equipment................... 9,485 5,029 24,495 11,818
Net operating loss on investments in real
estate and certain low-income housing
tax credit interests................... 2,696 622 4,988 1,819
Other operating expense................... 20,861 5,097 42,573 16,397
----------- ----------- ----------- -----------
Total.................................. $ 65,516 $ 31,219 $ 155,777 $ 85,103
=========== =========== =========== ===========
</TABLE>
Non-interest expense of $65.5 million for the third quarter of 1998
increased $34.3 million or 110% as compared to the third quarter of 1997 and
includes $15.4 million and $6.0 million related to Ocwen UK and OTX,
respectively.
The increase in compensation and employee benefits during the three and
nine months ended September 30, 1998 reflects an increase in the average number
of employees from 944 and 795 during the three and nine months ended September
30, 1997 to 1,680 and 1,462 during the three and nine months ended September 30,
1998.
The increase in occupancy and equipment expenses during the three and
nine months ended September 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 $15.8 million increase in other operating expenses during the three
months ended September 30, 1998 as compared to the comparable period in the
prior year is due primarily to a $7.2 million increase in loan expenses (of
which the US dollar equivalent of $6.1 million related to Ocwen UK), a $2.3
million increase in professional fees, a $2.5 million increase in amortization
of goodwill which includes a $2.0 million write off of goodwill at OFS and a
$1.8 million increase in marketing expenses.
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 Trust Securities. Cash distributions on the Capital Trust 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 Trust Security. For the three months ended
September 30, 1998, the Company has recorded $3.4 million of distributions to
holders of the Capital Trust 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 nine months ended September 30, 1998. During the third quarter of 1997, the
Company recorded $546,000 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 nine months of 1997 amounted to $16.2
million and consisted primarily of $7.7 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. See Note 3 to the Interim Consolidated
Financial Statements included in Item 1 hereof.
INCOME TAX EXPENSE. Income tax (expense) benefit amounted to $(2.9)
million and $(6.2) million during the third quarter of 1998 and 1997,
respectively, and $2.9 million and $(14.9) million for the first nine months of
1998 and 1997, respectively. The Company's income taxes reflect an expected tax
rate of 7.9% for 1998 before the use of 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 $4.6 million and
$3.8 million for the third quarter of 1998 and 1997, respectively, and $13.6
million and $10.3 million for the nine months ended September 30, 1998 and 1997,
respectively, resulting from investments in low-income housing tax credit
interests. The Company's expected tax rate for the nine months ended September
30, 1998 was based on projected earnings. The Company's actual earnings for 1998
may vary from those projections and accordingly could result in an actual tax
rate for 1998 which differs from the expected rate. No valuation allowance was
required at September 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".
32
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
MINORITY INTEREST. Minority interest in net (income) loss of
consolidated subsidiary represents the earnings 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 September 30, 1998 total assets
increased by $321.6 million or 11%. This increase was primarily due to a $160.3
million increase in the loans available for sale, a $105.6 million increase in
cash and cash equivalents, a $236.1 million increase in securities available for
sale, primarily short duration collateralized mortgage obligations and a $75.1
million increase in investment securities, offset by a $339.6 million decrease
in discount loans. Total liabilities increased by $297.1 million from December
31, 1997 to September 30, 1998 primarily due to a $215.5 million increase in
obligations outstanding under lines of credit and a $93.7 million increase in
deposits, offset by a $47.5 million increase in securities sold under agreements
to repurchase.
SECURITIES AVAILABLE FOR SALE. At September 30, 1998, securities
available for sale amounted to $712.9 million or 21% 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 September 30, 1998 included an aggregate of
$11.1 million of unrealized gains, net of deferred taxes, as compared to $5.0
million of unrealized losses, 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.
September 30, December 31,
1998 1997
--------- ---------
Mortgage-related securities: (Dollars in Thousands)
Single family residential:
CMOs (AAA-rated) ..................... $ 471,620 $ 160,451
Interest-only:
FHLMC .............................. -- 64,745
FNMA ............................... -- 59,715
GNMA ............................... -- 29,766
AAA-rated .......................... -- 13,863
Unrated subordinates ................. 113,728 41,737
Subprime unrated residuals ........... 97,748 41,786
Swap contracts ....................... (12) (94)
--------- ---------
683,084 411,969
--------- ---------
Multi-family residential and commercial:
Interest-only:
AAA-rated .......................... 71 1,485
BB-rated ........................... 7 190
Unrated ............................ 629 2,831
Subordinates:
B-rated ............................ 6,006 4,296
Unrated ............................ 11,022 9,753
--------- ---------
17,735 18,555
--------- ---------
Marketable equity securities:
Common stocks ....................... 12,031 46,272
--------- ---------
Total .............................. $ 712,850 $ 476,796
========= =========
The Company's securities available for sale of $712.9 million at
September 30, 1998 increased by $236.1 million or 49.5% from December 31, 1997
due primarily to $864.3 million of purchases which was offset by $269.8 million
of sales, $231.6 million of maturities and principal repayments, $60.5 million
of net premium amortization and $101.2 million of write-downs (including
write-downs of $8.5 million and $77.6 million on AAA-rated agency IOs in the
first and second quarter of 1998, respectively, as a result of the Company's
decision to discontinue this investment activity, and $4.2 million and $10.9
million in the second quarter and third quarter of 1998, respectively, as a
result of declines in value that are "other than temporary" on certain of the
Company's subordinate and residual securities).
33
<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 September 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, having a market value of $12.0 million ($22.9 million book value) and $35.2
($25.5 million book value) million, respectively.
At September 30, 1998 the carrying value of the Company's investment in
subordinated and residual interests amounted to $228.5 million ($206.9 million
book value) or 32% of total securities available for sale and supported senior
classes of securities having an outstanding principal balance of $3.69 billion.
Because of their subordinate position, subordinated and residual classes of
mortgage-related securities provide protection to and involve more risk than the
senior class. Specifically, when cash flow is impaired, debt service goes first
to the holders of senior classes. In addition, incoming cash flows 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, 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 and residual securities,
which are certificated, related to its securitization of loans. Subordinate and
residual interests in mortgage-related securities provide credit support to the
more senior classes of the mortgage-related securities. Principal from the
underlying mortgage loans generally is allocated first to the senior classes,
with the most senior class having a priority right to the cash flow from the
mortgage loans until its payment requirements are satisfied. To the extent that
there are defaults and unrecoverable losses on the underlying mortgage loans,
resulting in reduced cash flows, the most subordinate security will be the first
to bear this loss. Because subordinate and residual interests generally have no
credit support, to the extent there are realized losses on the mortgage loans
comprising the mortgage collateral for such securities, the Company may not
recover the full amount or, indeed, any of its initial investment in such
subordinate and residual interests. The Company generally retains the most
subordinate classes of the securities from the securitization and therefore will
be the first to bear any credit losses.
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 include the anticipated prepayment speeds and the anticipated credit
losses related to the underlying mortgages. In order to determine the present
value of this estimated excess cash flow, the Company currently applies a
discount rate of 18% to the projected cash flows on the unrated classes of
securities. 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 residual
34
<PAGE>
securities retained. During 1998, the Company utilized proprietary prepayment
curves generated by the Company (reaching an approximate range of annualized
rates of 30%-40%). In its estimates of annual loss rates, the Company utilizes
assumptions that it believes are reasonable. The Company estimates annual losses
of between 0.22% and 2.06% of the underlying loans.
Subordinate and residual interests are affected by the rate and timing
of payments of principal (including prepayments, repurchase, defaults and
liquidations) on the mortgage loans underlying a series of mortgage-related
securities. The rate of principal payments may vary significantly over time
depending on a variety of factors, such as the level of prevailing mortgage loan
interest rates and economic, demographic, tax, legal and other factors.
Prepayments on the mortgage loans underlying a series of mortgage-related
securities are generally allocated to the more senior classes of
mortgage-related securities. Although in the absence of defaults or interest
shortfalls all subordinates receive interest, amounts otherwise allocable to
residuals generally are used to make payments on more senior classes or to fund
a reserve account for the protection of senior classes until
overcollateralization or the balance in the reserve account reaches a specified
level. In periods of declining interest rates, rates of prepayments on mortgage
loans generally increase, and if the rate of prepayments is faster than
anticipated, then the yield on subordinates will be positively affected and the
yield on residuals will be negatively affected.
The credit risk of mortgage related securities is affected by the
nature of the underlying mortgage loans. In this regard, the risk of loss on
securities backed by commercial and multifamily loans and single-family
residential loans made to borrowers who, because of prior credit problems, the
absence of a credit history or other factors, are unable or unwilling to qualify
as borrowers under guidelines established by the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA") for
purchases of loans by such agencies, generally involve more risk than securities
backed by single-family residential loans which conform to the requirements
established by FHLMC and FNMA for their purchase by such agencies.
The Company marks its securities portfolio to market value at the end
of each month based upon broker/dealer marks, subject to an internal review
process. For those securities which do not have an available market quotation,
the Company requests market values and underlying assumptions from the various
broker/dealers that underwrote or are currently financing the securities or have
had prior experience with valuing the type of securities. Because the Company's
subordinate and residual securities are not readily marketable, trades can be
infrequent (and under some market conditions, non-existent), most broker/dealers
do not have the securities modeled and the market value is typically available
from only a small group of broker/dealers (and in most cases only one
broker/dealer). When valuations are obtained from two or more broker/dealers,
the average dealer mark is utilized. As of each reporting period, the Company
evaluates whether and to what extent any unrealized loss is to be recognized as
other than temporary.
The Company periodically assesses the carrying value of its subordinate
securities and 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
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 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 recognized the disparity. Other factors may also result in a write
down of the Company's subordinate securities and residual securities retained in
subsequent periods.
35
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The Company does not intend to purchase subordinate classes of
mortgage-related securities created by unaffiliated parties. The Company is
likely, however, to retain subordinated and 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 in the first quarter and one security with an aggregate value of $20.2
million was distributed in the third quarter of 1998. At September 30, 1998, the
Bank held two subordinate securities with a carrying value and book value of
$20.8 million and $16.2 million, respectively.
LOANS AVAILABLE FOR SALE. The Company's loans available for sale at
September 30, 1998, which are carried at the lower of cost or market, increased
by $160.3 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
September 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.
September 30, December 31,
1998 1997
---------- ----------
(Dollars in Thousands)
Single family residential loans................. $ 337,026 $ 176,554
Consumer loans.................................. 310 487
---------- ----------
$ 337,336 $ 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 Nine Months
For the periods ended September 30, ----------------------------- ------------------------------
(Dollars in Thousands) 1998 1997 1998 1997
- ------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of period............ $ 338,359 $ 103,627 $ 177,041 $ 126,366
Purchases (1):
Single family residential.............. 15,974 24,102 778,987 86,606
Originations (1):
Single family residential.............. 262,443 170,752 661,664 297,254
Sales (2)................................. (258,195) (101,271) (1,201,471) (289,119)
Decrease in lower of cost or
market reserve......................... (835) (683) (3,266) (1,125)
Loans transferred to loan portfolio....... -- -- -- (13,694)
Principal repayments, net of capitalized
interest............................... (17,998) (5,724) (70,463) (11,975)
Transfer to real estate owned............. (2,412) (791) (5,156) (4,301)
----------- ----------- ----------- -----------
Net (decrease) increase in loans....... (1,023) 86,385 160,295 63,646
----------- ----------- ----------- -----------
Balance at end of period.................. $ 337,336 $ 190,012 $ 337,336 $ 190,012
=========== =========== =========== ===========
</TABLE>
(1) During the three months ended September 30, 1998 and 1997 the Company
purchased and originated $278.4 million and $194.8 million, respectively;
of single family residential loans to subprime borrowers of which $88.0
million ((pound)53.2million) were originated by Ocwen UK. During the nine
months ended September 30, 1998 and 1997 the Company purchased and
originated $1.44 billion and $383.9 million, respectively, of single family
residential loans to subprime borrowers. Purchases during the nine months
ended September 30, 1998 includes $421.3 million ((pound)249.6 million)
purchased in connection with the acquisition of the U.K. operations of
Cityscape Financial Corp. during the second quarter of 1998
(2) Included in sales for the three months ended September 30, 1998 is the
securitization of 2,205 subprime single family residential mortgage loans
with an aggregate unpaid principal balance of $261.6 million. During the
36
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
nine months ended September 30, 1998, the Company securitized $1.17 billion
of subprime loans, which includes $363.8 million ((pound)218.1 million) by
Ocwen UK.
For additional information relating to the Company's securitization
activities, see "Result of Operations: Three and Nine Months Ended September 30,
1998 versus Three and Nine Months Ended September 30, 1997 - Non-Interest
Income."
The loans available for sale portfolio is geographically located
throughout the United States and the United Kingdom. The following table sets
forth the five states or countries in which the largest amount of properties
securing the Company's loans available for sale were located at September 30,
1998:
Single Family Multi-family
Residential Residential Total
------------- ------------ -----------
UK............................ $ 164,749 $ -- $ 164,749
California.................... 49,562 -- 49,562
Florida....................... 18,513 170 18,683
Illinois...................... 14,195 -- 14,195
New Jersey.................... 12,724 -- 12,724
Other (1)..................... 77,204 219 77,423
---------- --------- -----------
Total..................... $ 336,947 $ 389 $ 337,336
========== ========= ===========
(1) Consists of properties located in 42 other states, none of which aggregated
over $9.1 million in any one state.
The following table presents a summary of the Company's non-performing
loans (loans which were past due 90 days or more) in the loans available for
sale portfolio at the dates indicated:
September 30, December 31,
1998 1997
----------- -----------
(Dollars in Thousands)
Non-performing loans:
Single family.......................... $ 66,855 $ 13,509
Consumer............................... 40 25
----------- -----------
$ 66,895 $ 13,534
=========== ===========
Non-performing loans as a percentage of:
Total loans available for sale......... 19.83% 7.64%
Total assets........................... 1.97% 0.44%
Non-performing loans of which the US dollar equivalent of $43.6 million
represents UK subprime loans 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 mitigates the
higher default risk. OCN has discontinued its subprime domestic retail branch
system and is currently analyzing strategic alternatives with respect to its
subprime domestic wholesale operations.
INVESTMENT SECURITIES. Investment securities increased by $75.1 million
from December 31, 1997 to September 30, 1998 as a result of the Company's $50.6
million investment in 36.07% of the outstanding common stock of Kensington, a
leading originator of nonconforming residential mortgages in the U.K., and a
$27.1 million additional investment in OPLP during the first half of 1998 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 September 30, 1998, the Company's net
discount loan portfolio amounted to $1.09 billion or 32% 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.
37
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
September 30, December 31,
1998 1997
------------ ------------
(Dollars in Thousands)
Single family residential loans............. $ 495,802 $ 900,817
Multi-family residential loans.............. 219,576 191,302
Commercial real estate loans (1)............ 647,673 701,035
Other loans................................. 8,439 1,865
------------ ------------
Total discount loans..................... 1,371,490 1,795,019
Unaccreted discount (2)..................... (255,805) (337,350)
Allowance for loan losses................... (21,095) (23,493)
------------ ------------
Discount loans, net...................... $ 1,094,590 $ 1,434,176
============ ============
(1) The balance at September 30, 1998 consisted of $230.3 million of loans
secured by office buildings, $105.3 million of loans secured by hotels,
$91.2 million of loans secured by retail properties or shopping centers and
$220.9 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.
(2) The balance at September 30, 1998 consisted of $136.0 million on single
family residential loans, $27.2 million on multi-family residential loans,
$92.5 million on commercial real estate loans and $100,000 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 $200,000 on other loans.
The discount loan portfolio is geographically located throughout the
United States. The following table sets forth the five states in which the
largest amount of properties securing the Company's discount loans were located
at September 30, 1998:
<TABLE>
<CAPTION>
Commercial
Single Family Multi-family Real Estate
Residential Residential and Other Total
------------- ------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
California.................... $ 78,902 $ 35,156 $ 133,440 $ 247,498
New York...................... 57,016 9,924 81,644 148,584
Florida....................... 26,637 3,554 80,987 111,178
New Jersey.................... 44,741 3,536 60,554 108,831
Missouri...................... 6,782 65,808 31,051 103,641
Other (1)..................... 281,718 101,935 268,105 651,758
------------- ------------- ------------- -------------
Total..................... $ 495,796 $ 219,913 $ 655,781 $ 1,371,490
============= ============= ============= =============
(1) Consists of properties located in 47 other states, none of which aggregated over $81.0 million in any
one state.
38
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following tables set forth the activity in the Company's gross discount loan
portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three months ended September 30,
---------------------------------------------------
1998 1997
------------------------ -----------------------
No. of No. of
Balance Loans Balance Loans
----------- --------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ....... $ 1,760,768 10,315 $ 1,590,427 11,110
Acquisitions(1) ...................... 173,473 1,033 445,869 6,455
Resolutions and repayments(2) ........ (255,905) (571) (160,277) (786)
Loans transferred to real estate owned (104,088) (1,012) (69,900) (358)
Sales(3) ............................. (202,758) (2,725) -- --
----------- --------- ----------- --------
Balance at end of period ............. $ 1,371,490 7,040 $ 1,806,119 16,421
=========== ========= =========== ========
<CAPTION>
Nine months ended September 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) ...................... 849,779 5,743 1,288,220 16,209
Resolutions and repayments(2) ........ (461,697) (1,658) (358,054) (1,512)
Loans transferred to real estate owned (253,295) (2,335) (190,398) (1,102)
Sales(3) ............................. (558,317) (7,690) (248,048) (2,634)
----------- -------- ----------- --------
Balance at end of period ............. $ 1,371,490 7,040 $ 1,806,119 16,421
=========== ======== =========== ========
</TABLE>
(1) During the three months ended September 30, 1998, acquisitions consisted of
$87.2 million of single family residential loans, $20.6 million of
multi-family residential loans and $87.2 million of commercial real estate
and land loans. During the first nine months of 1998, acquisitions
consisted of $65.7 million of single family residential loans, $169.1
million of multi-family residential loans and $258.2 million of commercial
real estate and land loans. Included in acquisitions for the nine months
ended September 30, 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 consist 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 are the securitizations of discount single family
residential mortgage loans. For discussion and analysis regarding the
securitizations of discount single family residential mortgage loans, see
"Results of Operations: Three and Nine Months Ended September 30, 1998
versus Three and Nine Months Ended September 30, 1997 - Non-Interest
Income."
39
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth certain information relating to the payment
status of loans in the Company's discount loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------- ----------------------
Principal % of Principal % of
Amount Loans Amount Loans
---------- ------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Loans without Forbearance Agreements:
Current....................................... $ 673,329 49.08% $ 670,115 37.33%
Past due 31 to 89 days........................ 80,085 5.84 21,098 1.18
Past due 90 days or more...................... 441,163 32.18 638,319 35.56
Acquired and servicing not yet transferred.... 79,808 5.82 28,053 1.56
---------- ------- ---------- -------
Subtotal.................................... 1,274,385 92.92 1,357,585 75.63
---------- ------- ---------- -------
Loans with Forbearance Agreements:
Current....................................... 2,629 0.19 3,140 0.18
Past due 31 to 89 days........................ 946 0.07 1,688 0.09
Past due 90 days or more (1).................. 93,530 6.82 432,606 24.10
---------- ------- ---------- -------
Subtotal.................................... 97,105 7.08 437,434 24.37
---------- ------- ---------- -------
Total............................................ $1,371,490 100.00% $1,795,019 100.00%
========== ======= ========== =======
</TABLE>
(1) Includes $88.8 million of loans which were less than 90 days past due under
the terms of the forbearance agreements at September 30, 1998, of which
$61.7 million were current and $27.1 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 - Allowances for Losses".
LOAN PORTFOLIO. The following table sets forth the composition of the
Company's loan portfolio by type of loan at the dates indicated.
September 30, December 31,
1998 1997
------------ ------------
(Dollars in Thousands)
Single family residential loans............... $ 33,617 $ 46,226
Multi-family residential loans................ 65,355 71,382
Commercial real estate and land loans:
Hotel...................................... 27,299 89,362
Office buildings........................... 102,300 68,759
Land....................................... 2,541 2,858
Other...................................... 8,398 16,094
------------ ------------
Total.................................... 140,538 177,073
Consumer...................................... 144 244
------------ ------------
Total loans.............................. 239,654 294,925
Undisbursed loan funds........................ (7,836) (22,210)
Unaccreted discount........................... (2,935) (2,721)
Allowance for loan losses..................... (4,142) (3,695)
------------ ------------
Loans, net............................... $ 224,741 $ 266,299
============ ============
40
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The loan portfolio is geographically located throughout the United
States. The following table sets forth the five states in which the largest
amount of properties securing the Company's loans were located at September 30,
1998.
<TABLE>
<CAPTION>
Single Family Multi-family Commercial
Residential Residential Real Estate Consumer Total
------------ ------------- ------------- ------------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
New York....... $ 1,758 $ 16,111 $ 40,294 $ 28 $ 58,191
California..... 21,490 6,895 4,223 13 32,621
New Jersey..... 177 1,650 25,949 -- 27,776
Maryland....... 1,902 1,827 8,989 -- 12,718
Georgia........ 269 4,729 6,278 -- 11,276
Other (1)...... 8,021 34,143 54,805 103 97,072
------------ ------------- ------------- ------------ -------------
Total.......... $ 33,617 $ 65,355 $ 140,538 $ 144 $ 239,654
============ ============= ============= ============ =============
</TABLE>
(1) Consists of properties located in 24 other states, none of which aggregated
over $11.1 million in any one state.
The following table sets forth the activity in the Company's gross loan
portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
----------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period............ $ 296,361 $ 507,300 $ 294,925 $ 501,114
Originations:
Single family residential loans........ -- 218 -- 1,987
Multi-family residential loans......... 7,950 257 30,221 12,994
Commercial real estate loans and land
loans................................ 16,511 2,835 16,568 50,035
Commercial non-mortgage and consumer
loans................................ 26,825 -- 86,698 1,134
----------- ----------- ----------- -----------
Total loans originated............... 51,286 3,310 133,487 66,150
----------- ----------- ----------- -----------
Purchases................................. -- -- -- 78
Sales..................................... -- -- -- (2,346)
Loans transferred from available for sale. -- -- -- 13,802
Principal repayments, net of capitalized
interest................................. (107,993) (58,481) (188,758) (126,316)
Transfer to real estate owned............. -- (162) -- (515)
----------- ----------- ----------- -----------
Net (decrease) increase in loans..... (56,707) (55,333) (55,271) (49,147)
----------- ----------- ----------- -----------
Balance at end of period (1).............. $ 239,654 $ 451,967 $ 239,654 $ 451,967
=========== =========== =========== ===========
</TABLE>
(1) The decline in the balance of the gross loan portfolio at September 30,
1998 as compared to September 30, 1997, is primarily due to significant
payoffs of multi-family and commercial real estate loans secured by hotel
and office buildings during the fourth quarter of 1997 and the second and
third quarters 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:
41
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Nonperforming loans (1):
Single family residential loans.......................................... $ 1,510 $ 1,575
Multi-family residential loans........................................... 12,233 7,583
----------- -----------
$ 13,743 $ 9,158
=========== ===========
Nonperforming loans as a percentage of:
Total loans (2).......................................................... 6.00% 3.36%
Total assets............................................................. 0.40% 0.30%
Allowance for loan losses as a percentage of:
Total loans (2).......................................................... 1.68% 1.37%
Nonperforming loans...................................................... 27.90% 40.35%
</TABLE>
(1) The Company did not have any loans which were accruing interest but past
due 90 days or more at the dates indicated.
(2) Total loans is net of undisbursed loan funds and unaccreted discount.
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>
September 30, 1998 December 31, 1997
------------------------------------ ----------------------------------
Gross Gross
Loan Loan
Allowance Balance Percent Allowance Balance Percent
--------- ---------- ---------- --------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loan portfolio:
Single family................ $ 388 $ 33,617 14.0% $ 512 $ 46,226 15.7%
Multi-family................. 1,800 65,355 27.3 2,163 71,382 24.2
Commercial real estate....... 1,947 140,538 58.6 1,009 177,073 60.0
Consumer..................... 8 144 0.1 11 244 0.1
-------- ---------- --------- -------- ---------- ---------
$ 4,143 $ 239,654 100.0% $ 3,695 $ 294,925 100.0%
======== ========== ========= ======== ========== =========
Discount loan portfolio:
Single family................ $ 9,522 $ 495,802 36.2 $ 15,017 $ 900,817 50.2%
Multi-family................. 2,483 219,576 16.0 2,616 191,302 10.7
Commercial real estate....... 8,883 647,673 47.2 5,860 701,035 39.0
Other........................ 207 8,439 0.6 -- 1,865 0.1
-------- ---------- --------- -------- ---------- ---------
$ 21,095 $1,371,490 100.0% $ 23,493 $1,795,019 100.0%
======== ========== ========= ======== ========== =========
</TABLE>
42
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
The following table summarizes activity in the allowance for loan losses related
to the Company's loan portfolio and discount loan portfolio during the six
months ended September 30, 1998.
<TABLE>
<CAPTION>
Balance Balance
December 31, September 30,
1997 Additions Charge-offs Recoveries 1998
---------- --------- ----------- ---------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loan portfolio:
Single family.................. $ 512 $ (124) $ -- $ -- $ 388
Multi-family................... 2,163 (363) -- -- 1,800
Commercial real estate......... 1,009 938 -- -- 1,947
Consumer....................... 11 4 (7) -- 8
---------- ---------- ---------- ---------- ----------
$ 3,695 $ 455 $ (7) $ -- $ 4,143
========== ========== ========== ========== ==========
Discount loans:
Single family.................. $ 15,017 $ 6,176 $ (11,999) $ 328 $ 9,522
Multi-family................... 2,616 1,915 (2,048) -- 2,483
Commercial real estate......... 5,860 5,306 (2,282) -- 8,884
Other......................... -- 206 -- -- 206
---------- ---------- ---------- ---------- ----------
$ 23,493 $ 13,603 $ (16,329) $ 328 $ 21,095
========== ========== ========== ========== ==========
</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 September 30, 1998 the Company had
$133.7 million of investments in low-income housing tax credit interests as
compared to $128.6 million at December 31, 1997. During the first quarter of
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. During the third quarter of 1998, the Company completed the sale
of its investment in three low-income housing tax credit projects which had a
carrying value of $9.1 million for a gain of $2.3 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 $50.2 million at September 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 $20.1 million at September 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, a general partner
amounted to $63.4 million at September 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
September 30, 1998 and December 31, 1997, the Company's $1.2 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
43
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
real estate subsequent to foreclosure are recognized as a valuation allowance on
a property specific basis. Subsequent increases in the market value of the
foreclosed real estate are reflected as reductions in the valuation allowance,
but not below zero. Such changes in the valuation allowance are charged or
credited to income.
The following table sets forth certain information relating to the
Company's real estate owned at the dates indicated:
September 30, December 31,
1998 1997
----------- -----------
(Dollars in Thousands)
Discount loan portfolio:
Single family residential.................. $ 99,279 $ 76,409
Multi-family residential................... 25,983 16,741
Commercial real estate..................... 40,320 71,339
----------- -----------
Total.................................... 165,582 164,489
Loan portfolio................................ 108 357
Loans available for sale...................... 4,030 2,419
----------- -----------
$ 169,720 $ 167,265
=========== ===========
The following table sets forth certain geographical
information by type of property at September 30, 1998 related to the Company's
real estate owned.
<TABLE>
<CAPTION>
Multi-family Residential
Single Family Residential and Commercial Total
------------------------- ------------------------ -----------------------
No. of No. of No. of
Amount Properties Amount Properties Amount Properties
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
California............... $ 34,749 548 8,716 12 $ 43,465 560
Maryland................. 9,145 166 18,876 3 28,021 169
Connecticut.............. 3,691 78 12,380 5 16,071 83
Florida.................. 4,638 94 7,062 15 11,700 109
New York................. 7,762 149 535 5 8,297 154
Other (1)................ 43,431 885 18,825 52 62,256 937
------------ ------------ ------------ ------------ ------------ ------------
Total................. $ 103,416 1,920 $ 66,394 92 $ 169,810 2,012
============ ============ ============ ============ ============ ============
</TABLE>
(1) Consists of properties located in 43 other states, none of which aggregated
over $6.5 million in any one state.
The following table sets forth the activity in the valuation allowance
on real estate owned for the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
For the period ended September 30, ------------------------------ -------------------------------
(Dollars in Thousands) 1998 1997 1998 1997
- ------------------------------------------ ------------- ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period............ $ 11,204 $ 5,633 $ 12,346 $ 11,493
Provision for loss in fair value.......... 6,798 2,478 12,561 4,725
Charge-offs and sales..................... (3,736) (2,307) (10,641) (10,414)
------------- ------------ ------------ ------------
Balance at end of period.................. $ 14,266 $ 5,804 $ 14,266 $ 5,804
============ ============ ============ ============
</TABLE>
44
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the activity in real estate owned during
the periods indicated.
<TABLE>
<CAPTION>
Three months ended September 30,
----------------------------------------------------------------
1998 1997
---------------------------- ----------------------------
No. of No. of
Amount Properties Amount Properties
---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period.......... $ 151,607 1,647 $ 117,703 866
Properties acquired through
foreclosure or deed-in-lieu thereof.. 76,546 1,042 49,158 372
Acquired in connection with
acquisitions of discount loans....... 3,798 52 20,823 176
Sales................................... (59,169) (729) (38,156) (308)
Change in allowance..................... (3,062) -- (171) --
---------- ---------- ---------- ----------
Balance at end of period(1)............. $ 169,720 2,012 $ 149,357 1,106
========== ========== ========== ==========
<CAPTION>
Nine months ended September 30,
----------------------------------------------------------------
1998 1997
---------------------------- ----------------------------
No. of No. of
Amount Properties Amount Properties
---------- ---------- ---------- ----------
(Dollars in Thousands)
<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.. 182,574 2,385 139,416 1,149
Acquired in connection with
acquisitions of discount loans....... 14,850 240 21,963 196
Sales................................... (193,049) (2,118) (121,415) (1,064)
Change in allowance..................... (1,920) 5,689
---------- ---------- ---------- ----------
Balance at end of period(1)............. $ 169,720 2,012 $ 149,357 1,106
========== ========== ========== ==========
</TABLE>
(1) The increase in the balance of real estate owned at September 30, 1998 as
compared to September 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.
September 30, December 31,
1998 1997
------------- -------------
(Dollars in Thousands)
One to two months......................... $ 68,223 $ 83,144
Three to four months...................... 30,288 28,912
Five to six months........................ 15,621 20,929
Seven to twelve months.................... 35,150 23,621
Over twelve months........................ 20,438 10,659
------------- -------------
$ 169,720 $ 167,265
============= =============
INVESTMENT IN REAL ESTATE. The Company's investments in real estate
amounted to $17.3 million at September 30, 1998 as compared to $66.0 million at
December 31, 1997, a decrease of $48.7 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
45
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
investment in a real estate limited partnership. The Company's investment in
such loans decreased to $11.6 million at September 30, 1998, as compared to
$64.3 million at December 31, 1997, primarily as a result of principal
repayments.
DEFERRED TAX ASSET. At September 30, 1998 the deferred tax asset, net
of deferred tax liabilities, amounted to $42.6 million, a decrease of $2.5
million from the $45.1 million deferred tax asset at December 31, 1997. At
September 30, 1998, the gross deferred tax asset amounted to $48.9 million and
consisted primarily of $2.7 million of mark-to-market adjustments and reserves
on real estate owned, $7.7 million of deferred interest expense on the discount
loan portfolio, $15.9 million of loan loss reserves, $3.5 million of profit
sharing expense, $5.2 million related to tax residuals, $5.6 million of gains on
loan foreclosures and $16.9 million of reserves on securities available for
sale. The gross deferred tax liability amounted to $6.3 million and consisted
primarily of $2.3 million of deferred interest income on the discount loan
portfolio, $800,000 mark-to market on securities available for sale and $600,000
of income from foreign entities. 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 September 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 September 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
of Admiral in May 1997. The excess of purchase price over net assets acquired
related to this transaction amounted to $8.2 million net of accumulated
amortization at September 30, 1998 and is being amortized on a straight-line
basis over a period of 15 years. The Company recorded $2.0 million of additional
amortization during the third quarter of 1998 in connection with its decision to
discontinue its subprime domestic retail branch network. To the extent the
Company decides to reduce its investment in the domestic subprime business,
recovery of the remaining excess of purchase price over net assets acquired may
be affected.
As part of its plan to market its advanced loan resolution technology
to third parties in the mortgage industry through software licenses, the Company
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 $12.4 million net of accumulated amortization at September 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 its residential subprime mortgage loan origination and servicing
businesses for $421.3 million ((pound)249.6 million) and assumed $34.3 million
((pound)20.3 million) of Cityscape UK's liabilities. The excess of purchase
price transaction, which amounted to $13.9 million net of accumulated
amortization at September 30, 1998, is being amortized on a straight-line basis
over a period of 15 years.
46
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
DEPOSITS. Deposits increased $93.7 million or 5% from December 31, 1997
to September 30, 1998. The increase in deposits during the nine months ended
September 30, 1998 was primarily the result of a $95.9 million increase in
brokered deposits obtained through national investment banking firms which
solicit deposits from their customers, and a $109.4 million increase in escrow
deposits, offset by a $81.2 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 $10.8
million decrease in checking and money funds. Brokered deposits obtained through
national investment banking firms amounted to $1.44 billion at September 30,
1998, as compared to $1.34 billion at December 31,1997. Deposits obtained
through direct solicitation and marketing amounted to $348.6 million at
September 30, 1998, as compared to $429.8 million at December 31, 1997. At
September 30, 1998 the Company had $143.9 million of certificates of deposit in
amounts of $100,000 or more, including $50.3 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".
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under
agreements to repurchase decreased $47.5 million to $60.8 million from December
31, 1997 to September 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 $225.3 million at September
30, 1998 decreased $1.7 million during the nine months ended September 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 $317,000 of short-term notes payable.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit of $333.8 million at September 30, 1998 increased by
$215.5 million during the nine months ended September 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, OCN 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."
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 Trust
Securities. Proceeds from issuance of the Capital Trust 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 September 30, 1998, the Company had recorded $10.2 million of
distributions to holders of the Capital Trust Securities. See Note 4 to the
Interim Consolidated Financial Statements included in Item 1 hereof.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $24.4 million or
6% during the nine months ended September 30, 1998. The increase in
stockholders' equity during this period was primarily attributable to an
increase of $16.1 million in the unrealized gain on securities available for
sale, net income for the period of $9.4 million and $1.4 million related to the
exercise of stock options, offset by the foreign currency translation adjustment
of $2.5 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
47
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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
September 30, 1998, the Company had entered into interest rate exchange
agreements with an aggregate notional amount of $30.7 million. Interest rate
exchange agreements had the effect of decreasing the Company's net interest
income by $31,000 and $40,000 during the three months ended September 30, 1998
and 1997, respectively, and $100,000 and $154,000 during the nine months ended
September 30, 1998 and 1997, respectively.
On February 25, 1998, the Company entered into a foreign currency swap
with a AAA-rated counterparty to hedge its .07% equity investment in Kensington,
a leading originator of nonconforming residential mortgages in the U.K. Under
the terms of the agreement, the Company will swap (pound)27.5 million for $43.5
million in five years based on the exchange rate on the date the contract became
effective. On August 6, 1998, the Company sold short foreign currency futures
contracts to further hedge its foreign currency exposure related to its equity
investment in Kensington. Under the terms of the currency futures, the Company
has the right to receive $410,000 and pay (pounds) 250,000. 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 September 30, 1998, the
Company had entered into U.S. Treasury futures (short) contracts with an
aggregate notional amount of $8.9 million. The Company had no outstanding
Eurodollar futures contracts at September 30, 1998. Futures contracts had the
effect of decreasing the Company's net interest income by $0 and $2,000 during
the three months ended September 30, 1998 and 1997, respectively and by $49,000
and $1.8 million during the nine months ended September 30, 1998 and 1997,
respectively. See Note 6 to the Interim Consolidated Financial Statements
included in Item 1 hereof.
During 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
$46.3 million and pay (pound)28.3 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.
48
<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
September 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
$199.5 million at September 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>
September 30, 1998
---------------------------------------------------------------------
More than 1
Within 4 to 12 Year to 3 Years
3 Months Months 3 Years and Over Total
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Interest-earning cash, federal funds
sold and repurchase agreements ............ $ 235,489 $ -- $ -- $ -- $ 235,489
Securities available for sale ............... 166,638 278,921 134,085 133,206 712,850
Loans available for sale (1) ................ 16,931 179,239 31,160 110,006 337,336
Investment securities, net .................. 36,988 -- -- 51,442 88,430
Loan portfolio, net (1) ..................... 34,519 40,801 67,863 81,558 224,741
Discount loan portfolio, net ................ 187,945 290,270 273,536 342,839 1,094,590
---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets ............... 678,510 789,231 506,644 719,051 2,693,436
---------- ---------- ---------- ---------- ----------
Rate-Sensitive Liabilities:
NOW and money market checking deposits ...... 7,885 4,654 9,223 16,683 38,445
Savings deposits ............................ 78 211 417 865 1,571
Certificates of deposit ..................... 398,742 590,245 590,837 257,162 1,836,986
---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits ........... 406,705 595,110 600,477 274,710 1,877,002
Securities sold under agreements
to repurchase ............................. 60,798 -- -- -- 60,798
Obligations outstanding under lines of credit 333,803 -- -- -- 333,803
Notes, debentures and other interest bearing
obligations ............................... -- -- 317 225,000 225,317
---------- ---------- ---------- ---------- ----------
Total rate-sensitive liabilities .......... 801,306 595,110 600,794 499,710 2,496,920
---------- ---------- ---------- ---------- ----------
Interest rate sensitivity gap before
off-balance sheet financial instruments ... (122,796) 194,121 (94,150) 219,341 196,516
Off-Balance Sheet Financial Instruments:
Futures contracts ........................... 8,900 -- -- (8,900) --
---------- ---------- ---------- ---------- ----------
Interest rate sensitivity gap .................. $ (113,896) 194,121 (94,150) 210,441 $ 196,516
---------- ---------- ---------- ---------- ==========
Cumulative interest rate sensitivity gap ....... $ (113,896) $ 80,226 $ (13,926) $ 196,516
========== ========== ========== ==========
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets ... (4.23%) 2.98% (.52%) 7.3%
</TABLE>
(1) Balances have not been reduced for non-performing loans.
Although interest rate sensitivity gap is a useful measurement and contributes
toward effective asset and liability management, it is difficult to predict the
effect of changing interest rates based solely on that measure. As a result, 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
49
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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.
The following table sets forth at September 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% 4.48% (29.87%)
+300% 3.73% (21.69%)
+200% 2.71% (13.99%)
+100% 1.46% (6.83%)
0.00% 0.00% 0.00%)
-100% (1.65%) 6.90%
-200% (3.47%) 15.19%
-300% (5.45%) 23.98%
-400% (7.57%) 33.76%
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 payments of principal and interest on loans and
securities and proceeds from sales and securitizations thereof.
Sources of liquidity include certificates of deposit obtained primarily
from wholesale sources. At September 30, 1998 the Company had $1.84 billion of
certificates of deposit, including $1.44 billion of brokered certificates of
deposit obtained through national investment banking firms, all of which are
non-cancelable. At the same date scheduled maturities of certificates of deposit
during the 12 months ending September 30, 1999 and 2000 and thereafter amounted
to $989.0 million, $345.4 million and $502.6 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 September 30, 1998,
the Company was eligible to borrow up to an aggregate of $652.5 million from the
FHLB of New York (subject to the availability of acceptable collateral) and had
$46.2 million of single family residential loans, $10.3 million of multi-family
residential loans and $2.5 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.
Additionally, at September 30, 1998 the Company had cash and cash equivalents in
excess of $261.0 million, unencumbered investment grade mortgage
50
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
backed securities of approximately $471.6 million, and unencumbered
non-investment grade securities of approximately $21.5 million which could be
used to secure additional 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 OCN includes lines of credit obtained by Ocwen
Financial Services ("OFS"), as follows: (i) a $200 million secured line of
credit, of which $100 million was committed, (ii) a $50 million secured line of
credit, (iii) a $200 million secured line of credit of which $100 million was
committed, and (iv) a $200 million secured line of credit, of which $100 million
was committed. The lines of credit mature between March 1999 and July 2001 with
the exception of the committed portion of $100.0 million of one line, which
matured on October 30, 1998. An aggregate of $144.1 million was outstanding
under these lines of credit at September 30, 1998. Additionally, at September
30, 1998 OFS had entered into $27.0 million of reverse repurchase agreements and
residual financing collateralized by subprime residuals with a number of
counterparties in order to finance residual securities retained in connection
with its securitization of subprime residential mortgage loans. Of this amount,
$16.8 million is scheduled to mature in July 2001, with the balance subject to
monthly renewal. Additionally, OFS had unpledged securities with a market value
of $19.0 million available to secure additional borrowings.
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 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 which matures in April 1999, is set
at a maximum of $169.9 million ((pound)100 million reduced for the amount
borrowed under the Term Loan) of which $115.8 million ((pound)68.2 million) was
funded as of September 30, 1998 to finance subprime mortgage loan originations
and bears interest at a rate of the 1-month LIBOR plus 1.50%. Subsequent to
September 30, 1998, the Revolving Facility was increased by (pound)20.0 million
which must be repaid or rebalanced on the line with additional collareral by
November 30, 1998. At September 30, 1998, the Term Loan, which matures in
January 1999, was for $37.4 million ((pound)22.0 million), against which $29.6
million ((pound)17.4 million) had been borrowed. Additionally, at September 30,
1998 Ocwen UK had entered into an $18.7 million reverse repurchase agreement,
which matures in July 2001, with Greenwich to finance a residual security
retained in connection with Ocwen UK's securitization of subprime residential
mortgage loans.
Subsequent to September 30, 1998, Ocwen UK obtained a (pound 75.0
million), 364 day secured warehouse line of credit to finance subprime mortgage
loan originations which bears interest at a rate of the 1-month LIBOR plus 0.80%
and which matures on Nvember 8, 1999.
At September 30, 1998, Ocwen Financial Corporation had $31.7 million of
cash and cash equivalents and approximately $34.1 million of debt outstanding
secured by discount commercial office loans. This debt was repaid in full on
October 6, 1998 in connection with the sale of the loans. At October 31, 1998,
Ocwen Financial Corporation had cash and cash equivalents of $40.6 million and
no secured debt outstanding.
At September 30, 1998, IMI had entered into $19.6 million of reverse
repurchase agreements with unrelated counterparties and had unpledged securities
with a market value of $43.3 million available to secure additional borrowings.
Subsequent to September 30, 1998, the amount outstanding under these reverse
repurchase agreements has been reduced to $13.6 million due to margin calls.
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 $129.0 million
and provided cash flows of $67.8 million during the nine months ended September
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 increase in net cash used by operating activities during the nine
months ended September 30, 1998 as compared to 1997 is primarily due to an
increase in the purchase and origination of loans available for sale, net of
sales proceeds, and a decrease in net income.
The Company's investing activities used cash flows totaling $22.5
million and $400.7 million during the nine months ended September 30, 1998 and
1997, respectively. During the foregoing periods, cash flows from investing
51
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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
decrease in net cash flows used by investing activities for the nine months
ended September 30, 1998 as compared to 1997 is due primarily to a decline in
purchases of discount loans and an increase in proceeds from sales of discount
and real estate owned, offset by an increase in purchases of securities
available for sale net of maturities and principal payments received.
The Company's financing activities provided $257.1 million and $386.6
million during the nine months ended September 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,
issuance of common stock and the issuance of the Capital Trust Securities, and
changes in the Company's deposits and reverse repurchase agreements.
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 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 nine
months ended September 30, 1998.
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 a verbal 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 $20.8 million at September 30, 1998, the Bank
may be limited in its ability to pay cash dividends to the Company. The Bank
recently received approval from the OTS to pay a $30.0 million cash dividend to
OCN, which the Bank paid to OCN on November 16, 1998. Future cash dividends
depend on future operating results of the Bank. See "Regulatory Capital
Requirements" below.
At September 30, 1998, the Company had $281.1 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.
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" 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
52
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 establishing the readiness of its
computer systems and applications for the year 2000 with no effect on customers
or disruption to business operations. The Company has established a project plan
to achieve year 2000 readiness of its mission critical and non-mission critical
systems, including hardware infrastructure and software applications. The
project plan has a budget of approximately $2.0 million and is divided into six
phases: identification, evaluation, remediation, validation, risk assessment and
contingency planning. The addition of risk assessment and contingency planning
efforts to the overall project plan accounts for the difference between the $2.0
million budgeted as of September 30, 1998 and the estimate of $1.5 million for
achieving year 2000 compliance included in the Company's 10-Q for the quarter
ended June 30, 1998.
As of September 30, 1998, the Company had expended approximately 27% of
budgeted manhours and incurred costs of approximately $515,000, which included
approximately $115,000 for Year 2000 testing tools, additional hardware, and
outside consulting assistance, while the remainder consisted of labor and
overhead expense from within the Company. At November 3, 1998, the Company had
expended approximately 40% of budgeted manhours and had incurred additional
costs of $100,000 substantially all of which represented internally generated
expense. As of October 1, 1998, the systems identification and evaluation phases
of the project were substantially completed. In its systems evaluation and
validation efforts, the Company is employing automated testing tools that are
designed to meet guidelines established by the Federal Financial Institution
Examination Council (FFIEC) as required by the OTS. The Company expects to have
substantially completed the remediation and validation phases of the project by
the end of 1998, and all new application development will include year 2000
readiness validation prior to implementation.
As part of the identification and evaluation phases of the project, the
Company documented critical operating functions within each business unit, as
well as strategic third-party and vendor relationships. These efforts also are
serving as the basis of the Company's year 2000 risk assessment and contingency
planning efforts. The Company has retained a business continuity expert to
prepare contingency plans and assist with the testing and validation of these
plans. The Company expects to complete its year 2000 risk assessment and
contingency planning efforts during the first quarter of 1999.
53
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 "COMMISSION"), 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 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," "FORESEE,"
"INTEND," "IN THE EVENT OF," "MAY," "PLAN," "PRESENT," "PROPOSE," "PROSPECT,"
"UPDATE," "WHETHER," "WILL," "WOULD," 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, EFFECTIVENESS OF
INTEREST RATE, CURRENCY AND OTHER HEDGING STRATEGIES, LAWS AND REGULATIONS
AFFECTING FINANCIAL INSTITUTIONS, REAL ESTATE INVESTMENT TRUSTS, INVESTMENT
COMPANIES AND REAL ESTATE (INCLUDING REGULATORY FEES, CAPITAL REQUIREMENTS,
INCOME AND PROPERTY TAXATION, ACCESS FOR DISABLED PERSONS AND ENVIRONMENTAL
COMPLIANCE), UNCERTAINTY OF FOREIGN LAWS, COMPETITIVE PRODUCTS, PRICING AND
CONDITIONS (INCLUDING FROM COMPETITORS THAT HAVE SIGNIFICANTLY GREATER RESOURCES
THAN THE COMPANY), CREDIT, PREPAYMENT, BASIS, DEFAULT, SUBORDINATION AND
ASSET/LIABILITY RISKS, LOAN SERVICING EFFECTIVENESS, ABILITY TO IDENTIFY
ACQUISITIONS AND INVESTMENT OPPORTUNITIES MEETING THE COMPANY'S INVESTMENT
STRATEGY, COURSE OF NEGOTIATIONS AND ABILITY TO REACH AGREEMENT WITH RESPECT TO
MATERIAL TERMS OF ANY PARTICULAR TRANSACTION, SATISFACTORY DUE DILIGENCE
RESULTS, SATISFACTION OR FULFILLMENT OF AGREED UPON TERMS AND CONDITIONS OF
CLOSING OR PERFORMANCE, TIMING OF TRANSACTION CLOSINGS, ACQUISITIONS AND
INTEGRATION OF ACQUIRED BUSINESSES, SOFTWARE INTEGRATION, DEVELOPMENT AND
LICENSING, AVAILABILITY OF AND COSTS ASSOCIATED WITH OBTAINING ADEQUATE AND
TIMELY SOURCES OF LIQUIDITY, DEPENDENCE ON EXISTING SOURCES OF FUNDING, ABILITY
TO REPAY OR REFINANCE INDEBTEDNESS (AT MATURITY OR UPON ACCLERATION), TO MEET
COLLATERAL CALLS BY LENDERS (UPON RE-VALUATION OF THE UNDERLYING ASSETS OR
OTHERWISE), TO GENERATE REVENUES SUFFICIENT TO MEET DEBT SERVICE PAYMENTS AND
OTHER OPERATING EXPENSES AND TO SECURITIZE WHOLE LOANS, TAXABLE INCOME EXCEEDING
CASH FLOW, AVAILABILITY OF DISCOUNT LOANS FOR PURCHASE, SIZE OF, NATURE OF AND
YIELDS AVAILABLE WITH RESPECT TO THE SECONDARY MARKET FOR MORTGAGE LOANS AND
FINANCIAL, SECURITIES AND SECURITIZATION MARKETS IN GENERAL, ALLOWANCES FOR LOAN
LOSSES, CHANGES IN REAL ESTATE CONDITIONS (INCLUDING LIQUIDITY, VALUATION,
REVENUES, RENTAL RATES, OCCUPANCY LEVELS AND COMPETING PROPERTIES), ADEQUACY OF
INSURANCE COVERAGE IN THE EVENT OF A LOSS, KNOWN OR UNKNOWN ENVIRONMENTAL
CONDITIONS, YEAR 2000 COMPLIANCE, OTHER FACTORS GENERALLY UNDERSTOOD TO AFFECT
THE REAL ESTATE ACQUISITION, MORTGAGE AND LEASING MARKETS, SECURITIES
INVESTMENTS AND RAPID GROWTH COMPANIES, AND OTHER RISKS DETAILED FROM TIME TO
TIME IN THE COMPANY'S REPORTS AND FILINGS WITH THE COMMISSION, INCLUDING ITS
REGISTRATION STATEMENTS ON FORMS S-1 AND S-3AND PERIODIC REPORTS ON FORMS 10-Q,
8-K AND 10-K. GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON SUCH STATEMENTS. THE COMPANY DOES NOT UNDERTAKE, AND
SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULT OF ANY
REVISIONS THAT 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.
54
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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 Trust 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 Trust
Securities of Ocwen Capital Trust I(3)
4.9 Form of Indenture between the Bank and The Bank of New York as
Trustee (5)
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)
10.6 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 September 30,
1998.
(1) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Company's 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
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.
55
<PAGE>
(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 similarly described exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
(b) Reports on Form 8-K.
(1) 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 U.K. subprime loans.
(2) 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 writedown and sale of its AAA rated agency IO
portfolio and its decision to explore strategic alliances.
(3) A Form 8-K was filed by the Company on July 31, 1998 which
contained a news release expanding on its strategic alliance
rationale.
(4) A Form 8-K was filed by the Company on October 9, 1998 which
contained a news release regarding third quarter earnings
estimates and the filing of a $250.0 million shelf
registration statement.
(5) A Form 8-K was filed by the Company on October 26, 1998 which
contained a news release announcing its third quarter 1998
results.
56
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Ocwen Financial Corporation
By: /s/ Mark S. Zeidman
---------------------------------------
Mark S. Zeidman,
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as its principal financial officer)
Date: November 16, 1998
56
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0000873860
<NAME> OCWEN FINANCIAL CORP.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 22,374
<INT-BEARING-DEPOSITS> 22,489
<FED-FUNDS-SOLD> 213,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 712,850
<INVESTMENTS-CARRYING> 88,430
<INVESTMENTS-MARKET> 88,430
<LOANS> 1,656,667
<ALLOWANCE> 25,239
<TOTAL-ASSETS> 3,390,728
<DEPOSITS> 2,076,537
<SHORT-TERM> 394,601
<LIABILITIES-OTHER> 124,046
<LONG-TERM> 225,317
0
0
<COMMON> 608
<OTHER-SE> 443,483
<TOTAL-LIABILITIES-AND-EQUITY> 3,390,728
<INTEREST-LOAN> 207,225
<INTEREST-INVEST> 29,288
<INTEREST-OTHER> 4,944
<INTEREST-TOTAL> 241,457
<INTEREST-DEPOSIT> 87,668
<INTEREST-EXPENSE> 141,291
<INTEREST-INCOME-NET> 100,166
<LOAN-LOSSES> 13,734
<SECURITIES-GAINS> (93,055)
<EXPENSE-OTHER> 165,972
<INCOME-PRETAX> 6,491
<INCOME-PRE-EXTRAORDINARY> 6,491
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,377
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
<YIELD-ACTUAL> 10.70
<LOANS-NON> 80,638
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 27,188
<CHARGE-OFFS> 16,322
<RECOVERIES> 328
<ALLOWANCE-CLOSE> 25,239
<ALLOWANCE-DOMESTIC> 25,239
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> Tag 18 includes Loans Available for Sale of $337,336, Loan Portfolio of
$224,741, and Discount Loan Portfolio of $1,094,590.
<F2> Tag 19 includes Allowance for Loan Losses on Loan Portfolio of $4,143, and
on Discount Loan Portfolio of $21,096.
<F3> Tag 22 includes Securities sold under agreements to repurchase of $60,798,
and Obligations outstanding under lines of credit of $333,803.
<F4> Tag 30 includes Interest Income on Loans Available for Sale of $46,185,
Loans of $31,688, and Discount Loans of $129,352.
<F5> Tag 38 includes Gains on sale of securities of $8,125 and an impairment
loss on AAA-rated agency IOs of $101,180.
<F6> Tag 39 includes Non-interest expense of $155,777 and Distributions on
Company-obligated, Mandatorily Redeemable Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures of the Company of $10,195.
</FN>
</TABLE>
