UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-21341
OCWEN FINANCIAL CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0039856
- ------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(561) 682-8000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Number of shares of Common Stock, $.01 par value, outstanding as of August 9,
1999: 60,601,156
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OCWEN FINANCIAL CORPORATION
FORM 10-Q
I N D E X
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PART I - FINANCIAL INFORMATION PAGE
Item 1. Interim Consolidated Financial Statements (Unaudited).............. 3
Consolidated Statements of Financial Condition
at June 30, 1999 and December 31, 1998........................... 3
Consolidated Statements of Operations for the three and six
months ended June 30, 1999 and 1998.............................. 4
Consolidated Statements of Comprehensive Income for the three
and six months ended June 30, 1999 and 1998...................... 5
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 1999........................... 6
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998.............................. 7
Notes to Consolidated Financial Statements......................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 57
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 62
Signature................................................................... 64
2
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PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Assets:
Cash and amounts due from depository institutions ............................... $ 107,476 $ 120,805
Interest earning deposits ....................................................... 18,127 49,374
Federal funds sold .............................................................. 75,000 275,000
Securities available for sale, at fair value .................................... 733,271 593,347
Loans available for sale, at lower of cost or market ............................ 132,425 177,847
Investment in capital stock of Federal Home Loan Bank, at cost .................. 10,825 10,825
Loan portfolio, net ............................................................. 133,678 230,312
Discount loan portfolio, net .................................................... 1,008,764 1,026,511
Investments in low-income housing tax credit interests .......................... 180,566 144,164
Investment in unconsolidated entities ........................................... 79,958 86,893
Real estate owned, net .......................................................... 183,162 201,551
Investment in real estate ....................................................... 22,256 36,860
Premises and equipment, net ..................................................... 43,805 33,823
Income taxes receivable ......................................................... 36,627 34,333
Deferred tax asset .............................................................. 68,279 66,975
Excess of purchase price over net assets acquired, net .......................... 17,030 12,706
Principal, interest and dividends receivable .................................... 11,798 18,993
Escrow advances on loans ........................................................ 107,097 88,277
Other assets .................................................................... 42,123 99,483
----------- -----------
$ 3,012,267 $ 3,308,079
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ..................................................................... $ 1,874,553 $ 2,175,016
Securities sold under agreements to repurchase ............................... 133,741 72,051
Obligations outstanding under lines of credit ................................ 94,039 179,285
Notes, debentures and other interest bearing obligations ..................... 279,236 225,000
Accrued interest payable ..................................................... 27,318 33,706
Accrued expenses, payables and other liabilities ............................. 41,928 61,053
----------- -----------
Total liabilities .......................................................... 2,450,815 2,746,111
----------- -----------
Company-obligated, mandatorily redeemable securities of subsidiary
trust holding solely junior subordinated debentures of the Company ............ 125,000 125,000
Minority interest ............................................................... 465 592
Commitments and contingencies (Note 7)
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; 60,601,156 and
60,800,357 shares issued and outstanding at June 30, 1999 and December 31,
1998, respectively ......................................................... 608 608
Treasury Stock, 205,300 shares at June 30, 1999 .............................. (1,832) --
Additional paid-in capital ................................................... 166,262 166,234
Retained earnings ............................................................ 262,953 257,170
Accumulated other comprehensive income, net of taxes:
Unrealized gain on securities available for sale ........................... 9,947 14,057
Net unrealized foreign currency translation loss ........................... (1,951) (1,693)
----------- -----------
Total stockholders' equity ................................................. 435,987 436,376
----------- -----------
$ 3,012,267 $ 3,308,079
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Three Months Six Months
---------------------------- ----------------------------
For the periods ended June 30, 1999 1998 1999 1998
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Federal funds sold and repurchase agreements .................. $ 2,059 $ 1,404 $ 5,454 $ 2,437
Securities available for sale ................................. 15,659 8,728 32,848 16,672
Loans available for sale ...................................... 11,014 25,291 19,144 34,794
Loans ......................................................... 8,878 11,655 15,044 17,917
Discount loans ................................................ 25,553 42,281 55,556 79,078
Investment securities and other ............................... 384 1,532 1,035 2,017
------------ ------------ ------------ ------------
63,547 90,891 129,081 152,915
------------ ------------ ------------ ------------
Interest expense:
Deposits ...................................................... 23,559 28,677 50,387 56,522
Securities sold under agreements to repurchase ................ 2,281 2,062 3,772 3,701
Obligations outstanding under lines of credit ................. 5,293 15,103 9,017 19,623
Notes, debentures and other interest bearing obligations ...... 6,705 6,734 13,460 13,586
------------ ------------ ------------ ------------
37,838 52,576 76,636 93,432
------------ ------------ ------------ ------------
Net interest income before provision for loan losses .......... 25,709 38,315 52,445 59,483
Provision for loan losses ..................................... 623 9,675 4,362 11,929
------------ ------------ ------------ ------------
Net interest income after provision for loan losses ........... 25,086 28,640 48,083 47,554
------------ ------------ ------------ ------------
Non-interest income (loss):
Servicing fees and other charges .............................. 18,929 13,972 37,180 23,696
(Loss) gain on interest earning assets, net ................... (5,867) (48,015) 14,275 (23,261)
Gain on real estate owned, net ................................ 2,677 10,521 3,306 11,547
Other income .................................................. 9,073 9,771 15,625 15,648
------------ ------------ ------------ ------------
24,812 (13,751) 70,386 27,630
------------ ------------ ------------ ------------
Non-interest expense:
Compensation and employee benefits ............................ 24,330 29,766 51,540 51,247
Occupancy and equipment ....................................... 8,732 8,507 19,369 14,925
Loan expenses ................................................. 2,652 7,357 6,780 9,694
Net operating loss on investments in real estate and
certain low-income housing tax credit interests ............ 1,374 1,046 3,221 2,292
Amortization of excess of purchase price over net
assets acquired ............................................ 257 563 487 934
Other operating expenses ...................................... 10,440 9,010 18,511 11,168
------------ ------------ ------------ ------------
47,785 56,249 99,908 90,260
------------ ------------ ------------ ------------
Distributions on Company-obligated, mandatorily redeemable
securities of subsidiary trust holding solely junior
subordinated debentures ....................................... 3,398 3,398 6,797 6,797
Equity in (losses) earnings of investment in unconsolidated
entities ...................................................... (3,470) 544 (4,713) 544
------------ ------------ ------------ ------------
(Loss) income before income taxes ............................... (4,755) (44,214) 7,051 (21,329)
Income tax benefit (expense) .................................... 972 6,383 (1,396) 5,810
Minority interest in net loss (income) of consolidated subsidiary 96 (68) 128 (35)
------------ ------------ ------------ ------------
Net (loss) income ............................................. $ (3,687) $ (37,899) $ 5,783 $ (15,554)
============ ============ ============ ============
(Loss) income per share:
Basic ......................................................... $ (0.06) $ (0.62) $ 0.10 $ (0.26)
============ ============ ============ ============
Diluted ....................................................... $ (0.06) $ (0.62) $ 0.10 $ (0.26)
============ ============ ============ ============
Weighted average common shares outstanding:
Basic ......................................................... 60,730,614 60,713,593 60,765,485 60,682,432
============ ============ ============ ============
Diluted ....................................................... 60,730,614 60,713,593 60,807,036 60,682,432
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
Three Months Six Months
-------------------- --------------------
For the periods ended June 30, 1999 1998 1999 1998
- ---------------------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) .............................................. $ (3,687) $(37,899) $ 5,783 $(15,554)
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale ........... (6,683) 18,296 (1,498) 23,455
Less: Reclassification adjustment .......................... 364 -- (2,613) --
-------- -------- -------- --------
Net change in unrealized gains on securities
available for sale ........................................ (6,319) 18,296 (4,111) 23,455
Unrealized foreign currency translation adjustment arising
during the period ......................................... (432) -- (257) --
-------- -------- -------- --------
Other comprehensive income .................................. (6,751) 18,296 (4,368) 23,455
-------- -------- -------- --------
Comprehensive (loss) income .................................... $(10,438) $ 19,603 $ 1,415 $ 7,901
======== ======== ======== ========
Disclosure of reclassification adjustment:
Unrealized holding gains arising during the period on
securities sold ............................................ $ 371 $ 250
Less: Adjustment for gains included in net (loss) income ... (7) (2,863)
-------- -------
Net reclassification adjustment for gains recognized in
other comprehensive (loss) income in prior years .......... $ 364 $(2,613)
======== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
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5
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(DOLLARS IN THOUSANDS)
Accumulated
other
Common Stock Additional comprehensive
---------------------- Paid-in Treasury Retained income,
Shares Amount Capital Stock earnings net of taxes Total
---------- --------- ----------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 ........... 60,800,357 $ 608 $ 166,234 $ -- $ 257,170 $ 12,364 $ 436,376
Net income .............................. -- -- -- -- 5,783 -- 5,783
Change in unearned directors'
compensation .......................... 6,099 -- 28 -- -- -- 28
Purchase of treasury shares ............. (205,300) -- -- (1,832) -- -- (1,832)
Other comprehensive income, net of taxes:
Change in unrealized gain on
securities available for sale ...... -- -- -- -- -- (4,111) (4,111)
Change in unrealized foreign
currency translation loss .......... -- -- -- -- -- (257) (257)
---------- --------- ----------- ----------- ---------- ---------- -----------
Balances at June 30, 1999 ............... 60,601,156 $ 608 $ 166,262 $ (1,832) $ 262,953 $ 7,996 $ 435,987
=========== ========= =========== =========== ========== ========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
6
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the six months ended June 30, 1999 1998
- ---------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................................. $ 5,783 $ (15,554)
Adjustments to reconcile net income (loss) to net cash provided
by operating Activities:
Net cash provided by trading activities ....................................... 36,804 55,657
Proceeds from sale of loans available for sale ................................ 560,336 943,947
Purchases of loans available for sale ......................................... (47,103) (350,622)
Origination of loans available for sale ....................................... (481,720) (399,221)
Principal payments received on loans available for sale ....................... 18,764 52,464
Premium amortization, net ..................................................... 13,116 75,508
Depreciation and amortization ................................................. 12,084 6,703
Provision for loan losses ..................................................... 4,362 11,929
Provision for real estate owned ............................................... 14,840 5,871
(Gain) loss on sale of interest-earning assets, net ........................... (14,275) 15,080
Gain on sale of real estate owned, net ........................................ (21,406) (23,382)
Gain on sale of investment in real estate ..................................... (1,631) --
Gain on sale of low-income housing tax credit interests ...................... -- (4,746)
Equity in losses (earnings) of unconsolidated entities, net ................... 4,713 (544)
Decrease (increase) in principal, interest and dividends receivable ........... 7,195 (6,045)
Increase in income taxes receivable ........................................... (2,293) (11,386)
Increase in deferred tax asset ................................................ (1,304) (33,466)
Increase in escrow advances ................................................... (18,820) (10,153)
Decrease (increase) in other assets, net ...................................... 41,525 (62,743)
(Decrease) increase in accrued expenses, interest payable
and other liabilities ....................................................... (25,614) 42,926
--------- ---------
Net cash provided by operating activities ........................................ 105,356 292,223
--------- ---------
Cash flows from investing activities:
Proceeds from sale of securities available for sale ........................... 633 91,230
Purchase of securities available for sale ..................................... (479,224) (453,449)
Maturities of and principal payments received on securities
available for sale .......................................................... 290,113 148,621
Purchase of securities held for investment .................................... -- (74,084)
Investment in low-income housing tax credit interests ......................... (37,717) (23,030)
Proceeds from sale of low income housing tax credit interests ................. -- 21,927
Proceeds from sale of discount loans .......................................... 238,704 318,222
Proceeds from sale of loans held for investment ............................... 26,243 --
Purchase and origination of loans held for investment, net of
undisbursed loan funds ...................................................... (15,658) (104,351)
Purchase of discount loans .................................................... (395,298) (587,608)
Decrease in real estate held for investment ................................... 16,447 43,519
Principal payments received on loans held for investment ...................... 84,425 90,102
Principal payments received on discount loans ................................. 107,813 175,840
Proceeds from sale of real estate owned ....................................... 142,363 155,050
Purchase of real estate owned in connection with discount loan purchases ...... (31,490) (7,769)
Acquisition of subsidiaries ................................................... (5,196) (426,096)
Additions to premises and equipment ........................................... (20,475) (20,954)
--------- ---------
Net cash used in investing activities ............................................ (78,317) (652,830)
--------- ---------
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(Continued on next page)
7
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
For the six months ended June 30, 1999 1998
- --------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Cash flows from financing activities:
(Decrease) increase in deposits ........................................ $ (300,463) $ 161,555
Increase in securities sold under agreements to repurchase ............. 61,690 25,720
Repayment of short-term notes .......................................... -- (1,506)
Net (repayments) proceeds from issuance of obligations
under lines of credit ................................................ (85,246) 203,153
Payments and repurchase of notes and mortgages payable ................. 4,236 --
Advances from the Federal Home Loan Bank ............................... 50,000 --
Exercise of common stock options ....................................... -- 15,350
Repurchase of common stock options ..................................... -- (14,107)
Repurchase of common stock (treasury stock)............................. (1,832) --
Repurchase of common stock in connection with acquisition of
subsidiary ........................................................... -- (7,772)
----------- -----------
Net cash (used) provided by financing activities .......................... (271,615) 382,393
----------- -----------
Net (decrease) increase in cash and cash equivalents ...................... (244,576) 21,786
Cash and cash equivalents at beginning of period .......................... 445,179 152,244
----------- -----------
Cash and cash equivalents at end of period ................................ $ 200,603 $ 174,030
=========== ===========
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions ...................... $ 107,476 $ 16,160
Interest earning deposits .............................................. 18,127 19,870
Federal funds sold and repurchase agreements ........................... 75,000 138,000
----------- -----------
$ 200,603 $ 174,030
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................................. $ 83,024 $ 93,031
=========== ===========
Income taxes ......................................................... $ 524 $ 34,425
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Real estate owned acquired through foreclosure ....................... $ 83,532 $ 106,030
=========== ===========
Exchange of discount loans and loans available
for sale for securities ............................................ $ 758,032 $ 1,233,811
=========== ===========
Acquisition of businesses:
Fair value of assets acquired ........................................... $ 5,304 $ 449,420
Liabilities assumed ..................................................... 101 15,069
Less stock issued ....................................................... -- (7,772)
----------- -----------
Cash paid ............................................................... 5,203 426,579
Less cash acquired ...................................................... (7) (483)
----------- -----------
Net cash paid for assets acquired ....................................... $ 5,196 $ 426,096
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
8
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in conformity with the instructions to Form 10-Q and Article 10, Rule
10-01 of Regulation S-X for interim financial statements. Accordingly, they do
not include all of the information and footnotes required by U.S. 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 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 Bank is a federally chartered savings bank regulated by the Office
of Thrift Supervision ("OTS").
In the opinion of management, the accompanying financial statements
contain all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the Company's financial condition at June 30, 1999 and
December 31, 1998, the results of its operations for the three and six months
ended June 30, 1999 and 1998, its comprehensive income for the three and six
months ended June 30, 1999 and 1998, its cash flows for the six months ended
June 30, 1999 and 1998, and its changes in stockholders' equity for the six
months ended June 30, 1999. The results of operations and other data for the six
month period ended June 30, 1999 are not necessarily indicative of the results
that may be expected for any other interim periods or the entire year ending
December 31, 1999. 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 Annual Report on
Form 10-K for the year ended December 31, 1998. Certain reclassifications have
been made to the prior period's consolidated financial statements to conform to
the June 30, 1999 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 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 supercedes 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.
9
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
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 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 what the impact on the results of operations, financial position
or cash flows would be as a result of implementing SFAS No. 133.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133 an amendment of SFAS No. 133." SFAS No. 137 defers the effective date of
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS No. 137 is effective upon issuance.
NOTE 3 ACQUISITIONS
On June 2, 1999, OTX acquired substantially all of the assets of
Synergy Software, LLC ("Synergy"), a developer of commercial and multi-family
mortgage servicing systems, for $10.0 million of which $5.0 million has been
paid and $5.0 million is a holdback which will be released over time if certain
performance objectives are attained. Synergy is in the final stages of
developing its SynergyOPEN(TM) software, a 32-bit, Microsoft(R) Windows-based
commercial and multifamily mortgage servicing system that employs multi-tier
architecture to allow distributed computing. The acquisition was accounted for
as a purchase. The excess of purchase price over net assets acquired related to
this transaction amounted to $4,811 and is being amortized on a straight-line
basis over a period of 15 years. Synergy is a wholly-owner subsidiary of OTX.
On July 25, 1999 OCN entered into a definitive merger agreement with
OAC (the "Merger") providing for OCN to acquire OAC for 0.71 shares of OCN
common stock for each outstanding share of OAC common stock (other than those
OAC shares owned by OCN or its subsidiaries). OCN has agreed to provide in
certain circumstances up to $25 million in financing for OAC's operations prior
to the merger. The Merger, which is structured to be taxable to the OAC
shareholders, is expected to close in the fourth quarter of 1999, subject to
antitrust approvals and the approval of the shareholders of each of OCN and OAC.
In connection therewith, on August 10, 1999, OCN filed a joint proxy and
registration statement on Form S-4 with the Securities and Exchange Commission
("SEC"). If the Merger is consummated, OAC will no longer qualify as a REIT
under the provisions of the Code, which requires a REIT to be owned by 100 or
more persons. If OAC does not qualify as a REIT, it will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. See Note 7.
NOTE 4 CAPITAL SECURITIES
In August 1997, Ocwen Capital Trust I ("OCT"), a wholly-owned
subsidiary of OCN, issued $125,000 of 10 7/8% Capital Securities (the "Capital
Securities"). Proceeds from issuance of the Capital Securities were invested in
10 7/8% Junior Subordinated Debentures issued by OCN. The Junior Subordinated
Debentures, which represent the sole assets of OCT, will mature on August 1,
2027.
Holders of the Capital Securities are entitled to receive cumulative
cash distributions accruing from the date of original issuance and payable
semi-annually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998, at an annual rate of 10 7/8% of the liquidation amount of
$1,000 per Capital Security. Payment of distributions out of moneys held by OCT,
and payments on liquidation of OCT or the redemption of Capital Securities, are
guaranteed by the Company to the extent OCT has funds available. If the Company
does not make principal or interest payments on the Junior Subordinated
Debentures, OCT will not have sufficient funds to make distributions on the
Capital Securities, in which event the guarantee shall not apply to such
distributions until OCT has sufficient funds available.
The Company has the right to defer payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 10 consecutive semi-annual periods with respect to each deferral
period, provided that no extension period may extend beyond the stated maturity
of the Junior Subordinated Debentures. Upon the termination of any such
extension period and the payment of all amounts then due on any interest payment
date, the Company may elect to begin a new extension period. Accordingly, there
could be multiple extension periods of varying lengths throughout the term of
the Junior Subordinated Debentures. If interest payments on the Junior
Subordinated Debentures are deferred, distributions on the Capital Securities
will also be deferred and the Company may, 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.
10
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
The Junior Subordinated Debentures are redeemable prior to maturity at
the option of the Company, subject to the receipt of any necessary prior
regulatory approval, (i) in whole or in part on or after August 1, 2007 at a
redemption price equal to 105.438% of the principal amount thereof on August 1,
2007 declining ratably on each August 1 thereafter to 100% on or after August 1,
2017, plus accrued interest thereon, or (ii) at any time, in whole (but not in
part), upon the occurrence and continuation of a special event (defined as a tax
event, regulatory capital event or an investment company event) at a redemption
price equal to the greater of (a) 100% of the principal amount thereof or (b)
the sum of the present values of the principal amount and premium payable with
respect to an optional redemption of such Junior Subordinated Debentures on
August 1, 2007, together with scheduled payments of interest from the prepayment
date to August 1, 2007, discounted to the prepayment date on a semi-annual basis
at the adjusted Treasury rate plus accrued interest thereon to the date of
prepayment. The Capital Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at maturity or
their earlier redemption, in an amount equal to the amount of the related Junior
Subordinated Debentures maturing or being redeemed and at a redemption price
equal to the redemption price of the Junior Subordinated Debentures, plus
accumulated and unpaid distributions thereon to the date of redemption.
For financial reporting purposes, OCT is treated as a subsidiary of the
Company and, accordingly, the accounts of OCT are included in the consolidated
financial statements of the Company. Intercompany transactions between OCT and
the Company, including the Junior Subordinated Debentures, are eliminated in the
consolidated financial statements of the Company. The Capital Securities are
presented as a separate caption between liabilities and stockholders' equity in
the consolidated statement of financial condition of the Company as
"Company-obligated, mandatorily redeemable securities of subsidiary trust
holding solely junior subordinated debentures of the Company". Distributions
payable on the Capital Securities are recorded as a separate caption immediately
following non-interest expense in the consolidated statement of operations of
the Company. The Company intends to continue this method of accounting going
forward.
NOTE 5 DERIVATIVE FINANCIAL INSTRUMENTS
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
swaps. Under swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional amount. The terms
of the swaps provide for the Company to receive a floating rate of interest
equal to the London Interbank Offered Rate ("LIBOR") and to pay fixed interest
rates. The notional amount of the outstanding swap is amortized (i.e., reduced)
monthly based upon estimated prepayment rates. The Company had no interest rate
swaps outstanding at June 30, 1999 and December 31, 1998.
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. Eurodollar
futures contracts have been sold by the Company to hedge the maturity risk of
certain short-duration mortgage-related securities. 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. The Company
had no interest rate futures contracts outstanding at June 30, 1999 and December
31, 1998.
The Company also manages its interest rate risk by purchasing European swaptions
and put options. A European swaption is an option to enter into an interest rate
swap at a future date at a specific rate. A European put option allows the
Company to sell a specified quantity of an asset, at a specified price at a
specified date. The following table sets for the terms and values of these
11
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
financial instruments at June 30, 1999. The Company held no such financial
instruments at December 31, 1998.
<TABLE>
<CAPTION>
Notional Strike
Amount Maturity Rate/Price Fair Value
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
European 10 year treasury
swaption .......................... $ 2,000 8/99 6.70% $ 23
7,500 3/00 6.78% 189
5,800 5/00 6.72% 176
European 10 year treasury
put option, 4.75% due 11/05/08..... -- 11/99 $ 92.91 139
------- ----------
$15,300 $ 527
======= ==========
</TABLE>
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 investment 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.
The Company sells short foreign currency futures contracts ("currency
futures") to hedge its foreign currency exposure related to its equity
investment in Ocwen UK. Periodically, the Company adjusts the amount of currency
futures contracts it has entered into in response to changes in its equity
investment in Ocwen U.K. In addition, during 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 had the right to receive $1,547 and pay (pound)938. These
currency futures were closed during January 1999.
The fair value of the currency futures is based on quoted market prices.
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)27,500 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.
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 accumulated other
comprehensive income in stockholders' equity.
12
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
The following table sets forth the terms and values of these financial
instruments at June 30, 1999, and December 31, 1998.
<TABLE>
<CAPTION>
Notional Amount
--------------------------- Contract Unamortized
Maturity Pay Receive Rate Discount Fair Value
-------- ------------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 1999:
Currency swap...................... 2003 (pound)27,500 $ 43,546 1.5835 $ 1,297 $ 165
============= ========= ========= =========
British Pound currency futures..... 1999 (pound)31,000 $ 49,724 1.6040 n/a $ 769
1999 14,250 22,886 1.6060 n/a 382
1999 563 895 1.5910 n/a (6)
------------- --------- ---------
(pound)45,813 $ 73,505 $ 1,145
============= ========= =========
DECEMBER 31, 1998:
Currency swap...................... 2003 (pound)27,500 $ 43,546 1.5835 $ 1,562 $ 2,096
============= ========= ========= =========
British Pound currency futures..... 1999 (pound) 938 $ 1,547 1.6500 n/a $ (6)
1999 26,563 43,828 1.6500 n/a (181)
------------- --------- ---------
(pound)27,501 $ 45,375 $ (187)
============= ========= =========
</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 counterparty 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.
On January 1, 1999, eleven of the fifteen member countries of the
European Union converted to a common currency (the "Euro"). Since such time
transactions have been 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. As a result, the Euro conversion had no effect on the
Company's financial condition or results of operations.
NOTE 6 REGULATORY REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions subject to Office
of Thrift Supervision ("OTS") supervision. The Bank must follow specific capital
guidelines stipulated by the OTS which involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items. An institution
that fails to comply with its regulatory capital requirements must obtain OTS
approval of a capital plan and can be subject to a capital directive and certain
restrictions on its operations. At June 30, 1999, the minimum regulatory capital
requirements were:
o Tangible and core capital of 1.50 percent and 3.00 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 8.00 percent of
the value of risk-weighted assets.
13
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
At June 30, 1999, the Bank was "well-capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To be
categorized as "well-capitalized," the Bank must maintain minimum core capital,
Tier 1 risk-based capital and total risk-based capital ratios as set forth in
the table below. The Bank's capital amounts and classification are subject to
review by federal regulators about components, risk-weightings and other
factors.
The following tables summarize the Bank's actual and required
regulatory capital at June 30, 1999:
<TABLE>
<CAPTION>
To Be Well
Minimum Capitalized for Commitment
for Capital Prompt Corrective Capital
Actual Adequacy Purposes Action Provisions Requirements
---------------------- --------------------- ---------------------- ------------
Ratio Amount Ratio Amount Ratio Amount Ratio
------ ----------- ----- ----------- ----- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stockholders' equity, and ratio
to total assets ........................... 10.28% $ 253,082
Net unrealized gain on certain available
for sale securities ....................... (729)
Excess mortgage servicing rights............. (588)
Acquired real estate......................... (19,846)
------------
Tangible capital, and ratio to adjusted
total assets .............................. 9.50% $ 231,919 1.50% $ 36,629
============ ===========
Tier 1 (core) capital, and ratio to
adjusted total assets ..................... 9.50% $ 231,919 3.00% $ 73,257 5.00% $ 122,095 9.00%
=========== ===========
Low-level recourse deduction................. (12,181)
------------
Tier 1 capital, and ratio to
risk-weighted assets ...................... 11.52% $ 219,738 6.00% $ 114,399
============ ===========
Allowance for loan and lease losses.......... 23,853
Subordinated debentures...................... 98,000
------------
Tier 2 capital............................... 121,853
------------
Total risk-based capital, and ratio to
risk-weighted assets ...................... 17.92% $ 341,591 8.00% $ 152,533 10.00% $ 190,666 13.00%
============ =========== ===========
Total regulatory assets...................... $ 2,463,072
============
Adjusted total assets........................ $ 2,441,909
============
Risk-weighted assets......................... $ 1,906,657
============
</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 December 31,
1996. 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.
14
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
The OTS recently published amendments to its capital distribution
regulation which became effective April 1, 1999. Under the revised regulation,
the Bank is required to file either an application or a notice with the OTS at
least 30 days prior to making a capital distribution. The OTS may deny the
Bank's application or disapprove its notice if the OTS determines that (a) the
Bank will be "undercapitalized", "significantly undercapitalized" or "critically
under capitalized", as defined in the OTS capital regulations, following the
capital distribution, (b) the proposed capital distribution raises safety and
soundness concerns or (c) the proposed capital distribution violates a
prohibition contained in any statute, regulation, agreement between the Bank and
the OTS or a condition imposed on the Bank in an application or notice approved
by the OTS.
In addition to these OTS regulations governing capital distributions,
the indenture governing the $98,000 of 12% subordinated debentures (the
"Debentures") due 2005 and issued by the Bank on June 12, 1995 in the original
amount of $100,000, 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.
Following an examination by the OTS in late 1996 and early 1997, 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 to be maintained by it
pursuant to such commitment.
NOTE 7 COMMITMENTS AND CONTINGENCIES
At June 30, 1999, the Company had commitments to (i) originate $22,515
of subprime loans secured by single family residential properties, subject to
the borrower meeting certain conditions, and (ii) fund $11,159 of loans secured
by multi-family residential buildings. In addition, the Company through the Bank
had commitments under outstanding letters of credit in the amount of $25,705 at
June 30, 1999. The Company, through its investment in subordinate securities and
subprime residuals, which had a fair value of $242,042 (amortized cost of
$229,721) at June 30, 1999, supports senior classes of securities.
On April 23, 1999, a complaint was filed on behalf of a putative class
of public shareholders of OAC in the Circuit Court of the Fifteenth Judicial
Circuit, Palm Beach County, Florida against OCN and OAC. On April 23, 1999, a
complaint was filed on behalf of the putative classes of public shareholders of
OAC in the Circuit Court of the Fifteenth Judicial Circuit, Palm Beach Country,
Florida against OAC and certain directors of OAC. The plaintiffs in both
complaints seek to enjoin the consummation of the merger. Alternatively, in the
event the merger is consummated, the plaintiffs seek damages for alleged
breaches of common law fiduciary duties.
NOTE 8 BUSINESS SEGMENT REPORTING
Operating segments are defined as components of an enterprise that (a)
engage in business activities from which it may earn revenues and incur
expenses, (b) whose operating results are regularly reviewed by the enterprise's
chief operating decision-maker to make decisions about resources to be allocated
to the segment and assess its performance, and (c) for which discrete financial
information is available. An operating segment may engage in business activities
for which it has yet to earn revenues. The Company conducts a variety of
business activities within the following segments:
15
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
<TABLE>
<CAPTION>
Net Interest Non-Interest Non-Interest Net (Loss) Total
At or for the three months ended June 30, 1999 Income Income Expense Income Assets
- ----------------------------------------------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Discount loans:
Single family residential loans ............ $ 5,370 $ (13,702) $ 3,836 $ (8,865) $ 521,263
Commercial real estate loans ............... 4,706 5,893 4,967 3,298 743,263
----------- ----------- ----------- ----------- -----------
10,076 (7,809) 8,803 (5,567) 1,264,526
----------- ----------- ----------- ----------- -----------
Domestic mortgage loan servicing ............ 1,343 13,548 9,590 3,223 80,165
Investment in low-income housing tax credits. (2,660) 1,745 3,002 1,452 225,624
Commercial real estate lending .............. 5,622 378 15 3,712 39,494
UK operations ............................... 8,363 19,031 12,234 9,217 257,397
OTX ......................................... 4 314 4,574 (4,256) 27,536
Domestic subprime family residential lending. 2,951 (3,427) 3,360 (2,518) 129,244
Investment securities ....................... 860 (1,514) 1,593 (1,756) 519,409
Equity investment in OAC .................... -- -- -- (3,267) 35,968
Other ....................................... (850) 2,546 4,614 (3,927) 432,904
----------- ----------- ----------- ----------- -----------
$ 25,709 $ 24,812 $ 47,785 $ (3,687) $ 3,012,267
=========== =========== =========== =========== ===========
Net Interest Non-Interest Non-Interest Net (Loss) Total
At or for the six months ended June 30, 1999 Income Income Expense Income Assets
- ----------------------------------------------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Discount loans:
Single family residential loans ............ $ 12,252 $ (4,132) $ 7,935 $ (4,343) $ 521,263
Commercial real estate loans ............... 11,788 13,528 11,064 6,800 743,263
----------- ----------- ----------- ----------- -----------
24,040 9,396 18,999 2,457 1,264,526
----------- ----------- ----------- ----------- -----------
Domestic mortgage loan servicing ............ 2,537 27,479 19,073 6,730 80,165
Investment in low-income housing tax credits. (5,021) 2,368 6,271 2,997 225,624
Commercial real estate lending .............. 7,197 1,102 419 5,850 39,494
UK operations ............................... 15,524 24,625 23,373 9,346 257,397
OTX ......................................... 10 706 7,977 (7,261) 27,536
Domestic subprime family
residential lending ....................... 7,280 (1,811) 10,139 (2,982) 129,244
Investment securities ....................... 2,452 (1,615) 3,201 (1,844) 519,409
Equity investment in OAC .................... -- -- -- (3,485) 35,968
Other ....................................... (1,574) 8,136 10,456 (6,025) 432,904
----------- ----------- ----------- ----------- -----------
$ 52,445 $ 70,386 $ 99,908 $ 5,783 $ 3,012,267
=========== =========== =========== =========== ===========
</TABLE>
16
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
<TABLE>
<CAPTION>
Net Interest Non-Interest Non-Interest Net (Loss) Total
At or for the three months ended June 30, 1998 Income Income Expense Income Assets
- ----------------------------------------------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Discount loans:
Single family residential loans ............ $ 6,134 $ 11,348 $ 586 $ 4,520 $ 766,262
Commercial real estate loans ............... 15,532 15,712 5,801 11,773 1,010,738
----------- ----------- ----------- ----------- -----------
21,666 27,060 6,387 16,293 1,777,000
----------- ----------- ----------- ----------- -----------
Domestic mortgage loan servicing ............ 1,575 10,262 13,408 819 21,445
Investment in low-income housing tax credits. (1,979) (60) 2,269 1,435 179,497
Commercial real estate lending .............. 6,149 2,940 490 5,173 146,952
UK operations ............................... 4,910 17,225 11,423 7,449 209,350
OTX ......................................... -- 307 3,453 (3,146) 18,506
Domestic subprime family residential
lending ................................... 3,492 503 10,118 (4,268) 309,254
Investment securities ....................... 724 (73,743) 1,459 (47,122) 418,152
Other ....................................... 1,778 1,755 7,242 (14,532) 425,423
----------- ----------- ----------- ----------- -----------
$ 38,315 $ (13,751) $ 56,249 $ (37,899) $ 3,505,579
=========== =========== =========== =========== ===========
Net Interest Non-Interest Non-Interest Net (Loss) Total
At or for the six months ended June 30, 1998 Income Income Expense Income Assets
- ----------------------------------------------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Discount loans:
Single family residential loans ............ $ 12,989 $ 31,643 $ 4,326 $ 18,703 $ 766,262
Commercial real estate loans ............... 26,450 20,617 10,112 17,057 1,010,738
----------- ----------- ----------- ----------- -----------
39,439 52,260 14,438 35,760 1,777,000
----------- ----------- ----------- ----------- -----------
Domestic mortgage loan servicing ............ 2,644 19,481 21,273 2,323 21,445
Investment in low-income housing tax credits. (4,470) 4,686 3,915 6,394 179,497
Commercial real estate lending .............. 7,241 2,913 1,226 5,068 146,952
UK operations ............................... 4,910 17,225 11,423 7,449 209,350
OTX ......................................... -- 512 4,760 (4,248) 18,506
Domestic subprime family residential lending. 7,123 7,989 19,888 (3,587) 309,254
Investment securities ....................... (1,799) (79,805) 2,980 (53,991) 418,152
Other ....................................... 4,394 2,369 10,357 (10,722) 425,423
----------- ----------- ----------- ----------- -----------
$ 59,482 $ 27,630 $ 90,260 $ (15,554) $ 3,505,579
=========== =========== =========== =========== ===========
</TABLE>
Other consists primarily of consolidated tax effects not allocated to
individual business units, individually insignificant business activities,
including the Company's historical loan portfolio of conventional single family
residential loans, small commercial loan originations, unsecured collections,
and the operations of OCC.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
GENERAL
The Company's primary business activities currently consist of its
single family residential, multi-family residential and commercial discount loan
acquisition and resolution activities, subprime single family residential
lending, mortgage loans serviced for others, the development of loan servicing
technology and software for the mortgage and real estate industries, and
investments in low-income housing tax credit interests.
The Company is a registered savings and loan holding company subject to
regulation by the OTS. The Bank is subject to regulation by the OTS, as its
chartering authority, and by the Federal Deposit Insurance Corporation ("FDIC")
as a result of its membership in the Savings Association Insurance Fund ("SAIF")
administered by the FDIC, which insures the Bank's deposits up to the maximum
extent permitted by law. The Bank is also subject to certain regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board") and
currently is a member of the Federal Home Loan Bank ("FHLB") of New York, one of
the 12 regional banks which comprise the FHLB System.
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;
(iv) sales by the Company of loans and securities; and (v) the volume and
frequency of the Company's securitization of loans. Additionally, the results
for the first quarter of 1998 do not include the operations of Ocwen UK, which
was acquired in April 1998.
The Company continuously evaluates opportunities with respect to 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 following discussion of the Company's consolidated financial
condition, results of operations, capital resources and liquidity should be read
in conjunction with the Interim Consolidated Financial Statements and related
Notes included in Item 1 hereof.
RECENT DEVELOPMENTS
On July 25, 1999 OCN entered into a definitive merger agreement with
OAC (the "Merger") providing for OCN to acquire OAC for 0.71 shares of OCN
common stock for each outstanding share of OAC common stock (other than those
OAC shares owned by OCN or its subsidiaries). OCN has agreed to provide in
certain circumstances up to $25 million in financing for OAC's operations prior
to the merger. The Merger, which is structured to be taxable to the OAC
shareholders, is expected to close in the fourth quarter of 1999, subject to
antitrust approvals and the approval of the shareholders of each of OCN and OAC.
In connection therewith, on August 10, 1999, OCN filed a joint proxy and
registration statement on Form S-4 with the Securities and Exchange Commission
("SEC"). If the Merger is consummated, OAC will no longer qualify as a REIT
under the provisions of the Code, which requires a REIT to be owned by 100 or
more persons. If OAC does not qualify as a REIT, it will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. See Note 7 to the Interim Consolidated Financial
Statements included in Item 1 hereof.
On August 13, 1999, the Company reported that it entered into a
contract with Southern Pacific Funding Corporation to service 17,660 subprime
residential mortgage loans having an unpaid principal balance of $1.3 billion.
The loans were transferred to the Company's new national servicing center in
Orlando, Florida on August 3, 1999.
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION June 30, December 31, Increase
1999 1998 (Decrease)
------------ ------------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA (Dollars in thousands)
Total assets ....................................................... $ 3,012,267 $ 3,308,079 (9)%
Securities available for sale, at fair value ....................... 733,271 593,347 24
Loans available for sale, at lower of cost or market ............... 132,425 177,847 (26)
Loan portfolio, net ................................................ 133,678 230,312 (42)
Discount loan portfolio, net ....................................... 1,008,764 1,026,511 (2)
Investment in low-income housing tax credit interests .............. 180,566 144,164 25
Investment in unconsolidated entities .............................. 79,958 86,893 (8)
Real estate owned, net ............................................. 183,162 201,551 (9)
Total liabilities .................................................. 2,450,815 2,746,111 (11)
Deposits ........................................................... 1,874,553 2,175,016 (14)
Obligations outstanding under lines of credit ...................... 94,039 179,285 (48)
Notes, debentures and other interest bearing obligations ........... 279,236 225,000 24
Capital Securities ................................................. 125,000 125,000 --
Stockholders' equity ............................................... 435,987 436,376 --
At or For the Three Months Ended June 30,
-----------------------------------------------
Increase
1999 1998 (Decrease)
------------ ------------- -----------
<S> <C> <C> <C>
OPERATIONS DATA (Dollars in thousands)
Net interest income ................................................ $ 25,709 $ 38,315 (33)%
Provision for loan losses .......................................... 623 9,675 (94)
Non-interest income (loss) ......................................... 24,812 (13,751) 280
Non-interest expense ............................................... 47,785 56,249 (15)
Equity in (losses) earnings of investment
in unconsolidated entities ....................................... (3,470) 544 (738)
Income tax benefit ................................................. 972 6,383 (85)
Net loss ........................................................... (3,687) (37,899) 90
PER COMMON SHARE
Loss per share:
Basic ........................................................... $ (0.06) $ (0.62) 90%
Diluted ......................................................... (0.06) (0.62) 90
Stock price:
High ............................................................ $ 9.38 $ 28.38 (67)%
Low ............................................................. 8.19 22.31 (63)
Close ........................................................... 8.88 26.88 (67)
Repurchase of common stock (treasury stock) (1) .................... $ 8.92 $ -- --
KEY RATIOS
Annualized return on average assets (2) ............................ (0.47)% (3.80)% 88%
Annualized return on average equity (2) ............................ (3.36) (34.88) 90
Efficiency ratio (3) ............................................... 101.56 226.44 (55)
Core (leverage) capital ratio ...................................... 9.50 9.64 (2)
Risk-based capital ratio ........................................... 16.71 16.11 (4)
</TABLE>
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
At or For the Six Months Ended June 30,
-----------------------------------------------------
Increase
1999 1998 (Decrease)
--------------- ---------------- --------------
OPERATIONS DATA (Dollars in thousands)
<S> <C> <C> <C>
Net interest income.............................................. $ 52,445 $ 59,483 (12)%
Provision for loan losses........................................ 4,362 11,929 (63)
Non-interest income.............................................. 70,386 27,630 155
Non-interest expense............................................. 99,908 90,260 11
Equity in (losses) earnings of investment
in unconsolidated entities .................................... (4,713) 544 (966)
Income tax (expense) benefit..................................... (1,396) 5,810 (76)
Net income (loss)................................................ 5,783 (15,554) 137
PER COMMON SHARE
Earnings (loss) per share:
Basic......................................................... $ 0.10 $ (0.26) 138%
Diluted....................................................... 0.10 (0.26) 138
Stock price:
High $ 12.31 $ 30.75 (62)%
Low 7.75 22.25 (65)
Close......................................................... 8.88 26.88 (67)
Repurchase of common stock (treasury stock) (1) ................. $ 8.92 $ -- --
KEY RATIOS
Annualized return on average assets (2).......................... 0.36% (.86)% 184%
Annualized return on average equity (2).......................... 2.64 (7.23) 173
Efficiency ratio (3) ............................................ 84.58 102.98 (18)
Core (leverage) capital ratio.................................... 9.50 9.64 (2)
Risk-based capital ratio......................................... 17.92 16.11 4
</TABLE>
(1) On April 16, 1999, the Company announced that its Board of Directors
had authorized the repurchase of up to six million of its issued and
outstanding shares of common stock. During the second quarter of 1999,
the Company repurchased 205,300 shares of its common stock for a total
of $1.8 million. The 205,300 shares were the first such shares
repurchased under this program.
(2) Exclusive of the impairment charges of $28.7 million and $81.8 million
($22.9 million and $65.6 million after tax) for the three months ended
June 30, 1999 and 1998, respectively, the annualized return on average
assets would have been 2.43% and 2.76% for the three months ended June
30, 1999 and 1998, respectively and the annualized return on average
equity would have been 17.48% and 25.49% for the three months ended
June 30, 1999 and 1998, respectively. Exclusive of the impairment
charges of $28.9 million and $90.3 million ($23.1 million and $72.2
million after tax) for the six months ended June 30, 1999 and 1998,
respectively, the annualized return on average assets would have been
1.81% and 3.13% for the six months ended June 30, 1999 and 1998,
respectively and the annualized return on average equity would have
been 13.19% and 26.34% for the six months ended June 30, 1999 and 1998,
respectively.
(3) The efficiency ratio represents non-interest expense divided by the sum
of net interest income before provision for loan losses, non-interest
income and equity in (losses) earning of investment in unconsolidated
entities. Exclusive of the impairment charges of $28.8 million and
$81.8 million for the three months ended June 30, 1999 and 1998,
respectively, the efficiency ratio would have been 63.02% and 52.61%
for the three months ended June 30, 1999 and 1998, respectively.
Exclusive of the impairment charges of $28.9 million and $90.3 million
for the six months ended June 30, 1999 and 1998, respectively, the
efficiency ratio would have been 67.96% and 50.71% for the six months
ended June 30, 1999 and 1998, respectively.
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
RESULTS OF OPERATIONS: THREE AND SIX MONTHS ENDED JUNE 30, 1999 VERSUS THREE AND
SIX MONTHS ENDED JUNE 30, 1998
SEGMENT PROFITABILITY. The following table presents the contribution by
business segment to the Company's net income for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ------------------------------------
Increase Increase
For the periods ended June 30, 1999 1998 (Decrease) 1999 1998 (Decrease)
- ------------------------------------ ----------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Discount loans:
Single family residential loans.. $ (8,865) $ 4,520 $ (13,385) $ (4,343) $ 18,703 $ (23,046)
Commercial real estate loans..... 3,298 11,773 (8,475) 6,800 17,057 (10,257)
----------- ---------- ---------- ---------- --------- ---------
(5,567) 16,293 (21,860) 2,457 35,760 (33,303)
----------- ---------- ---------- ---------- --------- ---------
Domestic mortgage loan servicing.... 3,223 819 2,404 6,730 2,323 4,407
Low-income housing tax credits...... 1,452 1,435 17 2,997 6,394 (3,397)
Commercial real estate lending...... 3,712 5,173 (1,461) 5,850 5,068 782
UK operations....................... 9,217 7,449 1,768 9,346 7,449 1,897
OTX ................................ (4,256) (3,146) (1,110) (7,261) (4,248) (3,013)
Domestic subprime single family
residential lending................ (2,518) (4,268) 1,750 (2,982) (3,587) 605
Investment securities............... (1,756) (47,122) 45,366 (1,844) (53,991) 52,147
Equity investment in OAC............ (3,268) -- (3,268) (3,485) -- (3,485)
Other............................... (3,926) (14,532) 10,606 (6,025) (10,722) 4,697
----------- ---------- ---------- ---------- --------- ---------
Net (loss) income $ (3,687) $ (37,899) $ 34,212 $ 5,783 $ (15,554) $ 21,337
=========== ========== ========== ========== ========= =========
</TABLE>
o SINGLE FAMILY RESIDENTIAL DISCOUNT LOANS. Net losses in 1999 included $22.8
million of pretax impairment charges on residential subordinate securities
recorded in the second quarter. Also in the second quarter of 1999, OCN
completed one securitization of single family residential loans with an
aggregate unpaid principal balance of $90.0 million and recorded a total
gain of $8.9 million, of which $6.7 million was a cash gain. In the second
quarter of 1998, the Company completed one securitization of single family
residential loans with an aggregate unpaid principal balance of $98.3
million, which accounted for a total gain of $12.2 million, of which $7.4
million was a cash gain. For the six months ended June 30, 1999 and 1998,
securitization gains totaled $22.8 million and $28.9 million, respectively.
See "Non-Interest Income."
o COMMERCIAL REAL ESTATE DISCOUNT LOANS. Net income for the first six months
of 1998 included $8.2 million of pretax gains on sales of large commercial
real estate owned properties as compared to $4.1 million for the same
period in 1999. Also contributing to the decline in net income for 1999,
was an increase in the provision for loss in fair value on real estate
owned, offset by a decline in the provision for loan losses. Net income for
1998 also included $4.8 million of pretax gains on the sale of large
commercial discount loans, as compared to $2.6 million of gains on sales of
large and small commercial discount loans and a $3.8 million gain on the
sale of commercial subordinate securities for the same period in 1999.
o DOMESTIC MORTGAGE LOAN SERVICING. The increase in net income from mortgage
loan servicing during 1999 reflects an increase in servicing fees as
compared to 1998, and was primarily due to an increase in the average
unpaid principal balance of loans serviced for others. The unpaid principal
balance of loans serviced for others averaged $10.24 billion and $10.40
billion during the three and six months ended June 30, 1999, respectively,
as compared to $7.12 billion and $6.63 billion during the three and six
months ended June 30, 1998.
o LOW-INCOME HOUSING TAX CREDITS. Net income for the six months ended June
30, 1998 included a $4.7 million gain on the sale of investments in two tax
credit interests during the first quarter of 1998.
o UK OPERATIONS. Net income for 1999 included a $10.2 million gain recorded
in connection with one securitization of subprime single family loans with
an aggregate unpaid principal balance of $295.2 million during the second
quarter. For 1998, net income included a $9.1 million gain recorded in
connection with one securitization of subprime single family loans with an
unpaid principal balance of $363.8 million during the second quarter.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
o OTX. Recently, OTX introduced its RealTrans(SM) software, an update to its
e-commerce solution for ordering mortgage and real estate products and
services via the Internet. Real Trans(SM) links banks, brokers, appraisers,
agents, title insurers, attorneys and other ancillary service providers to
facilitate the closing of mortgage and real estate transactions. The losses
recorded by OTX reflect the continued investment in the development of this
business. Additionally, on June 2, 1999, OTX acquired substantially all of
the assets of Synergy Software, LLC ("Synergy"), a developer of commercial
and multi-family mortgage servicing systems Synergy is in the final stages
of developing its SynergyOPEN (TM) software, a 32-bit, Microsoft(R)
Windows-based commercial and multifamily mortgage servicing system that
employs multi-tier architecture to allow distributed computing. See Note 4
to the Interim Consolidated Financial Statements included in Item 1 hereof.
o DOMESTIC SUBPRIME SINGLE-FAMILY RESIDENTIAL LENDING. Net losses in 1999
included $4.1 million of pretax impairment on subprime residual securities
in the second quarter as compared to $4.2 million in 1998, also in the
second quarter. In the fourth quarter of 1998, the Company closed its
domestic retail branch network, wrote down the related assets and goodwill,
and centralized its remaining operations in West Palm Beach. In 1999, the
Company closed its domestic wholesale branch network, resulting in a 1999
first quarter pre-tax charge of $1.6 million.
In the second quarter of 1999, the Company securitized loans (domestic)
aggregating $148.6 million and recorded a total gain on sale of $1.1
million, all of which was non-cash. In the second quarter of 1998, the
Company securitized loans with an aggregate unpaid principal balance of
$382.7 million for a gain of $9.7 million, all of which was non-cash. See
"Non-Interest Income."
The Company continues to investigate strategic alternatives with respect to
its subprime domestic wholesale operations and has begun investigating
strategic alternatives with respect to its UK operations.
o INVESTMENT SECURITIES. The net losses on investment securities during 1998
were primarily due to $86.1 million of pretax impairment losses ($77.6
million during the second quarter) on the Company's portfolio of AAA-rated
agency interest-only securities ("IOs") The Company discontinued this
investment activity and sold the IOs during the third quarter of 1998.
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.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------------------------------------------------------
1999 1998
-------------------------------------- ------------------------------------
Average Annualized Average Annualized
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS: (Dollars in thousands)
Federal funds sold and repurchase agreements... $ 173,451 $ 2,059 4.75% $ 127,444 $ 1,404 4.41%
Securities available for sale (1).............. 591,156 15,659 10.60 589,879 8,728 5.92
Loans available for sale (2)................... 373,723 11,014 11.79 998,282 25,291 10.13
Loan portfolio (2)............................. 174,442 8,878 20.36 285,609 11,655 16.32
Discount loan portfolio (2).................... 958,571 25,553 10.66 1,307,021 42,281 12.94
Investment securities and other................ 30,451 384 5.04 48,227 1,532 12.71
----------- ----------- ---------- ----------- --------- -------
Total interest-earning assets.................. 2,301,794 63,547 11.04 3,356,462 90,891 10.83
----------- ---------
Non-interest earning cash...................... 56,590 25,264
Allowance for loan losses...................... (28,400) (24,143)
Investments in low-income housing
tax credit interests........................ 170,761 113,851
Investment in unconsolidated entities.......... 83,893 45,929
Real estate owned, net......................... 197,152 176,613
Investment in real estate...................... 41,955 61,573
Other assets................................... 331,721 237,353
----------- -----------
Total assets................................ $ 3,155,466 $ 3,992,902
=========== ===========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits............... $ 26,083 252 3.86% $ 26,884 257 3.82%
Savings deposits............................... 1,536 9 2.34 1,743 10 2.29
Certificates of deposit........................ 1,536,659 23,298 6.06 1,843,357 28,410 6.16
----------- ----------- ---------- ----------- ---------- -------
Total interest-bearing deposits............. 1,564,278 23,559 6.02 1,871,984 28,677 6.13
Securities sold under agreements to repurchase. 145,768 2,281 6.26 159,371 2,062 5.18
Federal Home Loan Bank advances................ 3,473 37 4.26 -- -- --
Obligations outstanding under lines of credit.. 342,501 5,293 6.18 924,218 15,103 6.54
Notes, debentures and other.................... 224,810 6,668 11.86 226,373 6,734 11.90
----------- ----------- ---------- ----------- ---------- -------
Total interest-bearing liabilities......... 2,280,830 37,838 6.64 3,181,946 52,576 6.61
----------- ----------
Non-interest bearing deposits.................. 22,580 19,440
Escrow deposits................................ 196,240 142,986
Other liabilities.............................. 91,474 88,932
----------- -----------
Total liabilities........................... 2,591,124 3,433,304
Capital securities............................. 125,000 125,000
Stockholders' equity........................... 439,342 434,598
----------- -----------
Total liabilities and stockholders' equity.. $ 3,155,466 $ 3,992,902
=========== ===========
Net interest income before provision for
loan losses................................. $ 25,709 $ 38,315
=========== ==========
Net interest rate spread....................... 4.40% 4.22%
Net interest margin............................ 4.47% 4.57%
Ratio of interest-earning assets to
interest-bearing liabilities................ 101% 105%
</TABLE>
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Six months ended June 30,
----------------------------------------------------------------------------
1999 1998
-------------------------------------- ------------------------------------
Average Annualized Average Annualized
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS: (Dollars in thousands)
Federal funds sold and repurchase agreements... $ 229,576 $ 5,454 4.75% $ 102,164 $ 2,437 4.77%
Securities available for sale (1).............. 550,249 32,848 11.94 559,602 16,672 5.96
Loans available for sale (2)................... 325,369 19,144 11.77 668,838 34,794 10.40
Loan portfolio (2)............................. 194,403 15,044 15.48 283,412 17,917 12.64
Discount loan portfolio (2).................... 964,504 55,556 11.52 1,343,067 79,078 11.78
Investment securities and other................ 37,303 1,035 5.55 42,437 2,017 9.51
----------- ----------- ----------- ----------
Total interest-earning assets.................. 2,301,404 129,081 11.22 2,999,520 152,915 10.20
----------- ----------
Non-interest earning cash...................... 85,389 22,744
Allowance for loan losses...................... (26,651) (25,026)
Investments in low-income housing
Tax credit interests........................ 158,979 122,775
Investment in unconsolidated entities.......... 85,089 44,055
Real estate owned, net......................... 205,467 174,283
Investment in real estate...................... 41,112 65,569
Other assets................................... 342,295 219,556
----------- -----------
Total assets................................ $ 3,193,084 $ 3,623,476
=========== ===========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits............... $ 48,228 892 3.70% $ 29,966 613 4.09%
Savings deposits............................... 1,551 18 2.32 1,739 20 2.30
Certificates of deposit........................ 1,635,190 49,477 6.05 1,817,165 55,889 6.15
----------- ----------- ------- ----------- ---------- ----
Total interest-bearing deposits............. 1,684,969 50,387 5.98 1,848,870 56,522 6.11
Securities sold under agreements to repurchase. 111,520 3,772 6.76 131,130 3,701 5.64
Federal Home Loan Bank advances................ 1,737 37 4.26 3,740 109 5.83
Obligations outstanding under lines of credit.. 292,479 9,017 6.17 604,214 19,623 6.50
Notes, debentures and other.................... 225,334 13,423 11.91 226,626 13,477 11.89
----------- ----------- ----------- ----------
Total interest-bearing liabilities ......... 2,316,039 76,636 6.62 2,814,580 93,432 6.64
----------- ----------
Non-interest bearing deposits.................. 26,978 21,022
Escrow deposits................................ 195,683 126,283
Other liabilities.............................. 91,124 106,047
----------- -----------
Total liabilities........................... 2,629,824 3,067,932
Capital securities............................. 125,000 125,000
Stockholders' equity........................... 438,260 430,544
----------- -----------
Total liabilities and stockholders' equity.. $ 3,193,084 $ 3,623,476
=========== ===========
Net interest income before provision for
loan losses................................. $ 52,445 $ 59,483
=========== ==========
Net interest rate spread....................... 4.60% 3.56%
Net interest margin............................ 4.56% 3.97%
Ratio of interest-earning assets to
Interest-bearing liabilities................ 99% 107%
</TABLE>
(1) Excludes effect of unrealized gains or losses on securities available
for sale.
(2) The average balances include non-performing loans, interest on which is
recognized on a cash basis.
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
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior rate), (ii) changes
in rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Three Months Six Months
-------------------------------------- -----------------------------------
1999 vs. 1998 1999 vs. 1998
-------------------------------------- -----------------------------------
Increase (decrease) due to Increase (decrease) due to
-------------------------------------- -----------------------------------
For the periods ended June 30, Rate Volume Total Rate Volume Total
- ------------------------------------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (Dollars in thousands)
Federal funds sold and repurchase
agreements .................................. $ 116 $ 539 $ 655 $ (10) $ 3,027 $ 3,017
Securities available for sale.................. 6,912 19 6,931 16,459 (283) 16,176
Loans available for sale....................... 3,595 (17,872) (14,277) 4,083 (19,733) (15,650)
Loan portfolio................................. 2,445 (5,222) (2,777) 3,490 (6,363) (2,873)
Discount loan portfolio........................ (6,651) (10,077) (16,728) (1,682) (21,840) (23,522)
Investment securities and other................ (712) (436) (1,148) (761) (221) (982)
--------- --------- --------- --------- --------- ---------
Total interest-earning assets.............. 5,705 (33,049) (27,344) 21,579 (45,413) (23,834)
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Interest-bearing demand deposits............... 3 (8) (5) (64) 343 279
Savings deposits............................... -- (1) (1) -- (2) (2)
Certificate of deposit......................... (455) (4,657) (5,112) (893) (5,519) (6,412)
--------- ---------- ---------- --------- --------- ---------
Total interest-bearing deposits............ (452) (4,666) (5,118) (957) (5,178) (6,135)
Securities sold under agreements to
repurchase .................................. 406 (187) 219 672 (601) 71
Federal Home Loan Bank advances................ 37 -- 37 (24) (48) (72)
Obligations outstanding under lines
of credit.................................... (779) (9,031) (9,810) (949) (9,657) (10,606)
Notes, debentures and other obligations........ (20) (46) (66) 22 (76) (54)
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities............. (808) (13,930) (14,738) (1,236) (15,560) (16,796)
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest income...... $ 6,513 $ (19,119) $ (12,606) $ 22,815 $ (29,853) $ (7,038)
========= ========= ========= ========= ========= =========
</TABLE>
The Company's net interest income before provision for loan losses of
$25.7 million decreased $12.6 million or 33% during the three months ended June
30, 1999 as compared to the same period in the prior year. The decrease in net
interest income reflects a $27.3 million decrease in interest income, offset by
a $14.7 million decrease in interest expense, and occurred primarily as a result
of a decrease in the average balance of interest earning assets and interest
bearing liabilities. The net interest spread increased 18 basis points during
the three months ended June 30, 1999 as a result of a 21 basis point increase in
the weighted average yield on interest-earning assets and a 3 basis point
increase in the weighted average rate on interest-bearing liabilities. The
impact of these rate changes resulted in a $6.5 million increase in net interest
income. Average interest-earning assets decreased by $1.05 billion or 31% during
the three months ended June 30, 1999 and reduced interest income by $33.0
million, while average interest-bearing liabilities decreased $901.1 million or
28% and reduced interest expense by $13.9 million. The net impact of these
volume changes resulted in a decrease of $19.1 million to net interest income.
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Average Balance Increase Average Yield Increase
------------------------- (Decrease) ------------------------ (Decrease)
For the three months ended June 30, 1999 1998 $ 1999 1998 Basis Points
- ----------------------------------- ----------- ----------- ----------- ------------ ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and
repurchase agreements ........ $ 173,451 $ 127,444 $ 46,007 4.75% 4.41% 34
Securities available for sale... 591,156 589,879 1,277 10.60 5.92 468
Loans available for sale ....... 373,723 998,282 (624,559) 11.79 10.13 166
Loan portfolio ................. 174,442 285,609 (111,167) 20.36 16.32 404
Discount loan portfolio ........ 958,571 1,307,021 (348,450) 10.66 12.94 (228)
Investment securities
and other .................... 30,451 48,227 (17,776) 5.04 12.71 (767)
----------- ----------- -----------
$ 2,301,794 $ 3,356,462 $(1,054,668) 11.04 10.83 21
=========== =========== ===========
Average Balance Increase Average Yield Increase
------------------------- (Decrease) ------------------------ (Decrease)
For the six months ended June 30, 1999 1998 $ 1999 1998 Basis Points
- ---------------------------------- ----------- ----------- ----------- ------------ ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and
Repurchase agreements......... $ 229,576 $ 102,164 $ 127,412 4.75% 4.77% (2)
Securities available for sale... 550,249 559,602 (9,353) 11.94 5.96 598
Loans available for sale........ 325,369 668,838 (343,469) 11.77 10.40 137
Loan portfolio.................. 194,403 283,412 (89,009) 15.48 12.64 284
Discount loan portfolio......... 964,504 1,343,067 (378,563) 11.52 11.78 (26)
Investment securities
and other..................... 37,303 42,437 (5,134) 5.55 9.51 (396)
----------- ----------- ------------
$ 2,301,404 $ 2,999,520 $ (698,116) 11.22 10.20 102
=========== =========== ============
</TABLE>
Interest income on discount loans decreased by $16.7 million or 40% in
the three months ended June 30, 1999, as a result of a $348.4 million or 27%
decrease in the average balance and a 228 basis point decrease in the weighted
average yield earned. For the six months ended June 30, 1999, interest income on
discount loans decreased $23.5 million or 30% primarily as a result of a $378.6
million or 28% decrease in the average balance and a 26 basis point decline in
the average yield. Securitizations, as well as a decline in acquisition volume,
have contributed significantly to the decline in the average balance. The yield
on the discount loan portfolio is likely to fluctuate from period to period as a
result of the timing of resolutions, particularly the resolution of large
multi-family residential and commercial real estate loans, and the mix of the
overall portfolio between performing and nonperforming loans.
Interest income on loans available for sale decreased $14.3 million or
56% during the second quarter of 1999 as compared to the same period in 1998 as
a result of a $624.6 million or 63% decrease in the average balance, offset in
part by a 166 basis point increase in the weighted average yield earned. For the
first six months of 1999, interest income on loans available for sale decreased
$15.7 million or 45% due to a $343.5 million or 51% decline in the average
balance, offset in part by a 137 basis point increase in the average yield
earned. The decline in the average balance reflects securitizations of foreign
and domestic subprime loans and a decline in originations due in large part to
the closure of domestic subprime origination branch networks.
Interest income on the loan portfolio decreased by $2.8 million or 24%
in the three months ended June 30, 1999, as a result of a $111.2 million or 39%
decrease in the average balance, offset by a 404 basis point increase in the
weighted average yield earned. For the six months ended June 30, 1999, interest
income on the loan portfolio decreased $2.9 million or 16% as a result of an
$89.0 million or 31% decline in the average balance, offset in part by a 284
basis point increase in the average yield earned. The significant yields and
declining average balances on the loan portfolio reflect the continuing payoff
of multifamily and nonresidential loans.
26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Interest income on securities available for sale increased by $6.9
million or 79% during the second quarter of 1999 as compared to the same period
in 1998 primarily as a result of a 468 basis point increase in the weighted
average yield earned. For the first six months of 1999, interest income on
securities available for sale increased $16.2 million or 97% primarily due to a
598 basis point increase in the average yield. As indicated in the table below,
the higher yields earned during 1999 reflect a change in the composition of the
securities available for sale portfolio.
<TABLE>
<CAPTION>
Average Balance Annualized Yield
----------------------------- -----------------------------
For the three months ended June 30, 1999 1998 1999 1998
- ------------------------------------ ----------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
CMOs (AAA-rated)................ $ 362,820 $ 227,160 5.29% 5.54%
Subordinates and residuals...... 228,336 124,467 19.02 12.31
IOs (AAA-rated agency).......... -- 204,103 -- 1.29
Other........................... -- 34,149 -- 12.78
----------- --------------
$ 591,156 $ 589,879 10.60% 5.92%
=========== ==============
Average Balance Annualized Yield
----------------------------- -----------------------------
For the six months ended June 30, 1999 1998 1999 1998
- ------------------------------------ ----------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
CMOs (AAA-rated)................. $ 327,010 $ 211,242 5.57% 5.71%
Subordinates and residuals....... 223,239 109,873 21.27 18.56
IOs (AAA-rated agency)........... -- 201,026 -- (1.13)
Other............................ -- 37,461 -- 8.48
----------- --------------
$ 550,249 $ 559,602 11.94% 5.96%
=========== ==============
</TABLE>
The average yield on the IOs and residuals was adversely affected by
declining interest rates and the resulting increase in prepayment speeds. During
the second quarter of 1998, OCN discontinued its IO this investment activity and
sold its entire portfolio of IOs in July 1998.
<TABLE>
<CAPTION>
Average Balance Increase Average Rate Increase
------------------------- (Decrease) -------------------- (Decrease)
For the three months ended June 30, 1999 1998 $ 1999 1998 Basis Points
- ------------------------------------- ----------- ----------- ----------- ---------- --------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits ........................... $ 1,564,278 $ 1,871,984 $ (307,706) 6.02% 6.13% (11)
Securities sold under
agreements to repurchase .......... 145,768 159,371 (13,603) 6.26 5.18 108
Obligations outstanding under
lines of credit .................. 342,501 924,218 (581,717) 6.18 6.54 (36)
Notes, debentures and other......... 228,283 226,373 1,910 11.75 11.90 (15)
----------- ----------- -----------
$ 2,280,830 $ 3,181,946 $ (901,116) 6.64 6.61 3
=========== =========== ===========
</TABLE>
27
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Average Balance Increase Average Rate Increase
------------------------- (Decrease) -------------------- (Decrease)
For the six months ended June 30, 1999 1998 $ 1999 1998 Basis Points
- ------------------------------------- ----------- ----------- ----------- ---------- --------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits ........................... $ 1,684,969 $ 1,848,870 $ (163,901) 5.98% 6.11% (13)
Securities sold under agreements
to repurchase .................... 111,520 131,130 (19,610) 6.76 5.64 112
Obligations outstanding under
lines of credit .................. 292,479 604,214 (311,735) 6.17 6.50 (33)
Notes, debentures and other ........ 227,071 230,366 (3,295) 11.86 11.80 6
----------- ----------- -----------
$ 2,316,039 $ 2,814,580 $ (498,541) 6.62 6.64 (2)
=========== =========== ===========
</TABLE>
Interest expense on deposits decreased $5.1 million or 18% during the
three months ended June 30, 1999 primarily due to a $ 307.7 million or 16%
decrease in the average balance of certificates of deposit. For the six months
ended June 30, 1999, interest expense on deposits decreased $6.1 million or 11%,
also primarily due to a decline in the average balance of certificates of
deposit.
Interest expense on obligations outstanding under lines of credit
decreased $9.8 million or 65% during the second quarter of 1999 primarily due to
a $581.7 million or 63% decline in the average balance. For the first six months
of 1999, interest expense on obligations outstanding under lines of credit
decreased $10.6 million or 54% primarily due to a $311.7 million or 52% decline
in the average balance. Lines of credit are used primarily to fund the
acquisition and origination of subprime single family loans at OFS and Ocwen UK.
The decline in the average balance of lines of credit during 1999 is consistent
with the decline in the average balance of loans available for sale during the
same period. 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."
PROVISIONS FOR LOAN LOSSES. Provisions for losses on loans are charged
to operations to maintain an allowance for losses on each of the loan portfolio
and the discount loan portfolio at a level which management considers adequate
based upon an evaluation of known and inherent risks in such loan portfolios.
Management's periodic evaluation is based upon portfolio composition, asset
classifications, historical loss experience, current economic conditions and
trends, collateral values and other relevant factors.
The following table sets forth the components of the Company's
provision for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Six Months
------------------------------- -------------------------------
For the periods ended June 30, 1999 1998 1999 1998
- ------------------------------------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Discount loans........................... $ (1,280) $ 9,562 $ 3,409 $ 11,485
Loan portfolio........................... 1,903 113 953 444
------------- ------------- ------------- -------------
Total.................................. $ 623 $ 9,675 $ 4,362 $ 11,929
============= ============= ============= =============
</TABLE>
The decline in provisions for discount loan losses during 1999 as
compared to 1998, is primarily due to a decline in the discount loan balance.
Despite a decline in the loan portfolio balance, the provision for loan
portfolio losses increased during 1999 primarily as a result of an increase in
nonperforming loans. The following table sets forth the allowance for loan
losses as a percentage of the respective loan balances at the dates indicated.
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------------------------------------ -------------------------------------
Loan Allowance Loan Allowance
Allowance Balance as a % Allowance Balance as a %
---------- ---------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Discount loans.......... 20,405 1,029,169 1.98 22,852 1,444,358 1.58%
Loan portfolio.......... $ 5,853 139,531 4.19% $ 4,139 285,090 1.45
---------- ---------- --------- ----------
$ 26,258 $1,168,700 2.25% $ 26,991 $1,729,448 1.56%
========== ========== ========= ==========
</TABLE>
Overall, the Company's aggregate allowance for losses on the loan
portfolios and real estate owned at June 30, 1999 increased to 3.18% of the
respective balances as compared to 2.02% at June 30, 1998.
28
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Although management utilizes its best judgment in providing for
possible loan losses, there can be no assurance that the Company will not change
its provisions for possible loan losses in subsequent periods to a higher level
from that recorded to date in 1999. Changing economic and business conditions,
fluctuations in local markets for real estate, future changes in non-performing
asset trends, large upward movements in market interest rates or other reasons
could affect the Company's future provisions for loan losses. For further
discussion and analysis regarding the provisions for loan losses, see "Changes
in Financial Condition Allowances for Losses."
NON-INTEREST INCOME. The following table sets forth the principal
components of the Company's non-interest income during the periods indicated.
<TABLE>
<CAPTION>
Three Months Six Months
------------------------------ -------------------------------
For the periods ended June 30, 1999 1998 1998 1998
- -------------------------------------------- ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Servicing fees and other charges............ $ 18,929 $ 13,972 $ 37,180 $ 23,696
(Loss) gain on interest-earning assets, net. (5,867) (48,015) 14,275 (23,261)
Gain on real estate owned, net.............. 2,677 10,521 3,306 11,547
Other income................................ 9,073 9,771 15,625 15,648
------------ ------------ ------------ ------------
Total.................................. $ 24,812 $ (13,751) $ 70,386 $ 27,630
============ ============ ============ ============
</TABLE>
The increases in servicing fees and other charges reflects an increase
in loan servicing and related fees as a result of an increase in the average
balance of loans serviced for others. The unpaid principal balance of loans
serviced for others averaged $10.24 billion and $10.40 billion during the three
and six months ended June 30, 1999, respectively, as compared to $7.12 billion
and $6.63 billion during the three and six months ended June 30, 1998. The
increase in the average balance of loans serviced for others was primarily
related to servicing retained in connection with subprime securitizations, net
of repayments.
The Company completed construction of its national servicing center in
Orlando, Florida, in July 1999 as scheduled.
The following table sets forth the Company's loans serviced for others
at June 30, 1999.
<TABLE>
<CAPTION>
---------------------- ---------------------- -------------------- -----------------------
Discount Loans Subprime Loans (1) Other Loans Total
---------------------- ---------------------- -------------------- -----------------------
No. of No. of No. of No. of
Amount Loans Amount Loans Amount Loans Amount Loans
----------- ------- ----------- ------- ----------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Loans securitized ...... $ 1,162,660 18,555 $ 2,028,039 38,546 $ -- -- $ 3,190,699 57,101
Loans serviced for third
parties .............. 1,372,020 18,388 5,359,045 80,492 982,792 749 7,713,857 99,629
----------- ------ ----------- ------- ----------- ----- ----------- -------
$ 2,534,680 36,943 $ 7,387,084 119,038 $ 982,792 $ 749 $10,904,556 156,730
=========== ====== =========== ======= =========== ===== =========== =======
</TABLE>
(1) Includes 42,328 loans with an unpaid principal balance of $977.8
million ((pound)619.8 million) which were serviced by Ocwen UK.
Loss on interest-earning assets for the second quarter of 1999 of $5.9
million was primarily comprised of $28.8 million of impairment charge on
securities available for sale, offset by $20.2 million of securitization gains,
as presented in the table below, and $1.4 million of gains on the sale of
commercial discount loans. Loss on interest-earning assets, net, for the second
quarter of 1998 of $48.0 million was primarily comprised of $31.0 million of
securitization gains, as presented in the table below, and a $2.8 million gain
recognized on the sale of small commercial discount loans, offset by $81.8
million of impairment losses on securities available for sale. See "Changes in
Financial Condition- Securities Available for Sale."
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
and economic conditions. 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
29
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
prior periods will be reported in future periods or that there will not be
substantial inter-period variations in the results from such activities.
The following table sets forth the Company's net gains recognized in
connection with the securitization of loans during the periods indicated.
<TABLE>
<CAPTION>
Book Value
of
Securities
Loans Securitized Retained
- ------------------------------------------------------------------- (Non-cash Cash
Type of Loans Principal No. of Loans Net Gain Gain) Gain
- ----------------------------------------- ----------- ------------ ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED JUNE 30,1999:
Single family discount ................. $ 90,037 1,443 $ 8,864 $ 2,133 $ 6,731
Single family subprime:
Domestic ............................ 148,628 1,381 1,117 7,659 --
Foreign (Ocwen UK) .................. 295,157 8,983 10,207 34,452 --
---------- ---------- ---------- ---------- ----------
443,785 10,364 11,324 42,111 --
---------- ---------- ---------- ---------- ----------
$ 533,822 11,807 $ 20,188 $ 44,244 $ 6,731
========== ========== ========== ========== ==========
FOR THE THREE MONTHS ENDED JUNE 30,1998:
Single family discount ................. $ 98,345 1,155 12,219 $ 4,831 $ 7,388
Single family subprime:
Domestic ............................ 382,716 4,522 9,675 27,262 --
Foreign (Ocwen UK) .................. 363,801 14,179 9,133 33,988 --
---------- ---------- ---------- ---------- ----------
746,517 18,701 18,808 61,250 --
---------- ---------- ---------- ---------- ----------
$ 844,862 19,856 $ 31,027 $ 66,081 $ 7,388
========== ========== ========== ========== ==========
FOR THE SIX MONTHS ENDED JUNE 30, 1999:
Single family discount (1) ............. 227,303 3,137 $ 22,763 $ 4,040 $ 18,723
Single family subprime:
Domestic ............................ 235,572 2,192 3,834 12,091 --
Foreign (Ocwen UK) .................. 295,157 8,983 10,207 34,452 --
---------- ---------- ---------- ---------- ----------
530,729 11,175 14,041 46,543 --
---------- ---------- ---------- ---------- ----------
$ 758,032 14,312 $ 36,804 $ 50,583 $ 18,723
========== ========== ========== ========== ==========
FOR THE SIX MONTHS ENDED JUNE 30,1998:
Single family discount ................. $ 325,894 4,932 $ 28,917 $ 20,205 $ 8,712
Single family subprime
Domestic ............................ 544,116 5,961 17,607 37,124 --
Foreign (Ocwen UK) .................. 363,801 14,179 9,133 33,988 --
---------- ---------- ---------- ---------- ----------
907,917 20,140 26,740 71,112 --
---------- ---------- ---------- ---------- ----------
$1,233,811 25,072 $ 55,657 $ 91,317 $ 8,712
========== ========== ========== ========== ==========
</TABLE>
(1) Includes 392 loans with an unpaid principal balance of $25.2 million
securitized from the loan portfolio
30
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the results of the Company's investment
in real estate owned (which does not include investments in real estate), which
were primarily related to the discount loan portfolio, during the periods
indicated:
<TABLE>
<CAPTION>
Three Months Six Months
------------------------------ ------------------------------
For the periods ended June 30, 1999 1998 1999 1998
- ----------------------------------------------------- ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Gains on sales....................................... $ 12,205 $ 14,619 $ 21,407 $ 23,382
Provision for loss in fair value..................... (9,779) (1,645) (14,840) (5,879)
Rental income (carrying costs), net.................. 251 (2,453) (3,261) (5,956)
------------ ------------ ------------ ------------
Gain on real estate owned, net..................... $ 2,677 $ 10,521 $ 3,306 $ 11,547
============ ============ ============ ============
</TABLE>
At June 30, 1999 the Company had established valuation allowances on
real estate owned of $17.3 million, or 8.61% of the balance, as compared to
$11.2 million or 6.9% of real estate owned at June 30, 1998. For additional
information relating to the Company's real estate owned, see "Changes in
Financial Condition-Real Estate Owned."
Other income for the first six months of 1999 of $15.6 million was
primarily comprised of $7.9 million of brokerage commissions earned in
connection with Ocwen UK loan originations, $3.1 million of management fees
earned from OAC and $1.6 million of gains on sales of investments in real
estate. For the six months ended June 30, 1998, other income of $15.6 million
was primarily comprised of $4.6 million of gains on the sale of low-income
housing tax credit interests, $2.9 million of gains on sales of investments in
real estate, $2.7 million of brokerage commissions earned in connection with
Ocwen UK loan originations and $2.3 million of management fees earned from OAC.
NON-INTEREST EXPENSE. Non-interest expense decreased $8.5 million or
15% in the second quarter of 1999 as compared to the second quarter of 1998, and
increased $9.6 million or 11% in the first six months of 1999 as compared to the
same period in 1998. The increase in non-interest expenses for the first six
months of 1999 was primarily related to the acquisition of Ocwen UK on April 24,
1998. Total non-interest expenses incurred by Ocwen UK amounted to $22.9 million
and $11.3 million during the six months ended June 30, 1999 and 1998,
respectively. The following table sets forth the principal components of the
Company's non-interest expense during the periods indicated.
<TABLE>
<CAPTION>
Three Months Six Months
------------------------------ ------------------------------
For the periods ended June 30, 1999 1998 1999 1998
- ---------------------------------------------------- ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Compensation and employee benefits.................. $ 24,330 $ 29,766 $ 51,540 $ 51,247
Occupancy and equipment............................. 8,732 8,507 19,369 14,925
Loan expenses....................................... 2,652 7,357 6,780 9,694
Net operating loss on investments in real estate
and certain low-income housing tax credit
interests......................................... 1,374 1,046 3,221 2,292
Amortization of goodwill ........................... 257 563 487 934
Other operating expenses............................ 10,440 9,010 18,511 11,168
------------ ------------ ------------ ------------
Total............................................ $ 47,785 $ 56,249 $ 99,908 $ 90,260
============ ============ ============ ============
</TABLE>
The decrease in compensation and employee benefits during the three
months ended June 30, 1999 reflects a reduction in profit sharing expense in
connection with the Company's decision to grant options under its annual
incentive plan at an exercise price equal to fair market value. Previously,
options were granted at exercise prices below fair market value, resulting in
the recognition of compensation expense. Also contributing to the decline in
compensation and employee benefits was a decrease in commissions incurred by OFS
as a result of the closing of retail and wholesale branch networks, and a
decrease in recruiting related expenses as a result of an increase in direct
hiring. These declines were partially offset by an increase in profit sharing
expense in connection with the Company's implementation of a long-term incentive
plan in the fourth quarter of 1998. For the six months ended June 30, 1999 as
compared to the same period in 1998, compensation and employee benefits incurred
by Ocwen UK increased $6.9 million, while that incurred by OFS declined $6.1
million.
31
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The $4.4 million increase in occupancy and equipment expenses during
the six months ended June 30, 1999 was primarily due to a $1.9 million increase
in technology costs and a $1.0 million increase in rent expense. Ocwen UK
accounted for $2.2 million of the $4.4 million increase in occupancy and
equipment expenses for the six months ended June 30, 1999. The Company completed
construction of its national servicing center in Orlando, Florida, in July 1999
as scheduled.
The $4.7 million, or 64%, and $2.9 million, or 30%, decrease in loan
expenses in the three and six months ended June 30, 1999, respectively, reflects
significant declines in the average balance of loans during 1999. The average
balance of loans (loans available for sale, loan portfolio and discount loans)
declined 42% and 35% during the three and six months ended June 30, 1999,
respectively, as compared to the same periods in 1998.
Other operating expenses are primarily comprised of professional fees
(primarily consulting), marketing, travel related costs, and regulatory and
insurance. The $7.3 million increase in other operating expenses during the six
months ended June 30, 1999 was due primarily to a $2.4 million increase in
professional fees, primarily consulting, a $1.8 million increase in advertising
and a $0.9 million increase in travel related costs.
EQUITY IN LOSSES OF INVESTMENTS IN UNCONSOLIDATED ENTITIES. The
following table summarizes the company's equity in losses of investments in
unconsolidated entities for the periods indicated.
<TABLE>
<CAPTION>
Equity in (Losses) Earnings
---------------------------------------------------------
Ownership Three months Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------- -------------------------
Entity Shares/Units % 1999 1998 1999 1998
- ------------------- ------------ -------- ---------- --------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
OAC................ 1,540,000 8.12% $ (1,475) $ -- $ (1,539) $ --
OPLP............... 1,808,733 8.71% (1,793) -- (1,947) --
Kensington (1)..... 549,993 36.05% (289) 544 (1,430) 544
Other.............. Various various 87 -- 203 --
---------- --------- ----------- ----------
$ (3,470) $ 544 $ (4,713) $ 544
========== ========= =========== ==========
</TABLE>
(1) Equity in earnings of investment in Kensington includes goodwill
amortization of $0.6 and $1.2 million for the three and six months
ended June 30, 1999, respectively, as compared to $0.9 million for the
three and six months ended June 30, 1998.
See "Changes in Financial Condition - Investment in Unconsolidated
Entities".
INCOME TAX EXPENSE. Income tax benefit (expense) amounted to $1.0
million and $6.4 million during the second quarter of 1999 and 1998,
respectively, and ($1.4) million and $5.8 million for the first six months of
1999 and 1998, respectively. OCN's income tax provision for 1999 reflects an
expected tax rate of 19.8%. OCN's expected income tax rate is less than its
statutory income tax rate primarily due to tax credits resulting from its
investment in certain low-income housing tax credit interests. Tax credits
amounted to $4.6 million and $4.3 million for the second quarter of 1999 and
1998, respectively, and $9.1 million and $9.0 million for the first six months
of 1999 and 1998, respectively. Additionally, 1998 income tax expense was
reduced as a result of the utilization of $8.6 million of net operating tax loss
carryforwards. See "Changes in Financial Condition-Investments in Low Income
Housing Tax Credit Interests".
CHANGES IN FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE. At June 30, 1999, securities available
for sale amounted to $733.3 million or 24% of the Company's total assets as
compared to $593.3 million or 18% of total assets at December 31, 1998.
Securities available for sale are carried at fair value with unrealized gains or
losses reported as a separate component of stockholders' equity net of deferred
taxes. Unrealized losses on securities that reflect a decline in value which is
other than temporary are charged to earnings. Securities available for sale at
June 30, 1999 included an aggregate of $14.2 million of net unrealized gains
($20.0 million of gross gains and $8.6 million of gross losses) as compared to
$21.7 million of unrealized gains ($22.0 million of gross gains and $0.3 million
of gross losses) at December 31, 1998.
32
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the fair value of the Company's
securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
Increase (Decrease)
June 30, December 31, -----------------------
1999 1998 Dollars Percent
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Mortgage-related securities: (Dollars in thousands)
Single-family residential:
CMOs (AAA-rated) .................... $ 491,156 $ 344,199 $ 146,957 43%
Subordinates:
BB-rated .......................... 8,878 9,921 (1,043) (11)
B-rated ........................... 5,061 4,940 121 2
BBB-rated ......................... 16,667 17,593 (926) (5)
Unrated ........................... 28,486 58,359 (29,873) (51)
Subprime residuals:
Unrated ........................... 162,328 135,187 27,141 20
AAA-rated non agency interest only... 16,518 6,981 9,537 137
--------- --------- ---------
729,094 577,180 151,914 26
--------- --------- ---------
Multi-family residential and commercial:
Unrated interest only ............... 77 106 (29) (27)
Subordinates:
B-rated ........................... 1,165 1,230 (65) (5)
Unrated ........................... 2,935 14,831 (11,896) (80)
--------- --------- ---------
4,177 16,167 (11,990) (74)
--------- --------- ---------
Total ............................. $ 733,271 $ 593,347 $ 139,924 24
========= ========= =========
</TABLE>
The Company's securities available for sale increased by $140.0 million
or 24% during the six months ended June 30, 1999, due primarily to $428.9
million of purchases and $50.4 million of subordinates and residual securities
acquired in connection with the Company's securitizations of 14,312 loans, which
was offset by $290.1 million of maturities and principal repayments, $29.1
million of impairment and $11.8 million of net premium amortization.
At June 30, 1999, the fair value of the Company's investment in
subordinate and residual interests amounted to $225.5 million ($212.2 million of
amortized cost) or 31% of total securities available for sale and supported
senior classes of securities having an outstanding principal balance of $4.2
billion. Because of their subordinate position, subordinated and residual
classes of mortgage-related securities provide protection to and involve more
risk than the senior classes. Specifically, when cash flow is impaired, debt
service goes first to the holders of senior classes. In addition, incoming cash
flows 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, subordinate 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
33
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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
securities retained. During 1999, the Company utilized proprietary prepayment
curves generated by the Company (reaching an approximate range of annualized
rates of 15%-50%). In its estimates of annual loss rates, the Company utilizes
assumptions that it believes are reasonable. The Company currently estimates
annual losses of between 0.03% and 4.06% 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 multi-family 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 adjusts its securities portfolio to market value at the end
of each month based upon the lower of dealer quotations or internal values,
subject to an internal review process. For those securities which do not have an
available market quotation, the Company will request market values and
underlying assumptions from the various securities dealers that underwrote, are
currently financing the securities, or have had prior experience with the type
of security to be valued. When quotations are obtained from two or more dealers,
the average dealer quote will be utilized.
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 asset 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.
34
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
It is intended that any securities retained by the Bank resulting from
the securitization of assets held by it directly will be distributed to the
Company as a dividend, subject to the Bank's ability to declare such dividends
under applicable limitations. During the first quarter of 1999, a subordinate
security with a fair value of $3.5 million was distributed by the Bank to the
Company in the form of a dividend. At June 30, 1999, the Bank held three
subordinate securities with an aggregate fair value of $13.8 million ($12.2
million of amortized cost) which are expected to be distributed by the Bank to
the Company during the third quarter of 1999.
35
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following tables detail the Company's securities available for sale
portfolio at June 30, 1999, and its estimates of expected yields on such
securities, taking into consideration expected prepayment and loss rates
together with other factors.
<TABLE>
<CAPTION>
Anticipated
Subordi- Yield to
Class Size nation/OC Maturity At:
Issue Rating ------------------ Interest Level At: ----------------
Securitization (Issuer) Security Date Rating Agencies Issuance 6/30/99 Percentage 6/30/99 Purchase 6/30/99
------------------------- ------- ---- ------ -------- -------- -------- ---------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SINGLE-FAMILY RESIDENTIAL (Dollars in thousands)
Subordinates:
BCF 1996 R1(5).......... B3 Oct-96 NR (a),(b) $70,773 $47,843 50.00% None 15.70% 13.57%
BCF 1997 R1(5).......... B4 Mar-97 NR (b),(c) 21,784 10,889 49.71 None 13.46 (27.36)
BCF 97 R2 (5)........... B4 Jun-97 Ba2,BB (b),(c) 6,358 5,927 73.54 7.66% 9.58 (.17)
B5 B2,B 6,264 5,839 73.54 4.29 10.74 (2.71)
B6 NR 13,883 7,418 73.54 None 15.98 (6.76)
BCF 1997 R3 (5)......... B4 Dec-97 NR (b),(d) 69,582 50,443 50.24 None 15.84 (6.97)
ORMBS 1998 R1 (6)....... B4 Mar-98 NR (b),(d) 101,774 88,403 50.34 None 20.50 5.07
ORMBS 1998 R2 (6)....... B4A Jun-98 Ba2 (b) 1,056 1,030 100.00 6.78 13.22 (30.80)
B4F Ba2 937 902 100.00 7.92 19.23 (23.98)
B5A B2 880 858 100.00 5.29 23.78 (26.93)
B5F B2 937 902 100.00 5.97 11.78 (24.48)
B6A NR 3,696 3,044 100.00 None 16.72 15.07
B6F NR 3,345 2,758 100.00 None 19.50 (10.31)
ORMBS 1998 R3 (6)....... B4 Sep-98 Ba2,BB (b),(d) 11,765 11,567 85.87 13.01 11.71 15.16
B5 B2,B 9,151 8,996 85.87 9.43 16.54 17.70
B6 NR 26,145 23,726 85.87 None 18.00 13.36
ORMBS 1999 RI (6)...... B5A Mar-99 B2,B (b),(d) 1,630 1,601 100.00 5.67 17.73 23.66
B5F B2,B 1,843 1,811 100.00 5.42 17.74 21.52
B6A NR 3,586 3,506 100.00 None 18.00 30.15
B6F NR 4,299 4,224 100.00 None 18.00 22.61
ORMBS 1999 R2 (6) ...... B4 Jun-99 BB (a),(c),(d) 10,530 10,530 100.00 4.00 13.45 13.09
B5 B 4,680 4,680 100.00 6.00 18.45 17.78
B6 NR 7,020 7,020 100.00 None 18.00 17.36
CSFB 1996-1R
(ITT 94-P1) (8) ........ 4B2 Oct-96 NR (b),(c) 1,046 192 100.00 None N/A N/A
Interest Only:
OML 2 (7)............... DAC-IO Nov-98 Aaa,AAA (b),(c) 186,175 158,596 100.00 N/A 28.50 18.48
OML 3 (7) .............. DAC-IO Jun-99 Aaa,AAA (b),(c) 259,548 259,548 100.00 N/A 25.30 23.25
Subprime residuals:
SBMS 1996 3 (1)......... R Jun-96 NR (a),(b) 130,062 39,402 100.00 12.17 15.52 2.62
MLM1 1996 1 (2)......... R Sep-96 NR (a),(b) 81,142 25,103 100.00 17.74 15.16 4.32
MS 1997 1 (3)........... X1 Jun-97 NR (a),(b) 17,727 12,162 100.00 3.38 21.47 15.52
X2 87,118 37,202 100.00 7.57 20.38 6.34
1997 OFS 2 (4).......... X Sep-97 NR (a),(b) 102,201 58,404 100.00 5.36 19.65 6.88
1997 OFS 3 (4).......... X Dec-97 NR (a),(b) 208,784 133,592 100.00 5.75 19.59 16.06
1998 OFS 1 (4).......... X Mar-98 NR (b),(d) 161,400 114,244 100.00 2.68 18.00 13.60
1998 OFS 2 (4).......... X Jun-98 NR (a),(b) 382,715 246,862 100.00 4.62 19.46 7.05
1998 OFS 3 (4).......... X Sep-98 NR (a),(d) 261,649 228,636 100.00 3.41 18.00 18.15
1998 OFS 4 (4).......... X Dec-98 NR (a),(b),(c) 349,000 334,901 100.00 2.14 18.00 24.60
1999 OFS 1 (4) ......... X Jun-99 NR (a),(b) 148,628 148,628 100.00 2.47 18.00 17.60
OML 1 (7)............... R Jun-98 NR (a),(d) 344,148 257,945 100.00 RF $10,900 20.72 50.70
OML 2 (7)............... B Nov-98 Baa2,B (b),(c) 16,725 16,504 100.00 RF $ 5,900 12.50 11.60
R NR 186,175 158,596 100.00 RF $ 5,900 36.50 15.61
S NR 6,311 6,101 100.00 None 25.30 23.25
OML 3 (7) .............. S Jun-99 NR (b),(c) 3,945 3,945 100.00 RF $ 1,500 25.30 23.25
R NR 260,386 260,386 100.00 N/A 25.30 23.25
MULTI-FAMILY AND COMMERCIAL
Subordinates:
BCF 1997 C1 (5)......... F Dec-97 B (c) 3,210 3,210 100.00 16.40 11.21 10.35
G NR 12,197 12,207 100.00 None 15.00 19.95
Interest-only:
BCF 1997 C1 (5)......... XI Dec-97 NR (c) 67,350 28,245 100.00 N/A 6.93 51.01
X2 NR 35,359 20,114 100.00 N/A 8.53 29.75
</TABLE>
36
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Anticipated
Subordi- Yield to
Class Size nation/OC Maturity At:
Issue Rating ------------------ Interest Level At: ----------------
Securitization (Issuer) Security Date Rating Agencies Issuance 6/30/99 Percentage 6/30/99 Purchase 6/30/99
------------------------- ------- ---- ------ -------- -------- -------- ---------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SINGLE-FAMILY RESIDENTIAL (Dollars in thousands)
E-IO BB 10,271 10,271 100.00 N/A 7.00 27.67
FNMA 1995 M2 (9)........ M Jun-95 NR (c) 100,275 10,854 100.00 N/A N/A (18.82)
BFBT Arm Strip.......... IO Jun-94 NR N/A 157,182 8,754 100.00 N/A 0.00 27.32
ISSUERS:
(1) Salomon Brothers Mortgage Securities VII (6) Ocwen Residential MBS Corporation RATING AGENCIES:
(2) Merrill Lynch Mortgage Investors, Inc. (7) Ocwen Mortgage Loans (a) S&P
(3) Morgan Stanley ABS Capital I, Inc. (8) Credit Suisse First Boston (ITT Federal (b) Moody's
(4) Ocwen Mortgage Loan Asset Backed Bank, FSB) (c) Fitch
Certificates (9) Federal National Mortgage Association (d) DCR
(5) BlackRock Capital Finance L.P. (10)Berkley Federal Bank & Trust
- -----------------------------------------------------------------------------------------------------------------------
N/A - Not Available RF - Reserve funds are actual cash reserves
</TABLE>
37
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
<TABLE>
<CAPTION>
Weighted Weighted Total Actual Life Actual Life
Average Average Delinquency to Date to Date Collateral Balance
Coupon At LTV/DSCR at CPR at Losses at Product Type At ------------------
Securitization (Issuer) 6/30/99 at 6/30/99 6/30/99 6/30/99 6/30/99 6/30/99 Issuance 6/30/99
- ----------------------- --------- ---------- ----------- ----------- ----------- --------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SINGLE-FAMILY RESIDENTIAL (Dollars in thousands)
Subordinates:
BCF 1996 R1 (5)......... 10.04% 97.91% 12.24% 13.32% $ 19,993 98% Fixed, 2% ARM 505,613 320,230
BCF 1997 R1 (5)......... 10.06 112.03 22.22 13.24 10,264 98% Fixed, 2% ARM 177,823 124,038
BCF 97 R2 (5)........... 8.06 88.59 32.76 12.54 5,724 26% Fixed, 74%ARM 251,790 173,003
BCF 1997 R3 (5)......... 9.63 112.23 20.97 10.20 17,213 98% Fixed, 2% ARM 579,851 473,301
ORMBS 1998 R1 (6)....... 8.94 121.21 21.18 7.26 11,364 98% Fixed, 2% ARM 565,411 514,342
ORMBS 1998 R2 (6)....... 9.01 89.49 30.32 12.41 1,034 45% Fixed, 55%ARM 123,917 103,784
ORMBS 1998 R3 (6)....... 8.96 127.02 30.40 5.47 1,983 98% Fixed, 2% ARM 261,452 251,544
ORMBS 1999 R1 (6)....... 9.05 85.85 12.44 11.58 18 56% Fixed, 44%ARM 147,101 139,740
ORMBS 1999 R2 (6)........ 9.29 117.42 -- -- -- 100% fixed 117,004 117,004
CSFB 1996 1R
(ITT 94-P1) (8) ....... 7.21 N/A 3.39 N/A 156 100% 1-Year CMT 32,487 6,264
Interest-only:
OML 2 (7).............. 12.30 62.54 38.34 23.95 723 100% UK Subprime 186,175 158,596
OML 3 (7).............. 11.59 66.07 -- -- -- 100% UK Subprime 260,386 260,386
Subprime residuals:
SBMS 1996 3 (1)......... 11.00 69.73 18.76 32.44 2,823 56% Fixed, 44%ARM 130,062 39,402
MLM1 1996 1 (2)......... 11.23 75.09 18.43 34.35 1,648 32% Fixed, 68%ARM 81,142 25,103
MS 1997 1 (3)........... 10.53 74.79 17.40 30.97 1,133 25% Fixed, 75%ARM 17,727 12,162
11.05 74.79 17.40 30.97 1,133 25% Fixed, 75%ARM 87,118 37,202
1997 OFS 2 (4).......... 10.28 78.38 15.39 26.92 815 17% Fixed, 83%ARM 102,201 58,404
1997 OFS 3 (4).......... 10.11 79.62 17.08 25.29 1,248 18% Fixed, 82%ARM 208,784 133,592
1998 OFS 1 (4).......... 10.33 80.07 17.51 23.77 984 14% Fixed, 86%ARM 161,400 144,244
1998 OFS 2 (4).......... 10.77 75.98 13.05 35.01 1,084 38% Fixed, 62%ARM 382,715 246,862
1998 OFS 3 (4).......... 10.38 79.15 17.52 15.98 369 28% Fixed, 72%ARM 261,649 228,636
1998 OFS 4 (4).......... 10.51 76.78 16.96 5.99 -- 41% Fixed, 59%ARM 349,000 334,901
1999 OFS 1 (4).......... 9.90 75.69 -- -- -- 64% Fixed, 36%ARM 146,628 146,628
OML 1 (7)............... 13.67 61.23 25.40 24.20 147 100% UK Subprime 344,148 257,945
OML 2 (7)............... 12.30 62.54 38.34 23.95 723 100% UK Subprime 186,175 158,596
OML 3 (7)............... 11.59 66.07 -- -- -- 100% UK Subprime 260,386 260,386
MULTI-FAMILY AND
COMMERCIAL
Subordinates:
BCF 1997 C1 (5)......... 10.08 1.52 14.08 N/A -- 20% Multi-family, 128,387 74,411
19% Hotel, 16%
Industrial
Interest-only:
BCF 1997 C1 (5)......... 10.08 1.52 14.08 N/A -- 20% Multi-family, 128,387 74,411
19% Hotel, 16%
Industrial
FNMA 1995 M2 (9)..... 9.48 1.35 -- 10.07 -- 100% Multi-family 216,797 138,251
BFBT Arm Strip.......... 8.20 N/A N/A N/A N/A 100% Conventional 157,182 8,754
ARMS
</TABLE>
38
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the principal amount of mortgage loans
by the geographic location of the property securing the mortgages that underlie
the Company's securities available for sale portfolio at June 30, 1999.
<TABLE>
<CAPTION>
Description California Texas Florida New York Maryland Other (1) Total
- ---------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Single family residential ... $ 722,023 $ 260,377 $ 271,364 $ 209,295 $ 166,347 $1,777,721 $3,407,127
Multi-family and commercial. 47,367 1,884 17,378 29,060 9,423 92,650 197,762
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total ...................... $ 769,390 $ 262,261 $ 288,742 $ 238,355 $ 175,770 $1,870,371 $3,604,889
========== ========== ========== ========== ========== ========== ==========
Percentage (2) ............. 21% 7% 8% 7% 5% 52% 100%
========== ========== ========== ========== ========== ========== ==========
</TABLE>
(1) No other individual state makes up more than 21% of the total of other.
(2) Based on a percentage of the total unpaid principal balance of the
underlying loans.
The following table summarizes information relating to the Company's
mortgage-related securities available for sale at June 30, 1999.
<TABLE>
<CAPTION>
ANTICIPATED
REMAINING ANTICIPATED
ORIGINAL YIELD TO WEIGHTED
ANTICIPATED MATURITY AVERAGE
AMORTIZED PERCENT YIELD TO AT REMAINING
RATING/DESCRIPTION COST FAIR VALUE OWNED MATURITY 6/30/99(1) COUPON LIFE (2)
- -------------------------------- ----------- ------------ ---------- ------------ ------------ -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SINGLE-FAMILY RESIDENTIAL:
BB-rated subordinates...... $ 8,693 $ 8,878 87.04% 11.93% 16.43% 6.86% 6.43
B-rated subordinates....... 4,254 5,061 89.19 16.06 34.70 7.05 4.06
BBB-rated subordinate...... 14,733 16,667 100.00 12.50 11.52 8.36 3.25
Unrated subordinates....... 27,521 28,486 72.69 21.97 36.46 8.82 2.72
AAA-rated interest-only.... 17,635 16,518 100.00 23.60 19.28 4.94 2.10
Unrated subprime residuals. 153,018 162,328 100.00 20.18 27.02 -- 6.57
MULTI-FAMILY AND COMMERCIAL:
Unrated interest-only...... 43 77 100.00 -- 43.54 0.34 1.21
B-rated subordinates....... 1,165 1,165 51.20 10.35 16.03 10.28 6.74
Unrated subordinates....... 2,803 2,935 51.20 15.00 20.24 10.28 7.30
</TABLE>
(1) Changes in the June 30, 1999 anticipated yield to maturity from that
originally anticipated are primarily the result of changes in
prepayment assumptions, loss assumptions and charges taken to reduce
the value of the securities.
(2) Equals the weighted average life based on June 30, 1999 book value.
The following table sets forth the property types of the Company's
commercial mortgage-backed securities at June 30, 1999, based upon the principal
amount.
Percentage
Property type Invested
--------------------------------- ----------
Multi-family..................... 72.17%
Lodging.......................... 6.68
Warehouse........................ 5.71
Office........................... 4.51
Mixed Use........................ 3.71
Other............................ 7.22
------------
Total............................ 100.00%
============
The following is a glossary of terms included in the above tables.
39
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
ACTUAL LIFE TO DATE CPR - The Constant Prepayment Rate is used to
measure the average prepayment rate for the underlying mortgage pool(s) over the
period of time lapsed since the issuance of the securities through the date
indicated and is calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
_ _
| |
| |
| |
| ( 1 - Final Aggregate Balance ACTUAL ) ( 12 ) |
Actual Life-to-Date CPR = 100 X | ( --------------------------------- ) X ( ---------------- ) |
| ( Final Aggregate Balance SCHEDULED ) ( Months in Period ) |
| |
|_ _|
</TABLE>
ACTUAL LIFE-TO-DATE LOSSES - Represents cumulative losses of the
original collateral at the indicated date.
ANTICIPATED YIELD TO MATURITY AT JUNE 30, 1999 - Effective yield from
inception to maturity based on the current carrying value and the then current
estimate of future cash flows under the assumptions at the respective date.
ANTICIPATED YIELD TO REMAINING MATURITY AT JUNE 30, 1999 - Effective
yield based on the current carrying value and the then current estimate of
future cash flows under the assumptions at the respective date.
ANTICIPATED YIELD TO MATURITY AT PURCHASE - Effective yield from
inception to maturity based on the purchase price and anticipated future cash
flows under pricing assumptions.
CLASS SIZE - Represents the dollar size of a particular class. Class
Size for subprime residuals is equal to the Collateral Balance at the respective
date.
COLLATERAL BALANCE - Represents the unpaid principal balance including
arrearage of the underlying collateral of the entire securities at the indicated
date.
INTEREST ONLY - Interest Only ("IO") securities receive the excess
interest remaining after the interest payments have been made on all senior
classes of bonds based on their respective principal balances. There is no
principal associated with IO securities and they are considered liquidated when
the particular class they are contractually tied to is paid down to zero.
INTEREST PERCENTAGE - Represents the percentage of the particular class
of security owned by the Company.
ISSUE DATE - Represents the date on which the indicated securities were
issued.
OVER-COLLATERIZATION LEVEL - For residual interest in residential
mortgage-backed securities, over collaterization ("OC") is the amount by which
the collateral balance exceeds the sum of the bond principal amounts. OC is
achieved by applying monthly a portion of the interest payments of the
underlying mortgages toward the reduction of the class certificate principal
amounts, causing them to amortize more rapidly than the aggregate loan balance.
The OC percentage, expressed as a percentage of the outstanding collateral
balance, represents the first tier of loss protection afforded to the
non-residual holders. The OC percentage also determines whether the
over-collaterization target has been satisfied as of a specific date, such that
cash flows to the residual holder are warranted. To the extend not consumed by
losses on more highly rated bonds, OC is remitted to the residual holders.
RATING - Refers to the credit rating designated by the rating agency
for each securitization transaction. Classes designated "A" have a superior
claim on payment to those rated "B", which are superior to those rated "C."
Additionally, multiple letters have a superior claim to designations with fewer
letters. Thus, for example, "BBB" is superior to "BB," which in turn is superior
to "B." The lower class designations in any securitization will receive interest
payments subsequent to senior classes and will experience losses prior to any
senior class. The lowest potential class designation is not rated ("NR") which,
if included in a securitization, will always receive interest last and
experience losses first.
SECURITIZATION - Series description.
SECURITY - Represents the name of the class associated with each
securitization held by the Company. This has no relationship to a formal rating
but is for identification purposes (although the names are usually in
alphabetical or numeric order from the highest rated to the lowest rated).
SUBORDINATION LEVEL - Represents the credit support for each
mortgage-backed security by indicating the percentage of outstanding bonds whose
right to receive payment is subordinate to the referenced security. The
subordinate classes must experience a complete loss before any additional losses
would affect the particular referenced security.
40
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
TOTAL DELINQUENCY - Represents the total unpaid principal balance of
loans more than 30 days delinquent at the indicated date as a percentage of the
unpaid principal balance of the collateral at such date.
WEIGHTED AVERAGE COUPON - Represents the interest rate of the
underlying mortgage loans weighted by the unpaid principal balance of the
underlying mortgage loans at the respective date.
WEIGHTED AVERAGE DSCR - Represents debt service coverage ratio, which
is calculated by dividing cash flow available for debt service by debt service
and applies to the multi-family and commercial securities.
WEIGHTED AVERAGE LTV - Represents the ratio of the unpaid principal
balance including arrearage to the value of the underlying collateral and
applies to the single-family residential securities.
LOANS AVAILABLE FOR SALE. The Company's loans available for sale at
June 30, 1999, which are carried at the lower of cost or fair value, decreased
by $45.4 million or 26% from December 31, 1998, and consist primarily of single
family residential loans to subprime borrowers. The Company generally intends to
sell or securitize its single family residential loans to subprime borrowers
and, as a result, all of such loans were classified as available for sale at
June 30, 1999 and December 31, 1998. The Company's single family residential
lending activities to subprime borrowers is conducted by OFS and Ocwen UK.
The following table sets forth the composition of the Company's loans
available for sale by type of loan at the dates indicated.
June 30, December 31,
1999 1998
------------ -------------
(Dollars in thousands)
Single family residential loans............. $ 132,245 $ 177,578
Consumer loans.............................. 180 269
------------ -------------
$ 132,425 $ 177,847
============ =============
The following table sets forth the activity in the Company's net loans
available for sale during the periods indicated.
<TABLE>
<CAPTION>
Three Months Six Months
---------------------------- -----------------------------
For the periods ended June 30, 1999 1998 1999 1998
- ------------------------------------------------------------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period............................... $ 374,094 $ 493,106 $ 177,847 $ 177,041
Purchases:
Single family residential (1) (2)......................... 32,440 441,293 47,103 763,013
Originations:
Single family residential (1)
Domestic ............................................... 42,517 170,593 188,713 353,115
Foreign (Ocwen UK) ..................................... 152,965 46,106 293,007 46,106
----------- ----------- ----------- -----------
195,482 216,699 481,720 399,221
Sales (3).................................................... (457,052) (777,117) (558,517) (943,276)
(Increase) decrease in lower of cost or market reserve....... 2,609 (752) 1,964 (1,079)
Principal repayments, net of capitalized interest............ (12,866) (32,814) (10,591) (53,817)
Transfer to real estate owned................................ (2,282) (2,056) (7,101) (2,744)
----------- ----------- ----------- -----------
Net increase (decrease) in loans.......................... (241,669) (154,747) (45,422) 161,318
----------- ----------- ----------- -----------
Balance at end of period..................................... $ 132,425 $ 338,359 $ 132,425 $ 338,359
=========== =========== =========== ===========
</TABLE>
41
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
(1) During the six months ended June 30, 1999 and 1998, the Company
purchased and originated single family residential loans to subprime
borrowers.
(2) Purchases of single family residential loans during the six months
ended June 30, 1998 include $292.8 million purchased from the U.S.
operations of Cityscape Financial Corp.
(3) Included in sales for the six months ended June 30,1999, is the
securitization of 2,192 domestic subprime single family loans with an
aggregate unpaid principal balance of $235.6 million and 8,983 foreign
subprime single family loans with an unpaid balance of $295.2 million.
Included in sales for the six months ended June 30, 1998 is the
securitization of 5,961 domestic subprime single family loans with an
aggregate unpaid principal balance of $544.1 million and 14,179 foreign
subprime single family loans with an aggregate unpaid principal balance
of $363.8 million.
The loans available for sale portfolio is secured by mortgages on
properties 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 June 30, 1999:
<TABLE>
<CAPTION>
Single-family
Residential Consumer Total
----------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
UK.......................... $ 79,448 $ -- $ 79,448
New Jersey.................. 8,915 -- 8,915
Florida..................... 5,959 80 6,039
Michigan.................... 5,539 -- 5,539
Illinois.................... 5,173 -- 5,173
Other(1).................... 27,211 100 27,311
----------- ---------- ------------
Total....................... $ 132,245 $ 180 $ 132,425
=========== ========== ============
</TABLE>
(1) Consists of properties located in 36 other states, none of which
aggregated over $4.3 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:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Non-performing loans:
Single family (1)................................. $ 28,442 $ 39,415
Consumer.......................................... 3 9
----------- -----------
$ 28,445 $ 39,424
=========== ===========
Non-performing loans as a percentage of:
Total net loans available for sale................ 21.49% 22.17%
Total assets...................................... 0.94% 1.19%
</TABLE>
(1) Includes $6.0 million ((pound)3.8 million) and $7.2 million ((pound)5.4
million) of non-performing loans related to Ocwen UK at June 30, 1999
and December 31, 1998, respectively.
Non-performing 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
42
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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.
DISCOUNT LOAN PORTFOLIO. At June 30, 1999, the Company's net discount
loan portfolio amounted to $1.01 billion or 33.5% of the Company's total assets
as compared to $1.03 billion or 31% of total assets at December 31, 1998. The
following table sets forth the composition of the Company's discount loan
portfolio by type of loan at the dates indicated.
June 30, December 31,
1999 1998
------------ ------------
(Dollars in thousands)
Single family residential loans........ $ 512,950 $ 597,100
Multi-family residential loans......... 260,313 244,172
Commercial real estate loans (1)....... 483,378 449,010
Other loans............................ 18,734 10,144
------------ ------------
Total discount loans................ 1,275,375 1,300,426
Unaccreted discount (2)................ (246,206) (252,513)
------------ ------------
1,029,169 1,047,913
Allowance for loan losses.............. (20,405) (21,402)
------------ ------------
Discount loans, net (3)............. $ 1,008,764 $ 1,026,511
============ ============
(1) The balance at June 30, 1999 consisted of $170.9 million of loans
secured by office buildings, $120.5 million of loans secured by hotels,
$104.4 million of loans secured by retail properties or shopping
centers and $87.6 million of loans secured by other properties. The
balance at December 31, 1998, consisted of $154.1 million of loans
secured by office buildings, $100.4 million of loans secured by hotels,
$21.2 million of loans secured by retail properties or shopping centers
and $173.3 million of loans secured by other properties.
(2) The balance at June 30, 1999 consisted of $129.6 million on single
family residential loans, $43.4 million on multi-family residential
loans, $72.2 million on commercial real estate loans and $1.0 million
on other loans. The balance at December 31, 1998 consisted of $161.6
million on single family residential loans, $20.8 million on
multi-family residential loans, $69.8 million on commercial real estate
loans and $0.3 million on other loans.
(3) The discount loan portfolio included $13.6 million and $8.2 million at
June 30, 1999 and December 31, 1998, respectively, of charged-off
unsecured credit card receivables which were acquired at a discount.
Collections of unsecured credit card receivables are accounted for
under the cost recovery method.
The discount loan portfolio is secured by mortgages on properties
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 June 30, 1999.
<TABLE>
<CAPTION>
Commercial
Single-family Multi-family Real Estate
Residential Residential and Other Total
--------------- -------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
California.................... $ 41,790 $ 21,179 $ 121,161 $ 184,130
New York...................... 55,573 6,285 82,092 143,950
Michigan...................... 8,067 64,714 26,174 98,955
Illinois...................... 17,726 72,357 1,312 91,395
New Jersey.................... 50,791 856 12,837 64,484
Other (1)..................... 209,401 51,519 185,335 446,255
--------------- -------------- ------------- -------------
Total..................... $ 383,348 $ 216,910 $ 428,911 $ 1,029,169
=============== ============== ============= =============
</TABLE>
(1) Consists of properties located in 44 other states, none of which
aggregated over $56.9 million in any one state.
43
<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 net
discount loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------------------------------------
1999 1998
-------------------------- ---------------------------
No. of No. of
Balance Loans Balance Loans
----------- ----------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period, net..... $ 893,180 6,042 $ 1,171,623 8,571
Acquisitions(1)......................... 381,501 2,774 585,756 4,138
Resolutions and repayments (2).......... (75,252) (305) (130,265) (590)
Loans transferred to real estate owned.. (37,468) (468) (84,404) (636)
Sales(3)................................ (116,635) (1,306) (115,196) (1,168)
Increase in discount.................... (40,025) -- (2,646) --
Decrease (increase) in allowance........ 3,463 -- (3,362) --
----------- ----------- ----------- ------------
Balance at end of period, net........... $ 1,008,764 6,737 $ 1,421,506 10,315
=========== =========== =========== ============
</TABLE>
(1) During the three months ended June 30, 1999, acquisitions consisted
primarily of $233.2 million of single family residential loans, $39.3
million of multi-family residential loans, $107.0 million of commercial
real estate loans and $2.0 million of other loans. For the three months
ended June 30, 1998, acquisitions consisted primarily of $293.9 million
of single family residential loans, $145.5 million of multi-family
residential loans, $146.3 million of commercial real estate loans and $
0.1 million of other loans.
(2) Resolutions and repayments consists of loans which were resolved in a
manner which resulted in partial or full repayment of the loan to the
Company, as well as principal payments on loans which have been brought
current in accordance with their original or modified terms (whether
pursuant to forbearance agreements or otherwise) or on other loans
which have not been resolved.
(3) Included in sales for the three months ended June 30, 1999 is the
securitization of 1,443 discount single family residential mortgage
loans with an aggregate unpaid principal balance of $90.0 million.
Included in sales for the three months ended June 30, 1998 is the
securitization of 1,155 discount single family residential mortgage
loans with an aggregate unpaid principal balance of $98.3 million.
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------------------------
1999 1998
-------------------------- ---------------------------
No. of No. of
Balance Loans Balance Loans
----------- ----------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period, net..... $ 1,026,511 8,100 $ 1,434,176 12,980
Acquisitions(1)......................... 486,458 3,339 676,305 4,710
Resolutions and repayments (2).......... (123,942) (528) (205,791) (1,087)
Loans transferred to real estate owned.. (108,162) (1,170) (149,207) (1,323)
Sales(3)................................ (279,032) (3,004) (355,559) (4,965)
Decrease in discount.................... 5,935 -- 20,941 --
Decrease in allowance................... 996 -- 641 --
----------- ----------- ----------- ------------
Balance at end of period, net........... $ 1,008,764 6,737 $ 1421,506 10,315
=========== =========== =========== ============
</TABLE>
(1) During the six months ended June 30, 1999, acquisitions consisted
primarily of $274.1 million of single family residential loans, $72.0
million of multi-family residential loans, $131.8 million of commercial
real estate loans and $8.6 million of other loans. For the six months
ended June 30, 1998, acquisitions consisted primarily of $335.3 million
of single family residential loans, $148.5 million of multi-family
residential loans, $186.2 million of commercial real estate loans and
$6.3 million of other loans.
44
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
(2) Resolutions and repayments consists of loans which were resolved in a
manner which resulted in partial or full repayment of the loan to the
Company, as well as principal payments on loans which have been brought
current in accordance with their original or modified terms (whether
pursuant to forbearance agreements or otherwise) or on other loans
which have not been resolved.
(3) Included in sales for the six months ended June 30, 1999 is the
securitization of 3,137 discount single family residential mortgage
loans with an aggregate unpaid principal balance of $227.3 million.
Included in sales for the six months ended June 30, 1998 is the
securitization of 4,932 discount single family residential mortgage
loans with an aggregate unpaid principal balance of $325.9 million.
The following table sets forth certain information relating to the
payment status of loans in the Company's discount loan portfolio at the dates
indicated.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
----------------------- ----------------------
Principal % of Principal % of
Amount Loans Amount Loans
----------- ------- ---------- -------
<S> <C> <C> <C> <C>
Loans without Forbearance Agreements: (Dollars in thousands)
Current....................................... $ 637,982 50.02% $ 578,269 44.47%
Past due 31 to 89 days........................ 36,393 2.85 35,555 2.73
Past due 90 days or more...................... 431,455 33.83 509,838 39.21
Acquired and servicing not yet transferred.... 100,270 7.86 57,048 4.39
----------- ------- ---------- -------
Subtotal.................................... 1,206,100 94.56 1,180,710 90.80
----------- ------- ---------- -------
Loans with Forbearance Agreements:
Current....................................... 2,020 0.16 1,180 0.09
Past due 31 to 89 days........................ 1,734 0.14 4,046 0.31
Past due 90 days or more (1).................. 65,521 5.14 114,490 8.80
----------- --------- ---------- ---------
Subtotal.................................... 69,275 5.44 119,716 9.20
----------- --------- ---------- ---------
Total............................................ $ 1,275,375 100.00% $1,300,426 100.00%
=========== ========= ========== =========
</TABLE>
(1) Includes $64.9 million of loans which were less than 90 days past due
under the terms of the forbearance agreements at June 30, 1999, of
which $60.3 million were current and $4.6 million were past due 31 to
89 days. Includes $110.1 million of loans which were less than 90 days
past due under the terms of the forbearance agreements at December 31,
1998, of which $77.9 million were current and $32.2 million were past
due 31 to 89 days.
For discussion and analysis regarding the allowance for loan losses on
discount loans, see "Changes in Financial Condition - Allowance for Losses"
below.
45
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
LOAN PORTFOLIO. The following table sets forth the composition of the
Company's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Single family residential loans.................................. $ 1,911 $ 30,361
Multi-family residential loans:
Permanent..................................................... 33,276 53,311
Construction.................................................. 12,909 22,288
------------ ------------
46,185 75,599
------------ ------------
Commercial real estate and land loans:
Hotel:
Permanent................................................... 20,610 29,735
Construction................................................ -- 6,896
Office buildings.............................................. 75,673 93,068
Land.......................................................... 1,788 2,266
Other......................................................... -- 6,762
------------ ------------
Total....................................................... 98,071 138,727
------------ ------------
Consumer......................................................... 88 132
------------ ------------
Total loans................................................. 146,255 244,819
Undisbursed loan funds........................................... (5,295) (7,099)
Unaccreted discount.............................................. (1,429) (2,480)
Allowance for loan losses........................................ (5,853) (4,928)
------------ ------------
Loans, net.................................................. $ 133,678 $ 230,312
============ ============
</TABLE>
The loan portfolio is secured by mortgages on properties 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 loan
portfolio were located at June 30, 1999.
<TABLE>
<CAPTION>
Single-family Multi-family Commercial
Residential Residential Real Estate Consumer Total
------------- ------------ ------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
New York.................. $ 158 $ 9,360 $ 24,581 $ 34 $ 34,133
Florida................... -- -- 14,732 -- 14,732
California................ 21 7,583 5,617 -- 13,221
Massachusetts............. 67 -- 12,875 -- 12,942
Virginia.................. -- -- 9,657 -- 9,657
Other (1)................. 1,665 29,242 30,609 54 61,570
------------- ------------ ------------- ------------- ------------
Total..................... $ 1,911 $ 46,185 $ 98,071 $ 88 $ 146,255
============= ============ ============= ============= ============
</TABLE>
(1) Consists of properties located in 19 other states, none of which
aggregated over $8.1 million in any one state.
46
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
(2) The following table sets forth the activity in the Company's gross loan
portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three Months Six Months
--------------------------- ----------------------------
For the periods ended June 30, 1999 1998 1999 1998
- ----------------------------------------------------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period....................... $ 189,989 $ 305,072 $ 244,819 $ 294,925
--------- --------- --------- ---------
Originations:
Multi-family residential loans.................... 1,758 8,500 4,225 22,271
Commercial real estate loans...................... 6,400 40,945 11,500 59,930
--------- --------- --------- ---------
Total loans originated.......................... 8,158 49,445 15,725 82,201
--------- --------- --------- ---------
Sales (1)............................................ (3,394) -- (25,486) --
Principal repayments, net of capitalized interest.... (48,392) (58,156) (86,231) (80,765)
Loans and transfer to real estate owned.............. (106) -- (2,572) --
--------- --------- --------- ---------
Net increase (decrease) in loans................ (43,734) (8,711) (98,564) 1,436
--------- --------- --------- ---------
Balance at end of period (2)......................... $ 146,255 $ 296,361 $ 146,255 $ 296,361
========= ========= ========= =========
</TABLE>
(1) Included in sales of the six months ended June 30, 1999 is the
securitization of 392 single family residential mortgage loans with an
aggregate unpaid principal balance of $25.2 million.
(2) The decline in the balance of the gross loan portfolio at June 30,
1999, as compared to June 30, 1998, is primarily due to repayments of
commercial real estate loans (hotels and office buildings) and
multifamily residential loans, as well as the sale of single family
residential loans. As of June 30, 1999 the Company ceased origination
of multifamily and commercial real estate loans.
The following table presents a summary of the Company's non-performing
loans (loans which are past due 90 days or more) in the loan portfolio and
significant ratios at the dates indicated:
June 30, December 31,
1999 1998
----------- -----------
(Dollars in thousands)
Nonperforming loans (1)
Single family residential loans........... $ 302 $ 1,169
Multi-family residential loans............ 13,441 7,392
Commercial real estate and other.......... 14,217 488
----------- -----------
$ 27,960 $ 9,049
=========== ===========
Nonperforming loans as a percentage of:
Total loans (2)........................... 19.84% 3.85%
Total assets.............................. 0.93% 0.27%
Allowance for loan losses as a percentage of:
Total loans (2)........................... 4.19% 2.09%
Nonperforming loans....................... 20.94% 54.46%
(1) The Company did not have any loans which were accruing interest and
were past due 90 days or more at the dates indicated.
(2) Total loans are net of undisbursed loan proceeds and unaccreted
discount.
ALLOWANCES FOR LOSSES. The Company uses an internal asset review system
to identify problem assets. 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 risk
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,
47
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
periodically reviews the adequacy of the Company's allowance for loan losses.
Such agency may require the company to recognize changes to the allowance based
on its judgment about information available to it at the time of examination.
The following table sets forth the allocation of the Company's
allowance for loan losses at the dates indicated by loan category and the
percentage of loans in each category to total loans in the respective portfolios
at the dates indicated:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
---------------------------------------- ----------------------------------------
Gross Gross
Loan Loan
Allowance Percent Balance Percent Allowance Percent Balance Percent
---------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan portfolio:
Single family ........ $ 30 0.5% $ 1,911 1.3% $ 215 4.3% $ 30,361 12.4%
Multi-family ......... 1,900 32.5 46,185 31.6 2,714 55.1 75,599 30.9
Commercial real estate 3,923 67.0 98,071 67.1 1,999 40.6 138,727 56.7
Consumer ............. -- -- 88 -- -- -- 132 --
---------- ----- ---------- ----- ---------- ----- ---------- -----
$ 5,853 100.0% $ 146,255 100.0% $ 4,928 100.0% $ 244,819 100.0%
========== ===== ========== ===== ========== ===== ========== =====
Discount loan portfolio:
Single family ........ $ 10,856 53.2% $ 512,950 40.2% $ 10,307 48.2% $ 597,100 45.9%
Multi-family ......... 2,503 12.3 260,313 20.4 2,457 11.5 244,172 18.8
Commercial real estate 6,887 33.8 483,378 37.9 8,607 40.2 449,010 34.5
Other ................ 159 0.7 18,734 1.5 31 0.1 10,144 0.8
---------- ----- ---------- ----- ---------- ----- ---------- -----
$ 20,405 100.0% $1,275,375 100.0% $ 21,402 100.0% $1,300,426 100.0%
========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
The following table summarizes activity in the allowance for loan
losses related to the Company's loan portfolio and discount loan portfolio
during the six months ended June 30, 1999.
<TABLE>
<CAPTION>
Balance Balance
December 31, June 30,
1998 Additions Charge-offs Recoveries 1999
---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Loan portfolio:
Single family................... $ 215 $ (177) $ (8) $ -- $ 30
Multi-family.................... 2,714 (794) (20) -- 1,900
Commercial real estate.......... 1,999 1,924 -- -- 3,923
Consumer........................ -- -- -- -- --
---------- ----------- ---------- ---------- ----------
$ 4,928 $ 953 $ (28) $ -- $ 5,853
========== =========== ========== ========== ==========
Discount loans:
Single family................... $ 10,307 $ 2,481 $ (2,156) $ 224 $ 10,856
Multi-family.................... 2,457 417 (371) -- 2,503
Commercial...................... 8,607 353 (2,073) -- 6,887
Other........................... 31 158 (30) -- 159
---------- ----------- ---------- ---------- ----------
$ 21,402 $ 3,409 $ (4,630) $ 224 $ 20,405
========== =========== ========== ========== ==========
</TABLE>
48
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. In 1993, the
Company commenced a program to invest in multi-family residential projects which
have been allocated low income housing tax credits under Section 42 of the
Internal Revenue Code by a state tax credit allocating agency.
The carrying value of the Company's investments in low-income housing
tax credit interests are as follows at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Investments solely as a limited partner made prior to May 18, 1995.............. $ 18,510 $ 19,607
Investments solely as a limited partner made on or after May 18, 1995........... 72,457 56,299
Investments both as a limited and, through subsidiaries, as a general partner... 89,599 68,258
----------- -----------
$ 180,566 $ 144,164
=========== ===========
</TABLE>
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, are accounted for using the equity method in accordance with the
consensus of the Emerging Issues Task Force as recorded in Issue Number 94-1.
Limited partnership investments made prior to May 18, 1995, 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 both as
a limited and, through a subsidiary, as general partner are presented on a
consolidated basis.
INVESTMENT IN UNCONSOLIDATED ENTITIES. The Company's investments in
unconsolidated entities was comprised of the following at the dates indicated.
<TABLE>
<CAPTION>
Ownership Carrying Value
------------------------ ----------------------------------
Entity Shares/Units % June 30, 1999 December 31, 1998
- -------------------- ------------ ------- ------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
OAC................. 1,540,000 8.12% $ 14,729 $ 16,268
OPLP................ 1,808,733 8.71% 21,239 22,820
Kensington.......... 549,993 36.05% 42,905 46,586
Other............... various various 1,085 1,219
------------ ------------
$ 79,958 $ 86,893
============ ============
</TABLE>
Other consists primarily of the Company's joint venture investment,
which consisted of a 10% interest in BCFL, a limited liability company formed by
the Bank and BlackRock in January 1997 to acquire discount multi-family
residential loans from HUD.
For the six months ended June 30, 1999, the Company recorded equity in
the losses of its investments in OAC and OPLP of $1.5 million and $2.0 million,
respectively. At June 30, 1999 and December 31, 1998, the Company's investment
in OAC stock was pledged as collateral on obligations outstanding under a line
of credit.
The Company's investment in Kensington includes the excess of the
purchase price over the net investment in the amount of $33.3 million ((pound)
20.2 million) at June 30, 1999, as compared to $34.5 million ((pound)20.9
million) at December 31, 1998. For the six months ended June 30, 1999, the
Company recorded equity in the losses of its investment in Kensington of $0.3
million.
See "Results of Operations-Equity in Losses of Investment in
Unconsolidated Entities."
REAL ESTATE OWNED. Properties acquired through foreclosure are valued
at the lower of the adjusted cost basis of the loan or fair value less estimated
costs of disposal of the property at the date of foreclosure. Properties
included in the Company's real estate owned are periodically re-evaluated to
determine that they are being carried at the lower of cost or fair value less
estimated costs to dispose. Rental income related to properties is reported as
earned. Holding and maintenance costs related to properties are recorded as
period costs as incurred. Decreases in market value of foreclosed real estate
subsequent to foreclosure are recognized as a valuation allowance on a property
49
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
specific basis. Subsequent increases in the market value of the foreclosed real
estate are reflected as reductions in the valuation allowance, but not below
zero. Such changes in the valuation allowance are charged or credited to income.
The following table sets forth certain information relating to the
Company's real estate owned at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Discount loan portfolio:
Single family residential........... $ 83,009 $ 94,641
Multi-family residential............ 2,465 20,130
Commercial real estate............. 90,289 82,591
------------- ------------
Total............................. 175,763 197,362
Loan portfolio......................... 2,685 227
Loans available for sale portfolio..... 4,714 3,962
------------- ------------
$ 183,162 $ 201,551
============= ============
</TABLE>
The following table sets forth the activity in the valuation allowance
on real estate owned for the periods indicated.
<TABLE>
<CAPTION>
Three Months Six Months
-------------------------------- --------------------------------
For the periods ended June 30, 1999 1998 1999 1998
- ----------------------------------------------------- -------------- -------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period (1)................... $ 13,545 $ 13,242 $ 15,325 $ 12,346
Provision for loss in fair value..................... 9,779 1,644 14,840 5,878
Charge-offs and sales................................ (6,064) (3,682) (12,905) (7,020)
-------------- -------------- -------------- --------------
Balance at end of period (1)......................... $ 17,260 $ 11,204 $ 17,260 $ 11,204
============== ============== ============== ==============
</TABLE>
(1) The valuation allowance as a percentage of total real estate owned was
8.61% at June 30, 1999 as compared to 7.07% at December 31, 1998, and
6.88% at June 30, 1998.
The following table sets forth the activity in real estate owned during
the periods indicated.
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------------------------
1999 1998
--------------------- ----------------------
No. of No. of
Amount Properties Amount Properties
--------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ...... $ 208,831 1,873 $ 172,693 1,642
Properties acquired through
foreclosure or deed-in-lieu thereof:
Discount loans ................. 37,468 468 84,404 637
Loans available for sale ....... 2,282 35 2,056 12
Loan portfolio ................. 106 2 -- --
Less discount transferred ...... (13,418) -- (24,134) --
--------- --------- --------- ---------
26,438 505 62,326 649
--------- --------- --------- ---------
Acquired in connection with
acquisitions of discount loans ... 23,330 429 8,137 135
--------- --------- --------- ---------
Sales ............................... (71,722) (941) (93,586) (779)
Decrease (increase) in allowance .... (3,715) -- 2,037 --
--------- --------- --------- ---------
Balance at end of period(1) ......... $ 183,162 1,866 $ 151,607 1,647
========= ========= ========= =========
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------------
1999 1998
--------------------- ---------------------
No. of No. of
Amount Properties Amount Properties
--------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ....... $ 201,551 1,999 $ 167,265 1,505
Properties acquired through
foreclosure or deed-in-lieu thereof:
Discount loans .................. 108,162 1,170 149,207 1,323
Loans available for sale ........ 7,101 91 2,744 20
Loan portfolio .................. 2,572 4 -- --
Less discount transferred ....... (34,303) -- (45,922)
--------- --------- --------- ---------
(83,532) 1,265 106,029 1,343
--------- --------- --------- ---------
Acquired in connection with
acquisitions of discount loans .... 31,490 575 11,052 188
--------- --------- --------- ---------
Sales ................................ (131,476) (1,973) (133,880) (1,389)
Decrease (increase) in allowance ..... (1,935) -- 1,141 --
--------- --------- --------- ---------
Balance at end of period(1) .......... $ 183,162 1,866 $ 151,607 1,647
========= ========= ========= =========
</TABLE>
(1) The increase in real estate owned at June 30, 1999, as compared to June
30, 1998, is primarily the result of commercial real estate 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.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------ -----------------------
Amount % Amount %
------------ --------- ------------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One to two months................................... $ 43,096 23.5% $ 38,444 19.1%
Three to four months................................ 17,651 9.7 79,264 39.3
Five to six months.................................. 25,293 13.8 27,115 13.4
Seven to twelve months.............................. 63,599 34.7 26,122 13.0
Over twelve months.................................. 33,523 18.3 30,606 15.2
------------ --------- ------------ ---------
$ 183,162 100.0% $ 201,551 100.0%
============ ========= ============ =========
</TABLE>
51
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth certain geographical information by type
of property at June 30, 1999 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>
Florida.................. $ 4,016 72 $ 49,341 10 $ 53,357 82
California............... 13,661 174 6,794 6 20,455 180
Connecticut.............. 4,605 83 12,953 2 17,558 85
Georgia.................. 1,214 26 14,078 2 15,292 28
New York................. 11,068 277 950 3 12,018 280
Other (1)................ 53,516 1,183 10,966 28 64,482 1,211
---------- ---------- ----------- ---------- ----------- ----------
Total................. $ 88,080 1,815 $ 95,082 51 $ 183,162 1,866
========== ========== =========== ========== =========== ----------
</TABLE>
(1) Consists of properties located in 43 other states, none of which
aggregated over $10.0 million in any one state.
DEPOSITS. Deposits decreased $300.5 million or 14% from December 31,
1998. The decrease in deposits during the six months ended June 30, 1999 was
primarily the result of a $195.1 million decrease in brokered deposits obtained
through national investment banking firms which solicit deposits from their
customers, an $88.5 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 $24.9
million decrease in escrow deposits. Brokered deposits obtained through national
investment banking firms amounted to $1.29 billion at June 30, 1999, as compared
to $1.48 billion at December 31,1998. Deposits obtained through direct
solicitation and marketing amounted to $288.9 million at June 30, 1999, as
compared to $377.4 million at December 31, 1998. At June 30, 1999, the Company
had $170.3 million of certificates of deposit in amounts of $100,000 or more,
including $96.9 million of deposits of states and political subdivisions in the
U.S. which are secured or collateralized as required under state law. See "-
Liquidity, Commitments and Off-Balance Sheet Risks" below.
NOTES, DEBENTURES AND OTHER INTEREST-BEARING OBLIGATIONS. Notes and
debentures outstanding at the dates indicated, mature as follows.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
1999:
<S> <C> <C>
5.975% Federal Home Loan Bank advance due July 1....... 50,000 --
2003:
11.875% Notes due October 1............................ 125,000 125,000
2004:
Loan payable due May 24 (LIBOR plus 150 basis points).. 6,236 --
2005:
12% Subordinated Debentures due June 15 (1)............ 98,000 100,000
------------ ------------
$ 279,236 $ 225,000
============ ============
</TABLE>
(1) During the first quarter of 1999, the Company repurchased $2.0 million
of its 12% subordinated Debentures at par.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit amounted to $94.0 million at June 30, 1999, a decrease of
$85.2 million from December 31, 1998. The decrease is primarily the result of a
decline in the balance of loans available for sale. Borrowings under lines of
credit generally have a one-year term and interest rates which float in
accordance with a designated prime rate. For additional information regarding
lines of credit, see "Liquidity, Commitments and Off-Balance Sheet Risks."
52
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
COMPANY-OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY. In August
1997, Ocwen Capital Trust I issued $125.0 million of 10 7/8% Capital Securities.
Proceeds from issuance of the Capital Securities were invested in 10 7/8% Junior
Subordinated Debentures issued by the Company. The Junior Subordinated
Debentures, which represent the sole assets of the Trust, will mature on August
1, 2027. Intercompany transactions between Ocwen Capital Trust I and the
Company, including the Junior Subordinated Debentures, are eliminated in the
consolidated financial statements of the Company.
For the three and six months ended June 30, 1998 and 1999, the Company
recorded $3.4 million and $6.8 million, respectively, of distributions to
holders of the Capital Securities. See Note 4 to the Interim Consolidated
Financial Statements included in Item 1 hereof.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $0.4 million
during the six months ended June 30, 1999. The decrease in stockholders' equity
during this period was primarily attributable to a $4.1 million decrease in
unrealized gain on securities available for sale and repurchases of common stock
in the amount of $1.8 million, offset by net income of $5.8 million. During the
second quarter of 1999 the Company repurchased 205,300 shares of its common
stock. See the Consolidated Statements of Changes in Stockholders' Equity in the
Interim Consolidated Financial Statements included in Item 1 hereof.
LIQUIDITY, COMMITMENTS AND OFF-BALANCE SHEET RISKS
Liquidity is a measurement of the Company's ability to meet potential
cash requirements, including ongoing commitments to fund deposit withdrawals,
repay borrowings, fund investment, loan acquisition and lending activities and
for other general business purposes. The primary sources of funds for liquidity
consist of deposits, FHLB advances, reverse repurchase agreements, lines of
credit and maturities and principal payments on loans and securities and
proceeds from sales thereof. An additional source of asset liquidity is the
ability to securitize assets such as discount loans and subprime loans.
Sources of liquidity include certificates of deposit obtained primarily
from wholesale sources. At June 30, 1999, the Company had $1.64 billion of
certificates of deposit, including $1.29 billion of brokered certificates of
deposit obtained through national investment banking firms, all of which are
non-cancelable. At the same date scheduled maturities of certificates of deposit
during the 12 months ending June 30, 2000 and 2001 and thereafter, amounted to
$216.8 million, $299.3 million and $1.12 billion, respectively. Brokered and
other wholesale deposits generally are more responsive to changes in interest
rates than core deposits and, thus, are more likely to be withdrawn from the
Company upon maturity as changes in interest rates and other factors are
perceived by investors to make other investments more attractive. Management of
the Company believes that it can adjust the rates paid on certificates of
deposit to retain deposits in changing interest rate environments, and that
brokered and other wholesale deposits can be both a relatively cost-effective
and stable source of funds. There can be no assurance that this will continue to
be the case in the future, however.
Sources of borrowings include FHLB advances, which are required to be
secured by single family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. At June 30, 1999, the
Company was eligible to borrow up to an aggregate of $603.3 million from the
FHLB of New York (subject to the availability of acceptable collateral) and had
$1.1 million of single family residential loans and $10.4 million of
multi-family residential loans and $77.3 million of short duration CMO's (all of
which were held by the Bank) pledged as security for any such advances. At June
30, 1999 the Company had $50.0 million outstanding in FHLB 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. At June 30, 1999, the Company had unrestricted cash and equivalents
of $168.6 million (including $155.8 million held at the Bank), $413.9 million of
short duration CMOs (all of which were held by the Bank), and $102.3 million of
subordinate and residual mortgages that could be used to secure additional
borrowings.
53
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The Company's lines of credit obtained through its subsidiaries to
finance its subprime lending are as follows:
<TABLE>
<CAPTION>
Balance
Outstanding at Amount of
Entity 6/30/99 Facility Committed Amount Maturity Date Interest Rate
- --------------- -------------- --------- ---------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
OFS (1)........ $ 7,193 $ 200,000 $ 100,000 July 2001 LIBOR + 75 basis points
11,635 115,000 100,000 May 2000 LIBOR + 95 - 150 basis points
1,726 50,000 50,000 May 2000 LIBOR + 137.5 basis points
Ocwen UK (1)... 47,790 197,188 201,412 Nov. 1999 LIBOR + 80 basis point
23,137 157,750 161,130 April 2000 LIBOR + 87.5 basis points
IMI (2) ....... 2,558 Lesser of N/A N/A LIBOR + 150 basis points
---------- $15,000 or 60%
of market
value of
collateral
Total ......... $ 94,039
==========
</TABLE>
(1) These lines are used to fund mortgage loan originations and are
generally advanced at a rate of 80% to 90% of the principal balance of
the mortgage loan and are secured by such mortgage loans.
(2) Line is collateralized by the shares held by the Company in OAC.
OFS's terms of the line of credit agreements contain, among other
provisions, requirements for maintaining certain profitability, defined levels
of net worth and debt-to-equity ratios. At June 30, 1999 and December 31, 1998,
OFS failed to comply with the maintenance of profitability covenant for one of
its credit lines. OFS obtained the lender's agreement waiving the requirement of
this covenant for the six months ended June 30, 1999 and the year ended December
31, 1998.
The Company believes that its existing sources of liquidity, including
internally generated funds, will be adequate to fund planned activities for the
foreseeable future, although there can be no assurances in this regard.
Moreover, the Company continues to evaluate other sources of liquidity, such as
lines of credit from unaffiliated parties, which will enhance the management of
its liquidity and the costs thereof.
The Company's operating activities provided cash flows of $105.4
million and $292.2 million during the six months ended June 30, 1999 and 1998,
respectively. During the foregoing periods, cash flows from operating activities
were provided primarily by proceeds from sales of loans available for sale, and
cash resources were used primarily to purchase and originate loans available for
sale. The decrease in net cash flows provided by operating activities during the
first half of 1999 as compared to the first half of 1998 was due primarily to a
decline in proceeds from the sales of loans available for sale, and an increase
in originations of loans available for sale, partially offset by a decrease in
purchases of loans available for sale
The Company's investing activities used cash flows totaling $78.3
million and $652.8 million during the six months ended June 30, 1999 and 1998,
respectively. During the foregoing periods, cash flows from investing activities
were provided primarily by principal payments on and sales of discount loans and
loans held for investment, maturities and principal payments on securities
available for sale and proceeds from sales of real estate owned. Cash flows from
investing activities were primarily utilized to acquire subsidiaries, to
purchase and originate discount loans and loans held for investment and purchase
securities available for sale. The decrease in net cash used by investing
activities during the six months ended June 30, 1999 as compared to the same
period in 1998, was due primarily to the acquisition of Ocwen UK in April 1998,
a decline in purchases of discount loans and purchases and originations of loans
held for investment, an increase in maturities of and principal payments on
securities available for sale and a decline in proceeds from sales of discount
loans.
The Company's financing activities used cash flows of $271.6 million
and provided cash flows totaling $382.4 million during the six months ended June
30, 1999 and 1998, respectively. In the first half of 1998, cash flows from
financing activities were provided primarily by the issuance of obligations
under lines of credit and deposits. In the first half of 1999, cash used related
primarily to deposits and the repayment of obligations under lines of credit.
54
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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, amounted to 11.53% at June 30,
1999.
The Bank's ability to make capital distributions pursuant to the OTS
capital distribution regulations is limited by the regulatory capital levels
which it has committed to the OTS it would maintain, commencing on June 30,
1997. As a result of an agreement between the Company and the OTS to dividend
subordinate and residual mortgage-related securities resulting from
securitization activities conducted by the Bank, which had an aggregate fair
value of $13.8 million at June 30, 1999, the Bank may be limited in its ability
to pay cash dividends to the Company. See "Regulatory Capital Requirements". In
addition to the foregoing OTS limitations, there are certain contractual
restrictions on the Bank's ability to pay dividends as set forth in the
indenture governing the Bank's $98.0 million of 12% Debentures. See Note 6 to
the Interim Consolidated Financial Statements included in Item 1 hereof. At June
30, 1999, the Bank held three subordinate securities with an aggregate fair
value of $13.8 million. Future cash dividends also depend on future operating
results of the Bank.
At June 30, 1999, the Company had $33.6 million of unfunded commitments
related to the purchase and origination of loans. Management of the Company
believes that the Company has adequate resources to fund all of its commitments
to the extent required and that substantially all of such commitments will be
funded during 1999. See Note 7 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 rate risk. See "Asset and
Liability Management" above and Note 5 to the Interim Consolidated Financial
Statements included in Item 1 hereof.
The Company conducts business with a variety of financial institutions
and other companies in the normal course of business, including counterparties
to its off-balance sheet financial instruments. The Company is subject to
potential financial loss if the counterparty is unable to complete an agreed
upon transaction. The Company seeks to limit counterparty risk through financial
analysis, dollar limits and other monitoring procedures.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured 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.
Following an examination in late 1996 and early 1997, 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 6 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.
55
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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 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 the objective of having
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. During 1998, the Company
substantially completed the systems identification and evaluation phases of the
project as well as remediation and validation of its mission critical systems.
As of June 30, 1999, the Company had expended approximately 96% of
budgeted man-hours and incurred costs of approximately $1.8 million, which
included approximately $309,000 for Year 2000 testing tools, additional
hardware, and outside consulting assistance, while the remainder consisted of
labor and overhead expense from within the Company.
In its systems evaluation and validation efforts, the Company has
employed automated testing tools that are designed to meet guidelines
established by the Federal Financial Institution Examination Council ("FFIEC")
as required by the OTS. All new application development will include year 2000
readiness validation prior to implementation, followed by such end-to-end
testing as may be necessary. During 1999 the Company is focusing on any
remaining validation tasks, including remediation and validation of its
non-mission critical systems and end-to-end testing with third parties. During
the second quarter of 1999, the Company participated in the Mortgage Banker
Association Year 2000 Inter-System Readiness Test with other mortgage industry
leaders as a means of coordinating critical end-to-end validation.
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 serve
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
business continuity expert reviewed the Company's year 2000 customer disclosure,
mission critical systems testing results, critical vendor listings, software and
hardware inventories, and disaster recovery plans for critical business units.
On the basis of this review, the business continuity expert built a Company
intranet business continuity template and database, established roles and
responsibilities for key personnel in the business continuity plan, and informed
the Company that as of April 30, 1999, the Company's year 2000 posture was sound
and conformed to FFIEC requirements. However, because it is not possible to
foresee all of the problems that may arise as a result of year 2000 issues, the
Company believes that there can be no assurance that all contingencies have been
adequately addressed by the business continuity plan.
Because the Company has validated the year 2000 readiness of its
mission critical systems and has developed business continuity plans to
accommodate unforeseen disruptions, the Company believes that its most
reasonably likely worst case year 2000 scenarios are characterized by potential
failures of non-critical vendor or customer computer systems or end-to-end
disruptions involving as yet unidentified, and hence untested, third-party
systems and records stored on those systems. The Company could experience
disruptions across all business segments as a result of year 2000 systems
failures at government agencies, utilities, telecommunications providers,
couriers and financial services vendors, among others. Concerning specific
Company business functions, data acquired from third-parties might contain year
2000 incompatible components, which could impact the timeliness of third-party
loan servicing functions such as payment processing or loan resolution. In
addition, loans acquired by the Company could experience increased borrower or
tenant defaults stemming from year 2000 related business shortfalls,
dislocations or delays. Such risks could also impact the value of the Company's
portfolio of mortgage-backed securities, as these are dependent upon the
underlying pool of mortgage loans. There can be no assurance that such risks, if
realized individually or collectively, would not have a material adverse effect
on the Company's business, results of operations or financial condition.
56
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
================================================================================
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. It is the objective of the
Company to attempt to control risks associated with interest rate movements. In
general, management's strategy is to match asset and liability balances within
maturity categories to limit the Company's exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time. The Company's asset and liability management strategy is formulated and
monitored by the Asset/Liability Committee, which is composed of officers of the
Company, in accordance with policies approved by the Board of Directors of the
Company. The Asset/Liability Committee meets regularly to review, among other
things, the sensitivity of the Company's assets and liabilities to interest rate
changes, the book and market values of assets and liabilities, unrealized gains
and losses, including those attributable to hedging transactions, purchase and
sale activity, and maturities of investments and borrowings. The Asset/Liability
Committee also approves and establishes pricing and funding decisions with
respect to overall asset and liability composition.
The Asset/Liability Committee is authorized to utilize a wide variety
of off-balance sheet financial techniques to assist it in the management of
interest rate risk. These techniques include interest rate exchange or swap
agreements, Eurodollar and U.S. Treasury interest rate futures contracts and
foreign currency swap agreements.
INTEREST RATE RISK MANAGEMENT. Under interest rate swap agreements, 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 and for the six months ended June
30, 1999, the Company had no outstanding interest rate exchange agreements.
Interest rate exchange agreements had the effect of decreasing the Company's net
interest income by $32,000 and $70,000 during the three and six months ended
June 30, 1998, respectively.
The Company also enters into interest rate futures contracts, which are
commitments to either purchase or sell designated financial instruments at a
future date for a specified price and may be settled in cash or through
delivery. Eurodollar futures contracts have been sold by the Company to hedge
the repricing or maturity risk of certain short duration mortgage-related
securities, and U.S. Treasury futures contracts have been sold by the Company to
offset declines in the market value of its fixed-rate loans and certain
fixed-rate mortgage-backed and related securities available for sale in the
event of an increasing interest rate environment. The Company had no outstanding
interest rate futures and Eurodollar futures contracts outstanding at and for
the six months ended June 30, 1999. Futures contracts had the effect of
decreasing the Company's net interest income by $49,000 during the six months
ended June 30, 1998. See Note 4 to the Interim Consolidated Financial Statements
included in Item 1 hereof.
During the six months ended June 30, 1999, the Company entered into
swaption and put option contracts to hedge its interest rate exposure on certain
of its investments in low-income housing tax credit interests. Swaption
contracts are options to enter into an interest rate swap agreement at a future
date at a specific interest rate. A European put option allows the Company to
sell a specified quantity of an asset at a specified price at a specific date.
See Note 5 to the Interim Consolidated Financial Statement 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.
57
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
================================================================================
The following table sets forth the estimated maturity or repricing of
the Company's interest-earning assets and interest-bearing liabilities at June
30, 1999. 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 $211.6 million at June 30, 1999, are excluded.
Management believes that these assumptions approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of the
Company's assets and liabilities in the table could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which the assumptions are based.
<TABLE>
<CAPTION>
June 30, 1999
---------------------------------------------------------------------------
Within Four to More than Three
Three Twelve One Year to Years
Months Months Three Years and Over Total
------------ ------------ ------------ ------------ ------------
Rate-Sensitive Assets: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning deposits....................... $ 18,127 $ -- $ -- $ -- $ 18,127
Federal funds sold.............................. 75,000 -- -- -- 75,000
Securities available for sale................... 142,216 320,030 143,982 127,043 733,271
Loans available for sale (1).................... 5,161 55,913 36,211 35,140 132,425
Investment securities, net...................... -- -- -- 10,825 10,825
Loan portfolio, net (1)......................... 55,661 41,190 26,407 10,420 133,678
Discount loan portfolio, net.................... 148,524 521,447 141,142 197,651 1,008,764
------------ ------------ ------------ ------------ ------------
Total rate-sensitive assets................... 444,689 938,580 347,742 381,079 2,112,090
------------ ------------ ------------ ------------ ------------
Rate-Sensitive Liabilities:
NOW and money market checking deposits.......... 7,241 3,799 7,539 13,734 32,313
Savings deposits................................ 78 210 414 766 1,468
Certificates of deposit......................... 272,290 522,261 691,642 142,941 1,629,134
------------ ------------ ------------ ------------ ------------
Total interest-bearing deposits............... 279,609 526,270 699,595 157,441 1,662,915
FHLB Advances................................... 50,000 -- -- --- 50,000
Securities sold under agreements to repurchase.. 133,741 -- -- -- 133,741
Obligations outstanding under lines of credit... 94,039 -- -- -- 94,039
Notes and debentures............................ 6,236 -- -- 223,000 229,236
------------ ------------ ------------ ------------ ------------
Total rate-sensitive liabilities.............. 563,625 526,270 699,595 380,441 2,169,931
Interest rate sensitivity gap before
off-balance sheet financial instruments....... (118,936) 412,310 (351,853) 638 (57,841)
Off-Balance Sheet Financial Instruments:
Swaptions and put option contracts.............. 23 504 -- -- 527
------------ ------------ ------------ ------------ ------------
Interest rate sensitivity gap...................... $ (118,913) $ 412,814 $ (351,853) $ 638 $ (57,314)
============ ============ ============ ============ ============
Cumulative interest rate sensitivity gap........... $ (118,913) $ 293,901 $ (58,952) $ (57,314)
============ ============ ============ ============
Cumulative interest rate sensitivity gap as a
Percentage of total rate-sensitive assets....... (5.63)% 13.92% (2.79)% (2.71)%
============ ============ ============ ============
(1) Balances have not been reduced for non-performing loans.
</TABLE>
Although the interest rate sensitivity gap analysis 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. The OTS has established specific minimum guidelines for thrift
institutions to observe in the area of interest rate risk as described in Thrift
Bulletin No. 13a, "Management of Interest Rate Risk, Investment Securities, and
Derivative Activities" ("TB 13a"). Under TB 13a, institutions are required to
establish and demonstrate quarterly compliance with board-approved limits on
58
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
================================================================================
interest rate risk that are defined in terms of net portfolio value ("NPV"),
which is defined as the net present value of an institution's existing assets,
liabilities and off-balance sheet instruments. These limits specify the minimum
net portfolio value ratio ("NPV Ratio") allowable under current interest rates
and hypothetical interest rate scenarios. An institution's NPV Ratio for a given
interest rate scenario is calculated by dividing the NPV that would result in
that scenario by the present value of the institution's assets in that same
scenario. The hypothetical scenarios are represented by immediate, permanent,
parallel movements in the term structure of interest rates of plus and minus
100, 200, and 300 basis points from the actual term structure observed at
quarter end. The minimum NPV Ratio for each of the seven rate shock scenarios
and the corresponding limits approved by the Board of Directors of the Bank, is
as follows at June 30, 1999.
Rate Shock Board Limits Current
(in basis points) (minimum NPV Ratios) NPV Ratios
------------------------ -------------------- ----------
+300 5.00% 18.41%
+200 6.00 18.66
+100 7.00 18.83
0 8.00 18.90
-100 7.00 18.91
-200 6.00 18.90
-300 5.00 18.96
The Asset/Liability Committee also regularly reviews interest rate risk by
forecasting the impact of alternative interest rate environments on net interest
income and NPV, and evaluating such impacts against the maximum potential
changes in net interest income and NPV that is authorized by the Board of
Directors of the Bank. The following table quantifies the potential changes in
net interest income and NPV should interest rates go up or down (shocked) 300
basis points, assuming the yield curves of the rate shocks will be parallel to
each other. The cash flows associated with the loan portfolios and securities
available for sale are calculated based on prepayment and default rates that
vary by asset. Projected losses, as well as prepayments, are generated based
upon the actual experience with the subject pool, as well as similar, more
seasoned pools. To the extent available, loan characteristics such as
loan-to-value ratio, interest rate, credit history, prepayment penalty terms and
product types are used to produce the projected loss and prepayment assumptions
that are included in the cash flow projections of the securities. When interest
rates are shocked, these projected loss and prepayment assumptions are further
adjusted. For example, under current market conditions, a 100 basis point
decline in the market interest rate is estimated to result in a 200 basis point
increase in the prepayment rate of a typical subprime residential loan. Most
commercial and multi-family loans are not subject to prepayments as a result of
prepayment penalties and contractual terms which prohibit prepayments during
specified periods. However, for those commercial and multi-family loans where
prepayments are not currently precluded by contract, declines in interest rates
are associated with steep increases in prepayment speeds in computing cash
flows. A risk premium is then calculated for each asset, which, when added to
the interest rate being modeled, results in a matrix of discount rates that are
applied to the cash flows computed by the model. The base interest rate scenario
assumes interest rates at June 30, 1999. Actual results could differ
significantly from those estimated in the table.
Estimated Changes in
Change in interest Rates --------------------------------
(Rate shock in basis points) Net Interest NPV
---------------------------- ------------ ------
+300 10.20% (6.61)
+200 6.80 (3.92)
+100 3.40 (1.72)
0 -- --
-100 (3.40) 1.28
-200 (6.80) 2.43
-300 (10.20) 3.94
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
59
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
================================================================================
income and NPV could vary substantially if different assumptions are used or
actual experience differs from the historical experience on which they are
based.
FOREIGN CURRENCY EXCHANGE RATE RISK MANAGEMENT. The Company uses
foreign currency derivatives to hedge its equity investment in Ocwen UK and
Kensington ("net investment hedges"). The Company's exposure to foreign currency
exchange rates exists with the British Pound versus the U.S. dollar. 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 investment in these foreign entities.
During 1998, the Company entered into a foreign currency swap with a
AAA-rated counterparty to hedge its equity investment in Kensington. 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. During the second quarter of 1999, the Company also 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 had the right to receive $0.9 million and pay
(pound)0.6 million.
The Company sells short foreign currency futures to hedge its foreign
currency exposure related to its equity investment in Ocwen UK. During the first
quarter of 1999, the Company increased its derivative hedging instruments to
include its foreign currency exposure resulting from the unrealized gain on
securities available for sale related to Ocwen UK. Under the terms of the
currency futures, at June 30, 1999 the Company had the right to receive $72.6
million and pay (pound)45.3 million. At December 31, 1998, the Company had the
right to receive $43.8 million and pay (pound)26.6 million. The value of the
currency futures is based on quoted market prices. See Note 5 to the Interim
Consolidated Financial Statements included in Item 1 hereof.
The Company's net investment hedges and related foreign currency equity
investments and net exposures as of June 30, 1999 and December 31, 1998 were as
follows.
<TABLE>
<CAPTION>
Equity Investment Net Hedges Net Exposure
----------------- ------------ ------------
<S> <C> <C> <C>
JUNE 30, 1999: (Dollars in thousands)
Ocwen UK (1)............... $ 64,578 $ 72,613 $ 8,035
Kensington................. $ 42,905 $ 44,441 $ 1,536
DECEMBER 31, 1998:
Ocwen UK (1)............... $ 53,436 $ 43,828 $ (9,608)
Kensington................. $ 46,586 $ 45,093 $ 1,493
</TABLE>
(1) Equity Investment in Ocwen UK excludes unrealized gains on securities
available for sale. Total stockholders' equity of Ocwen UK at June 30,
1999, including unrealized gain on securities available for sale and
foreign currency translation, net of tax, was $72.2 million.
The net exposures are subject to gain or loss if foreign currency
exchange rates fluctuate.
Additional information required by this Item appears in Note 5 to the
Interim Consolidated Financial Statements included in Item 1 hereof, and is
incorporated herein by reference.
60
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
================================================================================
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 EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS,
WHICH ARE BASED ON VARIOUS ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY'S
CONTROL), MAY BE IDENTIFIED BY REFERENCE TO A FUTURE PERIOD(S) OR BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "ANTICIPATE," "BELIEVE," "COMMITMENT,"
"CONSIDER," "CONTINUE," "COULD," "ENCOURAGE," "ESTIMATE," "EXPECT," "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, THE ABILITY OF THE COMPANY AND OAC TO CONSUMMATE THE MERGER,
MARKET PRICES OF THE COMMON STOCK OF THE COMPANY AND OAC, 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, RECENT EFFORTS TO REFOCUS ON CORE BUSINESSES AND INCREASE
LIQUIDITY, DISPOSITIONS AND WINDING DOWN OF DISCONTINUED BUSINESSES,
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
ACCELERATION), 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-3 AND PERIODIC REPORTS ON FORMS
10-Q, 8-K AND 10-K. SPECIFIC REFERENCE IS MADE TO EXHIBIT 99. 1, FILED HEREWITH,
FOR A DESCRIPTION OF MATERIAL RISKS FACED BY THE COMPANY AND ITS SECURITIES
HOLDERS. 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.
61
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
================================================================================
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 Amended and Restated Bylaws (2)
4.0 Form of Certificate of Common Stock (1)
4.1 Form of Indenture between the Company and Bank One, Columbus, NA
as Trustee (1)
4.2 Form of Note due 2003 (included in Exhibit 4.1) (1)
4.3 Certificate of Trust of Ocwen Capital Trust I (3)
4.4 Amended and Restated Declaration of Trust of Ocwen Capital Trust I
(3)
4.5 Form of Capital Security of Ocwen Capital Trust I (4)
4.6 Form of Indenture relating to 10 7/8% Junior Subordinated
Debentures due 2027 of the Company (3)
4.7 Form of 10 7/8% Junior Subordinated Debentures due 2027 of the
Company (4)
4.8 Form of Guarantee of the Company relating to the Capital
Securities of Ocwen Capital Trust I (3)
4.9 Form of Indenture between the Company 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 (6)
10.2 Annual Incentive Plan (1)
10.3 Ocwen Financial Corporation 1996 Stock Plan for Directors, as
amended (7)
10.4 Ocwen Financial Corporation 1998 Annual Incentive Plan (7)
10.5 Ocwen Financial Corporation Long-Term Incentive Plan (7)
10.6 Loan Facility Agreement dated April 23, 1999 between Ocwen
Limited, National Westminster Bank plc, and Ocwen Financial
Corporation (filed herewith)
10.7 Agreement of Merger dated as of July 25, 1999 among Ocwen
Financial Corporation, Ocwen Asset Investment Corp. and Ocwen
Acquisition Company (8)
27.1 Financial Data Schedule-For the three months ended June 30, 1999
(filed herewith)
99.1 Risk factors (filed herewith)
- ----------------------
(1) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-1
(File No. 333-5153) as amended, declared effective by the commission on
September 25, 1996.
(2) Incorporated by reference to the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998
(3) Incorporated by reference to the similarly described 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 included with
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(5) Incorporated by reference to the similarly described exhibit filed in
connection with Amendment No.2 to Offering Circular on Form OC (on Form
S-1) filed on June 7, 1995.
(6) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-8,
File No. 333-44999, effective when filed with the Commission on January
28, 1998.
(7) 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.
62
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
================================================================================
(8) Incorporated by reference to the similarly described exhibit included
with the Registrant's current report on Form 8-K filed with the
Commission on July 26, 1999.
(b) Reports on Form 8-K.
(1) A Form 8-K was filed by the Company on July 26, 1999 which
contained a news release announcing the signing of a
definitive agreement with Ocwen Asset Investment Corp. ("OAC")
that contemplates that OAC would merge with an indirect
subsidiary of the Company. The Form 8-K also contained the
Agreement of Merger dated July 25, 1999 among the Company,
Ocwen Acquisition Company and OAC.
(2) A Form 8-K was filed by the Company on August 12, 1999 which
contained a news release announcing its financial results for
the second quarter of 1999.
63
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Ocwen Financial Corporation
By: /s/ MARK S. ZEIDMAN
---------------------------------------
Mark S. Zeidman,
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as its principal financial officer)
Date: August 16, 1999
64
THIS AGREEMENT is made on 23 April 1999 between:
(1) OCWEN LIMITED, a company incorporated under the laws of England and
Wales, registered number 3542994 whose registered office is at Malvern
House, Croxley Business Park, Watford WD1 8YF (the "BORROWER"); and
(2) NATIONAL WESTMINSTER BANK PLC whose registered office is at 41
Lothbury, London EC2P 2BP (the "LENDER") acting through its duly
authorised agent, Greenwich NatWest Limited ("GNW") whose principal
office is at 135 Bishopsgate, London EC2; and
(3) OCWEN FINANCIAL CORPORATION, a company incorporated in the State of
Florida, USA and whose principal place of business is at The Forum,
1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401 ("OFC"
or the "GUARANTOR")
WHEREAS:
(1) The Borrower carries on the business of originating and acquiring
mortgage loans secured by residential property in England, Wales and
Scotland.
(2) The Lender has agreed to provide a facility to the Borrower to enable
the Borrower to repay the GIL Facility and to finance the origination
by the Borrower of mortgage loans on the terms and subject to the
conditions contained herein.
(3) OFC has agreed to indemnify the Lender in respect of, INTER ALIA, the
obligations of the Borrower under this Agreement.
1. INTERPRETATION
1.1 DEFINITIONS
In this Agreement (including the recitals hereto) the following terms
shall have the respective meanings set forth below:
"ACCELERATION" means any acceleration of the Advances hereunder
following the occurrence of an Event of Default;
"ACCOUNT CHARGES" means the Borrower Collection Account Charge and the
Borrower Funding Account Charge.
"ACCOUNT BANK" means National Westminster Bank Plc or such other bank
or financial institution as may be substituted as account bank with the
prior written consent of the Lender.
1
<PAGE>
"ADVANCE" means, save as otherwise provided herein, the Closing Date
Advance and any advance made by the Lender hereunder pursuant to this
Loan Facility to fund the origination of a Mortgage Loan (as from time
to time reduced by repayment and prepayment).
"ADVANCE DATE" means, in the case of the Closing Date Advance, the date
hereof and, in the case of each other Advance, each date on which the
Lender advances monies to the Solicitors under clause 4.3 to fund the
origination of Mortgage Loans hereunder.
"ADVANCE MONIES UNDERTAKING" means the Solicitors' undertaking given in
respect of monies drawn under this Facility (save in respect of the
refinancing of Existing Mortgage Loans), in the form set out in
Schedule 5 (part 1).
"AFFILIATE" means, in relation to any company, a subsidiary or holding
company of such company and, if such company is itself a subsidiary,
any company which is also a subsidiary of the holding company of such
first mentioned company, as such terms are defined in section 736 of
the Companies Act 1985.
"AGREED FORM DOCUMENTATION LETTERS" means the letters of even date from
the Lender, addressed respectively to (i) the Borrower, The Savjani
Partnership and Bernard Elliston Sandler & Co. and (ii) the Borrower
and Turner Macfarlane Green, with agreed form documentation attached,
in each case signed by way of acknowledgement and acceptance by the
relevant solicitors and the Borrower.
"AGREEMENT" means this Loan Facility Agreement, including all schedules
and annexures hereto, which expression shall include the same as
varied, supplemented, re-stated, novated, extended or replaced from
time to time.
"ASSOCIATED COSTS RATE" means the cost imputed to the Lender of
compliance with, inter alia, the mandatory liquid assets requirements
of the Financial Services Authority during any Interest Period (or
other period), expressed as a rate per annum and determined in
accordance with Schedule 4.
"AVAILABLE COMMITMENT" means, at any time, the Loan Commitment at such
time less the Loan Amount then outstanding.
"AVAILABILITY PERIOD" means the period commencing on the date of this
Agreement and ending on the earlier of:-
(a) the date on which the Lender ceases to be under any obligation
to make further Advances to the Borrower hereunder pursuant to
the terms hereof; and
(b) the Final Maturity Date.
"BARCLAYS FACILITY" means the loan facility agreement dated 9 November,
1998 between Ocwen 2 Limited as borrower and Barclays Bank plc as
lender.
2
<PAGE>
"BERNARD ELLISTON SANDLER & CO. CLIENT ACCOUNT" means account number
95629920 sort code 60-00-01 at the Account Bank in the name of Bernard
Elliston Sandler & Company - Ocwen Originations or such other account
or accounts as may be utilised for the purpose of funding the
origination of Mortgage Loans by Messrs. Bernard Elliston Sandler & Co.
"BORROWER COLLECTION ACCOUNT" means the account in the name of the
Borrower with the Account Bank number 36156914 charged to the Lender
pursuant to the Borrower Collection Account Charge.
"BORROWER COLLECTION ACCOUNT CHARGE" means the charge of the Borrower
Collection Account in favour of the Lender dated on or about the date
hereof in form and substance satisfactory to the Lender.
"BORROWER FUNDING ACCOUNT" means the account in the name of the
Borrower at the Account Bank number 36156892 charged to the Lender
under the Borrower Funding Account Charge.
"BORROWER FUNDING ACCOUNT CHARGE" means the charge of the Borrower
Funding Account in favour of the Lender dated on or about the date
hereof in form and substance satisfactory to the Lender.
"BORROWING BASE DEFICIENCY" means, on any day by reference to which the
same falls to be calculated, the excess (if any) of the Loan Amount
over Collateral Value calculated and agreed in accordance with clause
20.
"BUSINESS DAY" means a day (other than a Saturday or Sunday) on which
banks are generally open for business in London.
"CCA" means the Consumer Credit Act 1974.
"CLIENT ACCOUNTS" means the Savjani Partnership Client Account, the
Bernard Elliston Sandler & Co. Client Account and the Turner Macfarlane
& Green Client Account and "Client Account" means each of such
accounts.
"CLOSING DATE ADVANCE" means an advance in an amount equal to all
outstandings (other than the GIL Accrued Interest) under the GIL
Facility on the Closing Date, to be made available by the Lender
hereunder, subject to the terms hereof, on the Closing Date.
"CLOSING DATE" means 23 April 1999.
"CLOSING DATE ADVANCE REQUEST" means a written request from the
Borrower to the Lender for the Closing Date Advance substantially in
the form set out in Schedule 1, Part 1.
3
<PAGE>
"COLLATERAL PERCENTAGE" in respect of any Mortgage Loan as at any date
means the percentage of the Outstanding Principal Balance of the
Mortgage Loan set out in the table below by reference to the category
into which such Mortgage Loan falls:-
Performing Senior Mortgage Loan 100%
Performing Junior Mortgage Loan 95%
Non Performing Senior Mortgage Loan 70%
Non Performing Junior Mortgage Loan 30%
"COLLATERAL VALUE" means, on any Interest Payment Date by reference to
which the same falls to be determined, the aggregate of the values
attributed to each Mortgage Loan as at the related Determination Date
(other than any Mortgage Loan in relation to which the related Advance
has been repaid in full), the value to be attributed to each such
Mortgage Loan for such purpose to be determined by multiplying the
lesser of the Collateral Percentage and the Market Value Percentage for
each Mortgage Loan (on the basis of the status of such Mortgage Loan as
at the related Determination Date) by the Outstanding Principal Balance
of each such Mortgage Loan as at the relevant Determination Date
provided that the Collateral Value shall be deemed to be zero with
respect to each Mortgage Loan:
(a) in respect of which there is a material breach of a
representation and warranty contained in clause 15.4 as at the
relevant Determination Date which:
(i) is curable but, as at the relevant Determination
Date, has remained uncured for a period of 50 days or
more; or
(ii) (in the reasonable opinion of the Lender) is not
curable;
(b) in respect of which the related Mortgaged Property has been
repossessed;
(c) if
(i) the related Mortgage Loan or the related Mortgage is
not genuine or is not the legal, valid, binding and
enforceable obligation of the maker or grantor
thereof;
(ii) such Mortgage, is not a valid, subsisting and
enforceable mortgage or heritable security on the
Mortgaged Property with the priority which it is
expressed to have.
"COLLECTION PERIOD" means the period from and including the first day
of the calendar month immediately preceding the calendar month in which
the relevant Interest Payment Date falls until and including the last
day of such preceding calendar month.
4
<PAGE>
"CONSOLIDATED INDEBTEDNESS" means for any period, the aggregate
Indebtedness of the relevant entity determined on a consolidated basis
in accordance with GAAP less any non-specific balance sheet reserves
maintained in accordance with GAAP.
"CONSOLIDATED TANGIBLE NET WORTH" means all amounts included as capital
on the relevant entity's consolidated balance sheet determined in
accordance with GAAP less amounts owing to affiliates and less any
intangible assets including, without limitation, goodwill and deferred
tax assets.
"COUNTER INDEMNITY" means the counter indemnity to be entered into on
or about the date hereof between OFC and the Borrower in respect of the
Indemnity, in form and substance satisfactory to the Lender.
"DEBENTURE" means the debenture to be entered into on or about the date
hereof in form and substance satisfactory to the Lender by the Borrower
in favour of the Lender creating fixed and floating charges over all of
the Borrower's undertaking and assets and includes (where the context
so admits) all further deeds and documents granted or executed pursuant
thereto.
"DETERMINATION DATE" means the fifth Business Day of each calendar
month and "related Determination Date" in the context of an Interest
Payment Date means the fifth Business Day of the calendar month in
which such Interest Payment Date falls.
"DRAWDOWN REQUEST" means the form of written request for an Advance to
be delivered by the Borrower to the Lender prior to the relevant
Advance Date, substantially in the form set out in Schedule 1, Part 2,
together with a Solicitors' Report on Title attached thereto in
relation to each Mortgage Loan to be originated.
"ELIGIBLE COLLATERAL" means any mortgage loan which, as at the date on
which the Borrower is required to provide additional security to the
Lender hereunder:
(a) is neither subject to the fixed charges contained in the
Debenture nor forms the subject of a Scottish Sub-Security;
and
(b) complies with all representations and warranties set out in
clause 15.4.
"ELIGIBLE COLLATERAL SCHEDULE" means a schedule provided by the
Borrower to the Lender under clause 8.
"ENGLISH MORTGAGE LOAN" means a Mortgage Loan secured over a Mortgaged
Property situated in England or Wales.
"EVENT OF DEFAULT" means any one of the conditions or circumstances
referred to in clause 18.
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"EXISTING MORTGAGE LOANS" means those of the mortgage loans which are
financed under the GIL Facility as at the Closing Date, details of
which are listed in the Existing Mortgage Loans Schedule.
"EXISTING MORTGAGE LOANS SCHEDULE" means the schedule of mortgage loans
set out in Schedule 1 to the Debenture.
"EXISTING MORTGAGE LOANS UNDERTAKING" means the Solicitors'
undertakings in respect of Existing Mortgage Loans in the form set out
in Schedule 5 (part 2) addressed to the Lender.
"FACILITY OFFICE" means the office of the Lender through which it makes
any Advance to the Borrower.
"FINAL MATURITY DATE" means the day falling 364 days from (but
including) the date hereof unless that day is not a Business Day in
which case the Final Maturity Date shall be the immediately preceding
day which is a Business Day.
"FIRST LEGAL SUB-MORTGAGE" means a document in the form set out in
Schedule 2 to the Debenture relating to a Mortgage Loan of a Mortgaged
Property in England or Wales.
"GIL" means Greenwich International, Ltd.
"GIL FACILITY" means the loan facility agreement dated 24 April 1998
between GIL as lender, the Borrower as borrower and OFC as guarantor,
as amended and supplemented by an amending agreement dated 21 October
1998 and as further amended and supplemented by a second amending
agreement dated 26 October 1998.
"GIL ACCRUED INTEREST" means the amount of interest accrued under the
GIL Facility from and including 15 April 1999 to but excluding the
Closing Date.
"GNW" means Greenwich NatWest Limited.
"INDEBTEDNESS" means any obligation (whether incurred as principal,
cautioner or surety) for the payment or repayment of money in respect
of:
(a) monies borrowed and debit balances at banks;
(b) any loan note, bond, note, loan stock, commercial paper,
debenture or other security;
(c) any acceptance or documentary credit;
(d) the deferred purchase price of property or services, except
accounts payable and accrued expenses arising in the ordinary
course of business;
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(e) any receivable sold or discounted (otherwise than on a
non-recourse basis);
(f) the capital value of any lease (whether in respect of land,
machinery, equipment or otherwise) entered into primarily as a
method of raising finance or financing the acquisition of the
asset leased;
(g) any currency or interest swap, cap, collar or floor
transaction, any repurchase or reverse repurchase transaction,
any foreign exchange, spot or forward transaction, any stock
lending transaction, any financial option, or any combination
of any of the foregoing; or
(h) without double counting, any guarantee, indemnity or
contingent liability in respect of any borrowings of any
person of a type referred to in (a) to (g) above but only to
the extent the borrowings thereby guaranteed or indemnified
against are outstanding.
"INDEMNITY" means the indemnity to be given by OFC on or about the date
hereof in form and substance satisfactory to the Lender indemnifying,
inter alia, the Lender for, inter alia, the obligations of the Borrower
under this Agreement.
"INTEREST PAYMENT DATE" means the 15th day of each month unless that
day is not a Business Day in which case the Interest Payment Date shall
be the immediately preceding day which is a Business Day.
"INTEREST PERIOD" means, for each Advance, each of the following
periods:
(a) the period commencing on (and including) the day the relevant
Advance is made and ending on (but excluding) the next
following Interest Payment Date; and
(b) thereafter, each period commencing on (and including) an
Interest Payment Date and ending on (but excluding) the next
following Interest Payment Date,
provided that any Interest Period which would otherwise overrun the
Final Maturity Date or the Repayment Date of the relevant Advance shall
end upon whichever is the earlier of the Final Maturity Date or the
relevant Repayment Date.
"ISSUERS" means each of City Mortgage Receivables 1 Plc (Company No.
3126751), City Mortgage Receivables 2 Plc (Company No. 3245450), City
Mortgage Receivables 3 Plc (Company No. 3245445), City Mortgage
Receivables 4 Plc (Company No. 3246090), City Mortgage Receivables 5
Plc (Company No. 3304205), City Mortgage Receivables 6 Plc (Company No.
3328209), Ocwen Mortgage Loans 1 Plc (Company No. 3565250) and Ocwen
Mortgage Loans 2 Plc (Company No. 3654408).
"JUNIOR MORTGAGE LOAN" means any Mortgage Loan which is secured other
than by way of a first ranking legal mortgage or first ranking Standard
Security.
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"LIBOR" in respect of a particular period and in relation to an Advance
or other amount in respect of which an interest rate is to be
determined pursuant to this Agreement, means the percentage interest
rate per annum for the time being offered in the London Interbank
Market to prime banks for one month sterling deposits at or about 11.00
a.m. (London time) on the first day of such period as published on the
relevant page of The Bloomberg (Bloomberg L.P.) under the heading
"Money Market Money Market Rates".
"LOAN AMOUNT" means, on any date, the aggregate of Advances drawn down
against the Loan Commitment by the Borrower as at that date, save to
the extent that any such Advances have been repaid to the Lender.
"LOAN COMMITMENT" means an aggregate amount of (pound)100,000,000 (one
hundred million pounds) (including, for the avoidance of doubt, the
Closing Date Advance).
"LOAN FACILITY" means the loan facility granted to the Borrower by the
Lender under this Agreement.
"MANUALS" has the meaning attributed to it in the Servicing Agreement.
"MARGIN" means 0.875%.
"MARKET VALUE PERCENTAGE" means in respect of any Mortgage Loan on any
date of determination, the market value of such Mortgage Loan
(expressed as a percentage of the Outstanding Principal Balance of such
Mortgage Loan) determined by the Lender in its sole discretion acting
reasonably and having notified the Borrower in advance of its
determination and the reasons therefor, which determination shall, in
the absence of manifest error, be conclusive.
"MHA DOCUMENTATION" means in relation to any Scottish Mortgage Loan,
any affidavit, consent or renunciation granted in terms of the
Matrimonial Homes (Family Protection) (Scotland) Act 1981 given in
connection with such Scottish Mortgage Loan or the Mortgaged Property
secured thereunder.
"MINDED TO REVOKE NOTICE" means any notice given under section 32 of
the CCA.
"MIRAS" means the mortgage interest relief at source scheme specified
in section 369 of the Income and Corporation Taxes Act 1988.
"MONTHLY PAYMENT" means, in respect of any Mortgage Loan, the monthly
payment due and payable by the relevant Mortgagor on a Monthly Payment
Date in accordance with the relevant Mortgage Conditions including all
interest, principal, fees, charges and expenses payable thereunder.
"MONTHLY PAYMENT DATE" means, in respect of any Mortgage Loan, the date
in each month on which the relevant Mortgagor is required to make
payments of interest and, as the case may be, principal in accordance
with the Mortgage Deed applicable thereto.
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"MORTGAGE" means each charge, Standard Security or mortgage created by
a Mortgage Deed.
"MORTGAGE DEED" means in relation to each Mortgage Loan, the deed
creating the charge by way of first or subsequent ranking legal
mortgage or first or subsequent ranking Standard Security over the
relevant Mortgaged Property, and incorporating the terms and conditions
on which the relevant advance to the Mortgagor was made.
"MORTGAGE FILE" means the Mortgage Loan Documents pertaining to a
particular Mortgage Loan including, without limitation, any land
certificates or charge certificates obtained by it issued by HM Land
Registry or the Registers of Scotland now vested in the Borrower or
vesting in it after the date of this Deed, together with the related
mortgage application forms completed by the relevant Mortgagor(s),
credit agency checks, if any, carried out in respect of such
Mortgagor(s), correspondence files and all other material documents,
papers and computer records held by or for the Borrower in respect of
the particular Mortgage Loan and the origination and servicing thereof.
"MORTGAGE LOAN" means each mortgage loan referred to in a Mortgage Loan
Schedule and any other mortgage loan, the origination of which is
financed by the Lender hereunder (other than any such mortgage loan in
respect of which the Borrower has repaid the related Advance in full)
and all rights and entitlements of the Borrower in relation thereto and
all references herein to "Mortgage Loan" shall be construed as a
reference to the relevant Mortgage Loan, together with its Related
Security.
"MORTGAGE LOAN DOCUMENTS" means, in respect of a Mortgage Loan, the
original of each of the documents listed in Schedule 3 pertaining to
any Mortgage Loan.
"MORTGAGE LOAN SCHEDULE" means each of the following:-
(a) the Existing Mortgage Loans Schedule;
(b) a schedule of loans annexed to a Drawdown Request containing,
in respect of each mortgage loan specified therein the
information set out in Part 3 of Schedule 1; and
(c) any Eligible Collateral Schedule.
"MORTGAGED PROPERTY" means each and all (as the context admits)
freehold and/or leasehold properties in England or Wales and/or
properties held on heritable title or long lease in Scotland subject to
a Mortgage Deed.
"MORTGAGOR" means the party (or parties) referred to as such or as "the
Borrower" or "the Grantor" in the relevant Mortgage Deed.
"NEW MORTGAGE LOAN" means a mortgage loan (other than an Existing
Mortgage Loan) in respect of which the Borrower has drawn an Advance
under this Facility.
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"NEW MORTGAGE LOANS UNDERTAKING" means the Solicitors' Undertaking in
respect of New Mortgage Loans in the form set out in Schedule 5 (part
3) addressed to the Lender.
"NON PERFORMING JUNIOR MORTGAGE LOANS" means a Junior Mortgage Loan
which as of the last day of the related Collection Period has due and
unpaid all or any part of at least one Monthly Payment.
"NON PERFORMING SENIOR MORTGAGE LOANS" means each Mortgage Loan which:
(a) is a Senior Mortgage Loan; and
(b) as of the last day of the related Collection Period has due
and unpaid all or any part of at least two Monthly Payments.
"OFT" means the Office of Fair Trading.
"OFT GUIDELINES" means the guidelines issued by the OFT relating to the
non-status lending market in effect from time to time.
"OUTSTANDING PRINCIPAL BALANCE" means, in respect of any Mortgage Loan
on any date, the principal amount advanced to the relevant Mortgagor on
completion of that Mortgage Loan, together with any retention amounts
subsequently released to such Mortgagor and secured by the same
Mortgage, (but excluding for the avoidance of doubt any fees, charges,
disbursements and capitalised interest charged to the Mortgagor's
mortgage account) less any repayments of the same (other than early
repayments) received prior to that date.
"PERFORMING JUNIOR MORTGAGE LOAN" means a Junior Mortgage Loan which is
not a Non Performing Junior Mortgage Loan.
"PERFORMING SENIOR MORTGAGE LOAN" means each Mortgage Loan which:
(a) is a Senior Mortgage Loan; and
(b) is not a Non Performing Senior Mortgage Loan.
"PIPELINE LOAN" means such of the Existing Mortgage Loans brief details
of which are set out in Schedule 7.
"POTENTIAL EVENT OF DEFAULT" means any event which with the giving of
notice or the passing of time or both or the occurrence of any other
event will become an Event of Default.
"REASONABLY PRUDENT MORTGAGE LENDER" means a mortgage lender lending to
credit-impaired borrowers in England, Wales and Scotland who is
reasonably prudent in the origination, administration and enforcement
of mortgage loans and the security for their repayment beneficially
owned by such mortgage lender.
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"REGISTERS OF SCOTLAND" means the Land Register of Scotland and/or the
General Register of Sasines.
"REGULATED MORTGAGE LOAN" means a Mortgage Loan that is a regulated or
partly regulated agreement for the purposes of the Consumer Credit Act
1974.
"RELATED SECURITY" has the meaning given to it in the Debenture.
"REPAYMENT DATE" means, in relation to:
(a) the Closing Date Advance in respect of each Existing Mortgage
Loan refinanced by the Closing Date Advance, the date which is
180 days after the day on which the advance relating to such
Existing Mortgage Loan was made under the GIL Facility (such
that, for the avoidance of doubt, the Closing Date Advance
will become repayable on a number of Repayment Dates, each
determined as aforesaid); and
(b) in relation to any other Advance, the Final Maturity Date or
other date which is 180 days following its Advance Date,
whichever is the earlier.
"REPORT ON TITLE" means the Solicitors' report on title in respect of a
Mortgaged Property addressed to the Borrower.
"SAVJANI PARTNERSHIP CLIENT ACCOUNT" means account number 36202630 sort
code 60-00-01 with the Account Bank in the name of the Savjani
Partnership - Ocwen Originations or such other account or accounts as
may be utilised for the purpose of funding Mortgage Loans by the
Savjani Partnership.
"SCOTTISH MORTGAGE LOAN" means a Mortgage Loan secured over a Mortgaged
Property situated in Scotland.
"SCOTTISH SUB-SECURITY" means a Standard Security granted in favour of
the Lender over a Scottish Mortgage Loan pursuant to clause 3.7 or
3.8(b) of the Debenture substantially in either of the forms set out in
Schedule 3 and 4 thereof.
"SECURED SUMS" has the meaning given to it in the Debenture.
"SECURITISATION BANK AGREEMENTS" means the bank agreements dated 21
March 1996, 18 October 1996, 31 October 1996, 31 January 1997, 30 April
1997, 30 June 1998 and 25 November 1998 in relation to the
Securitisations.
"SECURITISATIONS" means each of the securitisations of mortgage loans
originated by City Mortgage Corporation Limited and certain of its
subsidiaries, effected through sales of mortgage loans to certain of
the Issuers on 21 March 1996, 18 October 1996, 31 October 1996, 31
January 1997 and 30 April 1997 and the securitisations of mortgage
loans originated by the Borrower and of mortgage loans acquired by the
Borrower from City Mortgage Corporation Limited and certain of its
subsidiaries effected through sales of such mortgage loans to certain
of the Issuers on 30 June 1998 and 25 November 1998.
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"SECURITISED MORTGAGE LOANS" has the meaning attributed to it in the
Debenture.
"SECURITY" includes any mortgage, sub mortgage, Standard Security,
fixed or floating charge, sub charge, encumbrance, lien, pledge,
hypothecation, absolute assignment, assignment by way of security, or
title retention arrangement, and any agreement or arrangement having
substantially the same economic or financial effect as any of the
foregoing (including any "hold back" or "flawed asset" arrangement).
"SECURITY DOCUMENTS" means the Debenture (and each further security
document executed pursuant thereto including, without limitation, any
First Legal Sub-Mortgage or Scottish Sub-Security) and the Account
Charges and any security executed in respect of additional collateral
provided pursuant to the terms hereof.
"SENIOR MORTGAGE LOANS" means each Mortgage Loan which is secured by
way of a first ranking legal mortgage or first ranking Standard
Security.
"SERVICE DOCUMENT" means a writ, summons, order, judgment or other
process issued out of the courts of England and Wales.
"SERVICER" means Ocwen UK Servicing Limited or, following the
termination of that company's appointment as servicer under the
Servicing Agreement, any substitute servicer appointed thereunder.
"SERVICER COLLECTION ACCOUNT" means the account in the name of Ocwen UK
Servicing Limited with the Account Bank, number 76694895.
"SERVICER COLLECTION ACCOUNT TRUST" means all trusts subsisting from
time to time over the Servicer Collection Account.
"SERVICING AGREEMENT" means the servicing agreement in form and
substance satisfactory to the Lender to be entered into on or about the
date hereof between the Borrower, the Lender and the Servicer.
"SOLICITOR LETTERS OF INSTRUCTION" means the form of letters of
instruction so described and annexed to each of the Agreed Form
Documentation Letters.
"SOLICITORS" means each of the Savjani Partnership, Bernard Elliston
Sandler & Co and in relation to Scottish Mortgage Loans, Turner
Macfarlane Green and each other firm of solicitors approved in writing
by the Lender, each comprising a minimum of two partners holding
current practising certificates issued by the Law Society or the Law
Society of Scotland, engaged by the Borrower to undertake conveyancing
and/or security enforcement services in relation to Mortgaged
Properties, and who carry professional indemnity insurance in the sum
of at least (pound)1,000,000 for each and every claim against them by
any party in any one year or such increased amount as may from time to
time be prescribed by the Lender, acting reasonably.
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"SOLICITORS UNDERTAKINGS" means each of the Existing Mortgage Loans
Undertakings, the Advance Monies Undertakings, and the New Mortgage
Loans Undertakings.
"STANDARD SECURITY" means a standard security in terms of the
Conveyancing and Feudal Reform (Scotland) Act 1970.
"STANDARD FORM DOCUMENTATION" means the standard form documents to be
used by the Borrower in the origination of Mortgage Loans as the same
have been initialled by the parties hereto for the purpose of
identification and annexed hereto in Annexure 2 or as otherwise
changed, varied, supplemented or substituted by or on behalf of the
Borrower as approved and agreed by the Lender.
"TERM" means save as otherwise provided herein, in relation to any
Advance, the period commencing on (and including) the date on which
such Advance is made and ending on (but excluding) the Repayment Date
relating to such Advance.
"TURNER MACFARLANE & GREEN CLIENT ACCOUNT" means account number
00895249 sort code 80-09-15 at Bank of Scotland in the name of Turner
Macfarlane & Green Client Account or such other account or accounts as
may be utilised for the purpose of funding Mortgage Loans by Turner
Macfarlane & Green.
"TRANSACTION DOCUMENTS" means this Agreement, the Security Documents,
the Indemnity, the Servicing Agreement, and each other document at any
time entered into between all or any of the Borrower, OFC, the Lender,
the Servicer and any third party pursuant to or in connection with any
document which is a Transaction Document.
"UNDERTAKING" means the undertaking to be given by OFC to the Borrower
on the date hereof.
"UNDERWRITING GUIDELINES" means the underwriting guidelines applied by
the Borrower in connection with the origination of Mortgage Loans, as
set out in Schedule 5, as the same may be amended or supplemented from
time to time with the prior written consent of the Lender.
"Y2K COMPLIANT" means, in respect of any computer system, that neither
the performance nor functionality of such system is affected by dates
prior to, during and after 9 September 1999, as more particularly
described in BS1 PD2000-1.
"HOLDING COMPANY" of a company or corporation means any company or
corporation of which the first-mentioned company or corporation is a
subsidiary, and references to a company or corporation shall be deemed
to include a company or corporation which is not formed and registered
under the Companies Act 1985.
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a "MONTH" is a reference to a period starting on one day in a calendar
month and ending on the numerically corresponding day in the next
following calendar month, provided that, where any such period would
otherwise end on a day which is not a Business Day, it shall end on the
following succeeding Business Day, unless that day falls in the
calendar month next following that in which it would otherwise have
ended, in which case it shall end on the immediately preceding Business
Day and provided further that, if there is no numerically corresponding
day in the next following calendar month, that period shall end on the
last Business Day in that next following calendar month (and references
to "MONTHS" shall be construed accordingly).
a "PERSON" shall be construed as a reference to any person, firm,
company, corporation, government, state or agency of a state or any
association or partnership (whether or not having separate legal
personality) of two or more of the foregoing.
"REPAY" (or any derivative form thereof) shall, subject to any contrary
indication, be construed to include "PREPAY" (or, as the case may be,
the corresponding derivative form thereof).
"SUBSIDIARY" has the meaning given to it by section 736 of the
Companies Act 1985 save that references therein to company shall be
deemed to include a company which has not been formed and registered
under the Companies Act 1985.
"TAX" shall be construed so as to include any present or future tax,
levy, impost, duty or other charge of a similar nature (including any
penalty or interest payable in connection with any failure to pay or
any delay in paying any of the same).
"VAT" shall be construed as a reference to value added tax including
any similar tax which may be imposed in place thereof from time to
time.
the "WINDING-UP", "DISSOLUTION" or "ADMINISTRATION" of a company or
corporation shall be construed so as to include any equivalent or
analogous proceedings under the law of the jurisdiction in which such
company or corporation is incorporated or any jurisdiction in which
such company or corporation carries on business including the seeking
of liquidation, winding-up, reorganisation, dissolution,
administration, arrangement, adjustment, protection or relief of
debtors.
1.2 INTERPRETATION
For the purposes of this Agreement except as otherwise expressly
provided or unless the context otherwise requires:-
(a) accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally
accepted accounting principles save that references herein to
GAAP are to generally accepted accounting principles in the
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United States of America in the case of information relating
to OFC and to generally accepted accounting principles in the
United Kingdom in the case of any entity based primarily in
the United Kingdom;
(b) references herein to "clauses", "sub-clauses", "paragraphs",
and other subdivisions without reference to a document are to
designated clauses, sub-clauses paragraphs and other
subdivisions of this Agreement;
(c) reference to a sub-clause without further reference to a
clause is a reference to such sub-clause as contained in the
same clause in which the reference appears, and this rule
shall also apply to paragraphs and other subdivisions;
(d) the words "herein", "hereof", "hereunder" and other words of
similar import refer to this Agreement as a whole and not to
any particular provision;
(e) headings to clauses and Schedules are for convenience only and
do not affect the interpretation of this Agreement;
(f) references to a "company" shall be construed so as to include
any company, corporation or other body corporate, wherever and
however incorporated or established;
(g) references to times of the day are to London time;
(h) references to any agreement (including without limitation to
each Transaction Document), shall be construed as a reference
to such agreement as the same may be, or may from time to time
have been, amended, modified, supplemented, novated or
restated in accordance with (in the case of a Transaction
Document) the terms of the Transaction Documents;
(i) "(POUND)", "POUNDS" and "STERLING" denote the lawful currency
of the United Kingdom;
(j) any reference in this Agreement to a statute shall be
construed as a reference to such statute as the same may have
been, or may from time to time be, amended, modified or
re-enacted;
(k) any reference to any person, including without limitation the
"LENDER", shall be construed so as to include its and any
subsequent successors and assigns in accordance with their
respective interests.
(l) any obligation of the Lender contained in this Agreement shall
be deemed to be discharged if such obligation is performed by
GNW on behalf of the Lender;
(m) any right which the Lender is entitled to exercise hereunder
may be exercised on behalf of the Lender by GNW;
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(n) any consent, authorisation or approval required to be given or
determination to be made by the Lender hereunder shall be
deemed to have been duly given if given by GNW on behalf of
the Lender.
2. THE FACILITY AND PURPOSE
2.1 The Lender hereby agrees to:-
(a) make the Closing Date Advance available to the Borrower in
accordance with clause 4.1 for the sole purpose of repaying
amounts owing by the Borrower under the GIL Facility; and
(b) make the remainder of the Loan Commitment available to the
Borrower on and subject to the terms of this Agreement for the
sole purpose of financing the origination of Mortgage Loans.
2.2 At no time may the Loan Amount exceed the Loan Commitment.
2.3 The Lender shall not be obliged to concern itself with the application
of amounts borrowed by the Borrower under this Agreement and
application by the Borrower of funds so borrowed contrary to the
provisions of clause 2.1 shall not prejudice the Lender's rights
hereunder or under any other Transaction Document.
2.4 Without prejudice to clause 18.1, the Lender shall cease to be obliged
to make any Advances hereunder on the Final Maturity Date and any
undrawn portion of the Loan Commitment shall be automatically cancelled
on that date.
3. AVAILABILITY
3.1 The Loan Facility will not become available to the Borrower and the
Lender shall be under no obligation to make any Advance hereunder until
each of the following conditions precedent shall have been fulfilled to
the satisfaction of the Lender:
(a) the Lender shall have received each of the following
documents, each in form and substance satisfactory to it:-
(i) a certified copy of the Certificate of Incorporation
and Memorandum and Articles of Association or
constitutional documents of each of the Borrower, OFC
(comprising, in the case of OFC, articles of
incorporation, byelaws and a certificate of good
standing) and the Servicer each duly certified by the
secretary or a director of the relevant company as
true, accurate and complete as at the date hereof;
(ii) originals (or, where the Lender is not party to the
relevant document, certified copies) of each of the
following documents, duly executed by each party
thereto other than the Lender:-
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(A) the Indemnity, Counter Indemnity and
Undertaking;
(B) the Security Documents (other than any First
Legal Sub-Mortgage or Scottish Sub-Security
to be delivered to the Lender under clause
3.9 of the Debenture) and all notices and
acknowledgements thereof to be given and
received thereunder and all consents to any
such security being granted;
(C) the Servicing Agreement;
(D) copies of the mandates relating to the
Servicer Collection Account;
(E) an Existing Mortgage Loans Undertaking
executed by each of the Solicitors;
(F) the Agreed Form Documentation Letters;
(G) the Solicitors Letters of Instruction, duly
acknowledged in writing by each of the
Solicitors;
(H) an Advance Monies Undertaking executed by
each of the Solicitors;
(I) a deed of release and reassignment by GIL of
all the assets of the Borrower subject to
the security created by the debenture dated
24 April 1998 granted by the Borrower in
favour of GIL and by the deeds of assignment
by the Borrower of the Borrower Collection
Account and the Borrower Funding Account in
favour of GIL, also dated 24 April 1998;
(iii) in respect of each of the Borrower, OFC and the
Servicer, a copy (certified by the secretary or a
director or equivalent officer of the relevant
company to be true, complete and up to date as at the
date of drawing of the Initial Advance) of all board
minutes and all other resolutions and authorisations
passed or given in relation to the entry into the
Transaction Documents or the performance of the
relevant party's obligations thereunder;
(iv) in respect of the Borrower and the Servicer, a
solvency certificate in the form set out in Schedule
2 dated the date hereof;
(v) in respect of each of the Borrower, OFC and the
Servicer a copy (certified by the secretary or a
director or equivalent officer of the relevant
company to be true, complete and up to date as at the
date of advance of the Closing Date Advance) of all
consents, approvals, authorisations or orders of any
court or governmental agency or body (including,
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<PAGE>
without limitation, the OFT) required for the
execution, delivery and performance by it of, or
compliance by it with, the terms of any Transaction
Document or the consummation of the transactions
contemplated thereby;
(iv) in relation to each of the Borrower and the Servicer,
a copy (certified by the secretary or a director of
the relevant company as in full force and effect) of
the Consumer Credit Act licence held by such company
together with evidence of registration of each such
company under the Data Protection Act 1984;
(vii) duly executed account mandates in relation to the
Borrower Funding Account and the Borrower Collection
Account, specifying the authorised signatories for
the Borrower;
(viii) a certificate of the Directors of the Servicer
stating that all computer and electronic systems
utilised by the Servicer in connection with the
administration and enforcement of the Mortgage Loans
is Y2K Compliant or will be Y2K Compliant by 9
September 1999; and
(ix) such information relating to the servicing agreement
entered into by the Servicer in relation to the
Barclays Facility as the Lender shall reasonably
require and the undertakings and covenants given by
the Servicer thereunder;
(b) confirmation as to the identity of all Solicitors engaged by
the Borrower as at the date of this Agreement in relation to
conveyancing and/or security enforcement concerning Mortgaged
Properties, together with evidence as to their respective
professional indemnity insurance cover;
(c) all conditions precedent under each other Transaction Document
(other than any requirement that the Facility shall have
become available hereunder) shall have been fulfilled or
expressly waived by the Lender;
(d) the Lender shall have received legal opinions, each in form
and substance satisfactory to it, from each of the following
firms:
(i) edge ellison;
(ii) Tods Murray; and
(iii) in house counsel to OFC;
(e) the Borrower having provided satisfactory information to the
Lender (including, without limitation, such legal opinions and
auditors' reports as the Lender shall require) relating to the
matters referred to in the letter dated 5 March 1999 from the
Lender to the Borrower, a copy of which is annexed hereto as
Schedule 8; and
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(f) GIL shall have received from the Borrower, in cleared funds
into an account nominated by GIL, an amount equal to the GIL
Accrued Interest.
4. DRAWINGS
4.1 Subject to:-
(a) the conditions precedent in clause 3 having been fulfilled to
the satisfaction of the Lender or waived by the Lender;
(b) no Event of Default or Potential Event of Default having
occurred and subsisting unremedied (to the satisfaction of the
Lender) and unwaived;
(c) there having been received from the Borrower by the Lender not
later than 5pm (London time) on the Business Day before the
date on which the Closing Date Advance is to be made a duly
completed Closing Date Advance Request relating thereto
including a schedule giving required details of each Existing
Mortgage Loan;
the Lender will make the Closing Date Advance to the Borrower on the
Closing Date.
4.2 Subject to:-
(a) each condition precedent in clause 3 having been fulfilled to
the satisfaction of the Lender or waived by the Lender;
(b) no Event of Default or Potential Event of Default having
occurred and subsisting unremedied (to the satisfaction of the
Lender) and unwaived;
(c) the following having been received by the Lender in respect of
each Mortgage Loan specified in a Mortgage Loan Schedule not
later than 5pm (London time) on the Business Day before the
date on which the Advance under the Loan Facility is to be
made to fund the origination of each such Mortgage Loan:
(i) a Report on Title in a form satisfactory to the
Lender (in its absolute discretion);
(ii) a duly completed Drawdown Request including a duly
completed Mortgage Loan Schedule specifying each loan
which the Borrower requires to be funded by that
Advance;
(iii) a data tape in respect of the relevant Mortgage
Loans, in computer readable form, containing the
information set out in Schedule 6 Part 1 regarding
each loan specified in the Mortgage Loan Schedule;
and
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(iv) a duly executed Scottish Sub-Security in respect of
each Scottish Mortgage Loan specified in the Mortgage
Loan Schedule;
(d) each Mortgage Loan specified in the Mortgage Loan Schedule
complying with the representations and warranties contained in
clause 15.1 and 15.4;
(e) the Borrower and OFC being, in all material respects, in
compliance with the covenants and undertakings contained in
clause 17;
(f) no Minded to Revoke Notice having been served on the Borrower
or the Servicer;
(g) no injunction or interdict having been obtained by (or on
behalf of) the OFT against the Borrower or the Servicer which
relates to their respective residential mortgage lending
and/or servicing activities including, without limitation, any
Mortgage Loan financed hereunder;
(h) where the proposed Advance is to fund Mortgage Loans secured
by a Mortgage over unregistered land in England and Wales
where the Borrower does not hold the title deeds to such
Mortgaged Property (and in relation to which the Borrower's
legal mortgage is therefore a second or subsequent ranking
legal mortgage protected at Central Land Charges Registry by
registration of a C(i) Land Charge) the Lender shall have
received a schedule of such Mortgage Loans (together with the
full names of the owners of such Mortgaged Property and the
full address of that Mortgaged Property);
the Borrower may draw Advances under the Loan Commitment (subject to
the provisions of this Agreement) to fund the origination of Mortgage
Loans provided always that:-
(i) Advances may only be made on Business Days during the
Availability Period;
(ii) the aggregate of Advances to be made on any one day
shall be a minimum of(pound)250,000 or, if less than
(pound)250,000, the Available Commitment;
(iii) no Advance shall be made to the extent that, if as a
result thereof :
(A) the Loan Amount for the time being
outstanding would exceed the Loan
Commitment; or
(B) the covenant of the Borrower contained in
clause 17.1(u) would be breached;
(iv) no Advance shall be made or may be requested to
refinance any Mortgage Loan the origination of which
was financed by a prior Advance under this Agreement;
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(v) the amount of each Advance requested shall not,
insofar as it relates to any particular Mortgage Loan
to be financed thereby, be greater than the value
attributed to such Mortgage Loan, such value to be
determined by multiplying the lesser of the
Collateral Percentage and the Market Value Percentage
of such Mortgage Loan by the Outstanding Principal
Balance thereof as at the relevant Advance Date.
4.3 Subject to the foregoing provisions of this clause 4, upon receipt of a
duly executed Drawdown Request the Lender shall, not later than 11 am
(London time) on the Business Day on which the Advance is to be made
(or such later time as may be agreed between the Borrower and GNW on
behalf of the Lender), make the Advance requested, such Advance to be
advanced to the Client Account of the Solicitors acting for the
Borrower in relation to the particular Mortgage Loans to be financed by
the Advance and it is acknowledged (for the avoidance of doubt) that
any Advance paid to Solicitors under this clause 4.3 shall be deemed to
have been drawn by the Borrower under this Agreement on the date of
such payment.
4.4 If the Borrower fails for any reason whatsoever (other than as a
consequence of a breach of the Lender's obligations) to draw down an
Advance after a Drawdown Request has been received by the Lender
(whether such failure be the result of the occurrence of an Event of
Default or otherwise), the Borrower will pay to the Lender on demand
such amount as the Lender certifies to be necessary to compensate the
Lender for all losses excluding loss of Margin incurred or to be
incurred on account of deposits acquired or arranged in order to fund
the Advance. Any such certificate by the Lender shall be PRIMA FACIE
evidence of such losses.
4.5 In the event that no duly completed New Mortgage Loans Undertaking
shall have been received by the Lender in respect of any Mortgage
Loan(s) in respect of which an Advance shall have been made hereunder
by 5pm (London time) on the fourth Business Day following the making of
the Advance (or such longer period as the Lender may, in its sole
discretion, agree) the Lender shall immediately notify the Borrower and
an amount equal to the Advance, or such part thereof as was advanced in
respect of such Mortgage Loan or Mortgage Loans shall become due and
repayable by the Borrower to the Lender together with accrued interest
thereon on the fourth Business Day following the making of the Advance.
4.6 If all or any part of any Advance made to finance a Mortgage Loan which
is subject to the provisions of clause 4.4 shall be held by any
Solicitors, payment in full by such Solicitors to the following account
of the amounts due under clause 4.5 shall discharge the Borrower's
obligation to pay the same:
Account Name: NatWest Capital Markets
Account Number: 04622626
Sort Code: 60-00-04
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4.7 All parties hereby agree and acknowledge that:
(a) all sums credited to the Borrower Funding Account shall be
subject to the Borrower Funding Account Charge; and
(b) all sums credited to the Borrower Collection Account shall be
subject to the Borrower Collection Account Charge.
5. CANCELLATION
5.1 The Borrower may at any time by giving not less than two Business Days
irrevocable written notice to the Lender cancel any amount (in integral
multiples of (pound)5,000,000) of the Loan Commitment to the extent not
currently outstanding or requested in a current Drawdown Request,
provided that if the Borrower wishes to reduce the Loan Commitment
below the Loan Amount then outstanding plus the amount of Advances
requested in a current Drawdown Request, the Borrower shall, prior to
the date on which the reduction takes effect:
(a) repay the Advances to the extent necessary to reduce the Loan
Amount outstanding to below the reduced Loan Commitment
requested; and
(b) pay to the Lender such amount as is certified by the Lender to
be necessary to compensate the Lender for loss of margin and
all other amounts which the Lender certifies to be necessary
to compensate it for all losses incurred by it in connection
with such cancellation. Any such certificate by the Lender
shall be PRIMA FACIE evidence of such loss.
5.2 During such period of notice the Borrower may not serve a Drawdown
Request purporting to draw all or any part of the amount of the subject
of such notice of cancellation.
5.3 Upon such cancellation becoming effective, the Loan Commitment shall be
appropriately reduced.
6. INTEREST ON ADVANCES
6.1 The Borrower will pay interest on each Advance on each Interest Payment
Date in respect of each Interest Period referable thereto at the rate
per annum equal to the aggregate of (i) the Margin and (ii) LIBOR for
the relevant Interest Period and (iii) the Associated Costs Rate.
6.2 The Lender will, as soon as practicable after commencement of each
Interest Period advise the Borrower of LIBOR for that Interest Period.
Any certificate of the Lender as to the rate and amount of interest
determined by it under this Agreement in respect of any Interest Period
shall, save for manifest error, be conclusive and binding on the
Borrower and OFC.
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<PAGE>
6.3 Interest at the rate determined as aforesaid shall be calculated on
each Advance and each part thereof on the basis of actual days elapsed
and a 365 day year, shall accrue from day to day from and including the
first day of each Interest Period to but excluding the date of
repayment of such Advance.
6.4 If LIBOR cannot be determined for any reason the rate of interest
applicable to such Advance shall be the sum of the Margin, the
Associated Costs Rate and the rate, expressed as a percentage rate per
annum, which is the actual cost to the Lender of funding such Advance
from whatever sources it may reasonably select during such Interest
Period (as applicable) and, if the Lender so requires, within five days
of such notification the Lender and the Borrower shall enter into
negotiations with a view to agreeing a substitute basis for determining
the rates of interest which may be applicable to Advances in the
future.
7. REPAYMENT AND APPLICATION OF RECEIPTS
7.1 Without prejudice to any of the Borrower's other obligations to make
any payment, repayment or prepayment hereunder (including without
limitation under clause 18.1), the Borrower shall repay the whole of
the outstanding amount of each Advance and, in the case of the Closing
Date Advance, each part thereof on the Repayment Date relating thereto.
Any amount repaid or any part thereof may, subject to the provisions of
this Agreement, be redrawn.
7.2 Prior to midday on the Business Day prior to each Interest Payment
Date, the Borrower shall provide a data tape to the Lender specifying
the Mortgage Loans in relation to which all or any part of the relevant
Advances are to be repaid on such Interest Payment Date which shall
include the information set out in Schedule 6.
7.3 If on any Interest Payment Date there is a Borrowing Base Deficiency
the Borrower shall, at its option, on the relevant Interest Payment
Date or on the Business Day immediately following the Interest Payment
Date either:-
(a) prepay an amount equal to the amount of the Borrowing Base
Deficiency; or
(b) provide additional Eligible Collateral of a value which is
determined by the Lender to be at least equal to the amount of
the Borrowing Base Deficiency in accordance with clause 8.
7.4 On each Interest Payment Date all amounts standing to the credit of the
Borrower Collection Account shall be applied in or toward satisfaction
of obligations of the Borrower in the following order of priority:-
(a) first, in or toward payment of all interest falling due to the
Lender hereunder on the relevant Interest Payment Date
together with any overdue interest accrued thereon up to and
including the relevant distribution date;
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(b) second, in or towards repayment of any Borrowing Base
Deficiency or any other amount due under clause 7.3 on such
date;
(c) third, in or towards payment of all amounts due and owing to
the Lender under all Transaction Documents other than the
foregoing; and
(d) the balance to be released to the Borrower,
provided that at all times following the occurrence of an Acceleration
the provisions of this clause 7.4 shall cease to apply and after such
time all amounts received or recovered in respect of the assets subject
to the Security Documents may be applied by the Lender (whether through
set-off or otherwise) in or towards satisfaction of the Secured Sums in
such order as the Lender in its absolute discretion shall determine.
7.5 If the Borrower wishes to or is required to repay all or any part of an
Advance other than on an Interest Payment Date, the Borrower will pay
to the Lender on demand such amount as the Lender certifies to be
necessary to compensate it for all losses excluding loss of Margin
incurred or to be incurred by it on account of deposits acquired or
arranged in order to fund the Advance which the Borrower is seeking to
or is obliged to repay except in the case of a repayment of any Advance
on any such date where:
(a) that Advance is repaid from the proceeds of a securitisation
of the relevant Mortgage Loan or Mortgage Loans (whether as
part of a securitisation involving any such Mortgage Loan or
otherwise); and
(b) the Lender or any Affiliate of the Lender is the lead arranger
(or lead manager) in respect of the relevant securitisation
(it being agreed that any appointment as co-lead arranger or
co-lead manager shall not constitute fulfilment of this
condition (b)).
Any such certificate by the Lender shall be PRIMA FACIE evidence of
such losses.
7.6 Subject to clause 7.5, the Borrower may on any Business Day, upon five
Business Days prior written notice to the Lender, prepay in whole or in
part any Advance outstanding hereunder together with all accrued
interest thereon.
7.7 If the outstanding Advances are prepaid pursuant to clause 11.6 or
clause 12.4, the Loan Commitment shall be reduced to zero and the
Lender shall cease to be obliged to make Advances hereunder.
8. ELIGIBLE COLLATERAL
In the event that the Borrower is obliged to provide Eligible
Collateral under clause 7.3(b), 17.1(r) or if, in the case of clause
16.5(b), the Borrower elects to provide Eligible Collateral the
Borrower shall, on the Business Day prior to the day on which the
Borrower is required to provide such additional Eligible Collateral,
deliver a schedule to the Lender substantially in the form set out in
Part 3 of Schedule 1 setting out details of Mortgage Loans which
constitute Eligible Collateral and which the Borrower wishes to provide
to the Lender as additional security in discharge of its obligations
under those clauses. If the Lender, in its sole discretion, is
satisfied that each loan referred to in such schedule constitutes
Eligible Collateral, (but without prejudice to the Lender's rights
under clauses 9 or 16) the Lender shall evidence such approval by
signing the same.
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9. EXAMINATION OF MORTGAGE FILES
9.1 The Lender or its delegates shall have the right to examine the
Mortgage Files to determine, INTER ALIA, whether each Mortgage Loan
complies with the representations and warranties in clause 15.4 and the
undertakings and covenants in clause 17. Such examination may be made
by or on behalf of the Lender at any time during reasonable hours upon
reasonable prior notice before or after the date on which any Advance
is to be or was made.
9.2 If the Lender or its delegates makes such examination prior to the date
on which an Advance is to be made and properly identifies any Mortgage
Loans specified in a schedule attached to a Drawdown Request which do
not comply with the representations and warranties in clause 15.4, such
loans shall be deleted from the schedule of loans appended to the
Drawdown Request.
9.3 The Lender may make an Advance without conducting any partial or
complete examination. The fact that the Lender has conducted or has
failed to conduct any partial or complete examination of the Mortgage
Files or to review any Drawdown Request under clause 9.2 shall not
affect the Lender's (or any of its successor's) rights provided herein
including, without limitation, those contained in clause 16 and clause
18.
10. EVIDENCE OF DEBT
The Lender shall maintain, or shall cause to be maintained, in
accordance with its usual practice accounts evidencing the amounts from
time to time lent by and owing to it hereunder, and in any legal action
or proceeding arising out of or in connection with this Agreement, the
entries made in such accounts shall in the absence of manifest error be
PRIMA FACIE evidence of the existence and amounts of the specified
obligations of the Borrower.
11. TAXES
11.1 Subject to clause 11.2, all payments to be made by the Borrower to the
Lender hereunder shall be made free and clear of and without deduction
or withholding for or on account of tax.
11.2 If the Borrower is nevertheless required as a result of any change in
law or in its interpretation or administration to make any payment to
the Lender hereunder subject to any deduction or withholding on account
of tax the sum payable by the Borrower in respect of which such
deduction or withholding is required to be made shall be increased to
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<PAGE>
the extent necessary to ensure that, after the making of the required
deduction or withholding, the Lender receives and retains (free from
any liability in respect of such deduction or withholding) a net sum
equal to the sum which it would have received and so retained had no
such deduction or withholding been made or required to be made.
11.3 If the Borrower makes any payment hereunder in respect of which it is
required by law to make any deduction or withholding on account of tax,
it shall pay the full amount required to be deducted or withheld to the
relevant taxation or other authority within the time allowed for such
payment under applicable law and shall deliver to the Lender, within
thirty days after it has made such payment to the applicable authority,
an original receipt (or a certified copy thereof) issued by such
authority evidencing the payment to such authority of all amounts so
required to be deducted or withheld in respect of such payment or any
other written evidence acceptable to the Lender.
11.4 All amounts payable under this Agreement are expressed to be exclusive
of any VAT chargeable in respect thereof. If any VAT is chargeable in
respect of such amounts, the Borrower shall, in addition, pay to the
Lender an amount equal to such VAT, and the Lender shall provide the
Borrower with a proper VAT invoice in respect thereof.
11.5 If the Lender or the Borrower becomes aware that the Borrower will be
required as a result of any change in law or its interpretation or
administration to make any payment to the Lender hereunder subject to
any deduction or withholding on account of tax, the Lender or, as the
case may be, the Borrower shall, promptly upon becoming aware of the
same, notify the other party, in writing, setting out the reasons for
the anticipated deduction or withholding and the date from which such
deduction or withholding will be required by law to be made (such date
the "WITHHOLDING DATE").
11.6 If an increased payment is made under clause 11.2 by the Borrower and
the Lender reasonably determines that it has received or been granted
(and has derived use and benefit from) a credit against, or relief or
remission for, or repayment of, any tax, then, if and to the extent
that the Lender reasonably determines that such credit, relief,
remission or repayment is in respect of or calculated with reference to
the deduction or withholding giving rise to such increased payment, the
Lender shall, to the extent that it can do so without prejudice to the
retention of the amount of such credit, relief, remission or repayment,
pay to the Borrower such amount as the Lender shall have reasonably
concluded to be attributable to such deduction or withholding. Nothing
contained in this Clause shall interfere with the right of the Lender
to arrange its tax affairs in whatever manner it thinks fit or oblige
the Lender to disclose any information in relation to its tax affairs
or computations.
12. INCREASED COSTS
12.1 If, by reason of:-
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(a) the introduction of, or any change in any applicable law,
regulation or regulatory requirement or any change in the
interpretation or application of any thereof in each case
after the date hereof and/or
(b) compliance by the Lender or any holding company of the Lender
with any applicable directive, request or requirement whether
or not having the force of law but, if not having the force of
law being of general application and of a type with which the
Lender or a holding company of the Lender is accustomed to
comply of any central bank or any self regulating organisation
or any governmental, fiscal, monetary or other authority
(including, but not limited to, a directive, request or
requirement which affects the manner in which any bank
allocates capital in support of its assets or liabilities or
contingent liabilities or deposits with it or for its account
or advances or commitments made by it) which is brought into
effect after the date hereof,
and if, to the extent of compliance with either or both of paragraphs
(a) and (b) and as a result thereof:-
(c) the Lender or any holding company of the Lender is unable to
obtain the rate of return on its capital which it would have
been able to obtain but for the Lender's entering into or
assuming or maintaining a commitment or performing its
obligations (including its obligation to make Advances) under
this Agreement;
(d) the Lender or any holding company of the Lender incurs a cost
as a result of the Lender's entering into or assuming or
maintaining a commitment or performing its obligations
(including its obligation to make Advances) under this
Agreement;
(e) there is any increase in the cost to the Lender or any holding
company of the Lender of funding or maintaining all or any of
the Advances;
(f) the Lender or any holding company of the Lender becomes liable
to make any payment on account of tax or otherwise (except on
account of any tax imposed on and calculated by reference to
the net income of the Facility Office by the jurisdiction in
which the Lender (or its holding company) is incorporated or
in which the Facility Office is located), or foregoes any
interest or other return, on or calculated by reference to the
amount of any Advance or the amount of any sum received or
receivable by it (or its subsidiary) under this Agreement,
then the Borrower shall, from time to time on demand of the Lender,
promptly pay to the Lender amounts sufficient to indemnify the Lender
and its holding company against, as the case may be, (1) such reduction
in the rate of return of capital, (2) such cost, (3) such increased
cost (or such proportion of such increased cost as is, in the opinion
of the Lender, attributable to its or its holding company funding or
maintaining the Advance), or (4) such liability.
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12.2 If the Lender intends to make a claim pursuant to clause 12.1 it shall
notify the Borrower of the event by reason of which it is entitled to
do so, such notification to be given as soon as practicable following
the Lender becoming aware of the same, provided that nothing herein
shall require the Lender to disclose any confidential information
relating to the organisation of its affairs.
12.3 If the Borrower receives notice under clause 12.2, then without
prejudice to the Lender's rights under clause 12.1, the Lender shall
consult with the Borrower as to possible steps that could be taken to
reduce any such increased costs, provided that the Lender shall be
under no obligation to take any such steps considered.
12.4 Upon receipt of a notice under clause 12.2 the Borrower shall be
entitled, upon the giving of 5 Business Days written notice, to prepay
all (but not part) of the Advances (together with all interest accrued
thereon and other amounts then due hereunder) provided that the
provisions of clause 7.5 shall not apply in respect of any such
prepayment.
13. ILLEGALITY
13.1 If, at any time, it is or will become unlawful for the Lender to make,
fund or allow to remain outstanding all or part of any of the Advances,
then the Lender shall, promptly after becoming aware of the same,
deliver to the Borrower a notice to that effect notifying the Borrower
of the date (or estimated date) on which it will become (if it has not
already become) unlawful as aforesaid (such date the "Unlawful Date").
13.2 Unless the Lender shall have exercised its rights under clause 13.3 by
such time, the Lender shall not, with effect from close of banking
business on the Business Day immediately prior to the Unlawful Date, be
obliged to make any further Advances hereunder, the Loan Commitment
shall be immediately and automatically reduced to zero and the Borrower
shall, on such date, repay any outstanding Advances, in each case
together with accrued interest thereon and all other amounts owing to
the Lender hereunder.
13.3 Following service of notice under clause 13.1, the Lender shall consult
with the Borrower as to possible steps that could be taken to avoid
such illegality provided that the Lender shall be under no obligation
to take any such steps considered, and the Lender shall have the right,
during the period after service of such notice but before the Unlawful
Date to, to require the Borrower to repay all Advances hereunder
(together with all interest accrued thereon and other amounts
outstanding hereunder) on a date earlier than that specified under
clause 13.2 (the "Early Repayment Date") (in which event and whereupon
the Lender shall cease to be obliged to make further Advances hereunder
and the Loan Commitment shall be reduced to zero) provided that the
Lender shall only have the right to require repayment on an Early
Repayment Date after consultation with the Borrower, and acting
reasonably.
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14. PAYMENTS
Any payment to be paid by the Borrower to the Lender pursuant to this
Agreement shall be made in sterling, in immediately available, freely
transferrable and cleared funds for value same day, to such account of
the Lender as the Lender shall, from time to time, have specified in
writing for such purpose.
15. REPRESENTATIONS AND WARRANTIES
15.1 The Borrower and OFC (each in relation to itself) hereby represent,
warrant, covenant and undertake to the Lender that (except as
previously disclosed to the Lender in writing on or prior to the date
hereof):-
(a) it is a limited liability company duly incorporated under the
laws of England and Wales and, in the case of OFC, it is a
corporation duly incorporated and validly existing and in good
standing under the laws of the State of Florida and is duly
authorised and qualified to transact any and all business
contemplated by this Agreement and the other Transaction
Documents to be conducted by it and is in compliance with such
laws to the extent necessary to ensure its ability to enforce
each Mortgage Loan;
(b) it has the full corporate power and authority to execute,
deliver and perform, and to enter into and consummate the
transactions contemplated by this Agreement and the other
Transaction Documents to which it is a party and has been duly
authorised by all necessary corporate action on its part to
execute, deliver and perform this Agreement and the other
Transaction Documents to which it is a party; and its
obligations under this Agreement and each Transaction Document
to which it is a party, assuming the due authorisation,
execution and delivery thereof by the Lender, constitutes its
legal, valid and binding obligations, enforceable against it
in accordance with its respective terms, except to the extent
that (a) the enforceability thereof may be limited by
bankruptcy, insolvency, moratorium, receivership and other
similar laws relating to creditors' rights generally and (b)
the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to the equitable
defences and to the discretion of the court before which any
proceeding therefor may be brought;
(c) its execution and delivery of this Agreement and each
Transaction Document to which it is a party, the consummation
of any of the transactions herein or therein contemplated on
its part and the fulfilment of or compliance with the terms
hereof or thereof will not (i) result in a material breach of
any term or provision of its Memorandum and Articles of
Association and/or its other constitutional documents or (ii)
materially conflict with, result in a material breach,
violation or acceleration of, or result in a material default
under, the terms of any other material agreement or instrument
to which it is a party or by which it may be bound, or any
statute, order or regulation applicable to it of any court,
regulatory body, administrative agency or governmental body
having jurisdiction over it;
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(d) it is not party to, bound by, or in breach or violation of any
material indenture or other material agreement or instrument,
or subject to or in violation of any statute, order or
regulation of any court, regulatory body, administrative
agency or governmental body having jurisdiction over it, which
materially and adversely affects or, to its knowledge, would
in the future materially and adversely affect, (i) its ability
to perform its obligations under this Agreement or the
Transaction Documents to which it is a party or (ii) its
business, operations, financial condition, properties or
assets taken as a whole;
(e) no litigation is pending or, to the best of its knowledge,
threatened against it that would materially and adversely
affect the execution, delivery or enforceability of this
Agreement or the Transaction Documents to which it is a party
or its ability to perform any of its obligations hereunder or
thereunder in accordance with the terms hereof or thereof;
(f) no consent, approval, authorisation or order of any court or
governmental agency or body is required for the execution,
delivery and performance by it of, or compliance by it with,
this Agreement or any Transaction Document to which it is a
party or the consummation of the transactions contemplated
hereby or thereby, or if any such consent, approval,
authorisation or order is required, it has obtained or it is
in the process of obtaining the same.
15.2 The representations and warranties under clause 15.1(a) to (f)
inclusive shall be given on the date of this Agreement and shall be
repeated on each date on which any Advance is outstanding hereunder by
reference to the facts and circumstances existing at the relevant time.
15.3 The Lender represents and warrants to the Borrower in terms of clauses
15.1(a) to (f) (inclusive), MUTATIS MUTANDIS.
15.4 The Borrower hereby represents and warrants to the Lender in relation
to the Existing Mortgage Loans on the Closing Date and each other
Mortgage Loan on the Advance Date applicable thereto or, if later, the
date on which a New Mortgage Loans Undertaking in respect thereof is
issued, as follows:
(a) the information set forth on each Mortgage Loan Schedule (and,
in relation to any Scottish Mortgage Loan, in the schedule to
any Scottish Sub-Security) with respect to each Mortgage Loan
is true and correct in all material respects;
(b) each Mortgage Deed constitutes (i) in the case of English
Mortgage Loans, a valid and enforceable legal mortgage of the
relevant Mortgaged Property subject only in certain cases to
registration of the relevant Mortgage Deed at HM Land
Registry, or (ii) in the case of Scottish Mortgage Loans, a
valid and enforceable Standard Security over the relevant
Mortgaged Property subject only in certain cases to
registration or recording of the relevant Mortgage Deed in the
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Registers of Scotland, in either case duly executed by the
Mortgagor named in the relevant Mortgage Deed;
(c) the Borrower (subject only to registration of legal title at
HM Land Registry or the Registers of Scotland as appropriate)
has good title to each Mortgage Loan and its Related Security,
has full right and authority to charge and assign the same by
way of security and the same is the absolute property of the
Borrower (subject to any registration or recording in favour
of the Borrower which may be pending at HM Land Registry or
the Registers of Scotland) free and clear of all mortgages,
securities, charges, liens, encumbrances, claims and equities
(including, without limitation, rights of set off or
counterclaim, overriding interest within the meaning of
Section 3(xvi) of the Land Registration Act 1925 or Section
28(1) of the Land Registration (Scotland) Act 1979 and adverse
entries or notices of application therefor against any title
at HM Registry or the Registers of Scotland to any relevant
Mortgaged Property) except any such encumbrances, claims,
equities, overriding interests or entries which rank after the
interests of the Borrower and the Lender in the Mortgaged
Loans or which do not have an adverse effect on the value of
the relevant Mortgaged Property as security for the relevant
Mortgage Loan or which are the subject of a duly completed and
signed Postponement Agreement or appropriate executed MHA
Documentation as contemplated in sub-clause (y) below;
(d) each Mortgaged Property is a residential property or mixed
commercial and residential property in England, Wales or
Scotland;
(e) the steps necessary to perfect the vesting of full legal and
equitable title to each Mortgage Loan and the Related Security
in the Borrower have been duly taken at the appropriate time
or are in the course of being taken with all due diligence;
(f) to the best of its knowledge, each Mortgaged Property is free
of material damage;
(g) each Mortgage Loan at origination complied in all material
respects with applicable laws and regulations including, where
applicable, the Consumer Credit Act 1974 and any regulations
made thereunder (and in particular no Mortgage Loan is
cancellable thereunder) and consummation of the transactions
contemplated hereby will not involve the violation of any such
laws and regulations;
(h) in respect of each Existing Mortgage Loan the Borrower has not
(a) modified the Mortgage Loan in any material respect, except
that a Mortgage Loan may have been modified by a written
instrument in respect of which any applicable registration(s)
have been completed; (b) satisfied, cancelled or subordinated
such Mortgage Loan in whole or in part; (c) released the
related Mortgaged Property in whole or in part from the
security created by the relevant Mortgage Deed; or (d)
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executed any instrument of release, cancellation, discharge,
modification or satisfaction with respect thereto;
(i) no sub-mortgage, sub-charge, pledge, lien or right of set off
or counterclaim or other security interest or other adverse
right or interest has been created or has arisen between it
and any Mortgagor which entitles or entitled the Mortgagor to
reduce the amount of any payment otherwise due under the terms
of such Mortgagor's Mortgage Loan (save, in the case of Junior
Mortgage Loans, the relevant prior ranking legal mortgage or
mortgages of or Standard Security over the relevant Mortgaged
Property created by the Mortgagor and any related security for
the loan secured thereby);
(j) each Mortgage Loan was originated in all material respects in
accordance with the criteria set out in the Underwriting
Guidelines;
(k) each Mortgage Loan (other than a Pipeline Loan) was originated
in the name of the Borrower;
(l) each Pipeline Loan was acquired by the Borrower in accordance
with the origination and transfer agreement dated 24 April
1998 between, inter alia, the Borrower, City Mortgage
Corporation Limited and the Donors (as defined therein);
(m) in relation to each Mortgaged Property:-
(i) in respect of title to property in England or Wales
which is not registered, the relevant Mortgagor had
or will on completion of the relevant Mortgage have
good and marketable title to the fee simple absolute
in possession (if freehold) or a term of years
absolute of not less than thirty years beyond the
term of the Mortgage Loan (if leasehold) relating to
such Mortgaged Property and is free from any
encumbrance which would adversely affect such title;
(ii) in relation to title which is registered at HM Land
Registry, it is registered with title absolute in the
case of freehold property or absolute leasehold or
good leasehold title aforesaid in the case of
leasehold property;
(iii) in relation to which title is registered or recorded
in the Registers of Scotland, it was so registered or
recorded with valid and marketable title (whether
feudal or long lease), having in the case of a long
lease an unexpired term of not less than thirty years
beyond the term of the Mortgage Loan;
(iv) no works on the relevant Mortgaged Property were
carried out in violation of any applicable planning
law or regulation or building regulations;
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(v) if the relevant Mortgaged Property is leasehold or
(in Scotland) held under long lease, any requisite
consent of the landlord to or notice to the landlord
of the creation of the relevant Mortgage had been
obtained or given and no consents of or notices to
such landlord are required to any transfer,
assignation or sub-charge of the relevant Mortgage,
and a copy of any such consent or notice is held with
the title deeds to the relevant Mortgaged Property or
held to the order of the Lender or its Solicitors;
(vi) the relevant Mortgaged Property is not subject to any
adverse third party claim or proceeding for
compulsory acquisition thereof;
(n) the obligations of each grantor of each Mortgage relating to a
Mortgage Loan (and any other documents entered into in
relation to the relevant Mortgage Loan) constitute the legal,
valid and binding obligations of the grantor thereof,
enforceable in accordance with their respective terms and with
applicable laws and the parties thereto had legal capacity to
execute each Mortgage and associated document and the same
have been duly and properly executed by such parties;
(o) either:
(i) the full amount of each Mortgage Loan has been fully
disbursed and there is no requirement for further
advances thereunder; or
(ii) if any retention was recommended by the Borrower or
its valuer, the recommendation to make a retention
was implemented and cash was not advanced until the
Borrower had received a certificate (or other
evidence acceptable to it) of completion of the
relevant repairs or other works;
(p) the Mortgage Documents applicable to each Mortgage Loan are
substantially in the form of the relevant Standard Documents;
(q) the origination and underwriting practices used by the
Borrower with respect to each Mortgage Loan have been in all
respects in accordance with the standards of a Reasonably
Prudent Mortgage Lender and comply with the Underwriting
Guidelines;
(r) either:
(i) each Mortgaged Property is insured under the block
insurance policy from time to time maintained by the
Borrower to provide, cover against such risks and
contingencies as are commonly insured against in a
fully comprehensive buildings insurance for
residential properties to a minimum of the full cost
of reinstatement thereof together with inflation cost
over any period that may be required for obtaining
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any relevant planning permission and other approvals
and the reinstatement or repair period and architects
and other professional fees; or
(ii) where the Mortgagor insures, the Borrower has
established that such insurance was, at the date of
origination of the relevant Mortgage Loan, in
accordance with the foregoing provisions of this
sub-clause, with a reputable insurer, with an
acknowledgement by the insurer that the interest of
the Borrower has been or will be promptly following
the relevant Advance Date noted on the relevant
policy. In the case of leasehold property in England
and Wales, the relevant Mortgaged Property is insured
under arrangements effected by the freeholder or any
intermediate leaseholder, on a fully comprehensive
basis as aforesaid;
(s) prior to making the relevant advance the subject of a Mortgage
Loan, the Borrower carried out or caused to be carried on its
behalf the investigations, searches (other than local
authority searches) and other actions and made or caused to be
made on its behalf the enquiries as to the Mortgagor's status
that were required in accordance with the relevant lending
criteria of the Borrower applicable at the time when the offer
of advance was made and the results thereof were acceptable to
the Borrower in accordance with such lending criteria for the
purposes of the proposed advance;
(t) any further advances after the date of the Mortgage Deed but
made prior to the Advance Date have been advanced under
separate mortgage documentation (and, accordingly, have not
been consolidated with the outstanding principal amount
secured by the Mortgage), and all ground rents, ground burdens
and service charges and other payments required in relation to
leasehold property or heritable property which previously
became due and owing have been paid. Except for interest
accruing from the date of the relevant Mortgage Deed or date
of advance to the relevant Mortgagor, whichever is later, to
the day which precedes by one month the date for payment of
the first instalment of principal and interest, the Borrower
has not advanced funds, or induced, solicited or knowingly
received any advance of funds by a party other than the
Mortgagor, directly or indirectly, for the payment of any
amount in relation to the relevant Mortgage Loan save to the
extent that the same reduces the Mortgage Loan;
(u) to the best of the Borrower's knowledge and belief (the
Borrower having made all reasonable enquiries) there is no
default, breach, violation or event of acceleration existing
under any Mortgage Loans and it has not waived any default,
breach, violation or event of acceleration other than any
waiver which is in accordance with and permitted under the
relevant Manuals;
(v) each Mortgage File contains a valuation of the relevant
Mortgaged Property undertaken on the instructions of the
Borrower or instructions issued on its behalf by an
independent qualified valuer being an associate or fellow of
the Royal Institute of Chartered Surveyors or, as the case may
be, Society of Valuers and Auctioneers, in each case approved
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by the Borrower and unless otherwise agreed between the Lender
and the Borrower, the principal amount advanced to the
relevant Mortgagor was not more than the amount permissible
under the terms of the Underwriting Guidelines;
(w) at the time of the making of the Mortgage Loan, the Mortgaged
Property was not located within a 1 mile radius of any
contaminated land or any land with environmental or hazardous
waste risks known to the Borrower or, where such was the case,
an environmental audit was procured by the Borrower or
evaluated in accordance with its established environmental
review procedures, and found to be satisfactory;
(x) in selecting the Mortgage Loans in respect of which Advances
are made hereunder, no selection procedure was employed by the
Borrower which was intended to adversely affect the interests
of the Lender;
(y) prior to the making of the relevant mortgage advance, enquiry
was made of each Mortgagor as to the identity of the persons
in actual occupation of the Mortgaged Property and (i) in the
case of English Mortgage Loans, any person who at the date
when the advance was made had attained the age of 18 and who
was identified in writing to the Borrower or its Solicitor by
the Mortgagor as residing or being about to reside in the
relevant Mortgaged Property is either named as joint mortgagor
on the relevant Mortgage Deed or has signed a legally binding
agreement postponing (each a "POSTPONEMENT AGREEMENT") all
rights and entitlements to which such person may be entitled
in the Mortgaged Property to the interests, rights and
entitlements of the Borrower or such other person as may have
or acquire as mortgagee or chargee of the property from time
to time, such agreement in a form as was satisfactory to such
Solicitor, and (ii) in the case of Scottish Mortgage Loans,
prior to the making of the advance, the Borrower or its
Solicitor obtained all necessary validly executed MHA
Documentation so as to ensure that neither the relevant
Mortgage Loan nor the relevant Mortgaged Property was subject
to or affected by any statutory right of occupancy in favour
of a non-entitled spouse;
(z) the Borrower has kept, or caused to be kept, full and proper
accounts, books and records showing all transactions payments,
receipts and proceedings relating to that Mortgage and all
such accounts, books and records are up to date and in its
possession or held to its order;
(aa) there exists no litigation, dispute or complaint (subsisting
or pending or threatened) calling into question in any way
title of the Borrower to any Mortgage Loan or the ability of
the Borrower or any other person to enforce such Mortgage Loan
in accordance with its terms or, to the best of its knowledge,
the relevant Mortgagor's title to his Mortgaged Property;
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(bb) the Mortgage Loan Documents are held to the order of the
Lender by the relevant Solicitor or have been lodged at H.M.
Land Registry or the Registers of Scotland and in the case of
each Mortgaged Property the title to which is registered or
for which application for first registration has been made the
Borrower knows the title number under which the Mortgaged
Property is (or, in the case of first registration, is to be)
registered at H.M. Land Registry or the Registers of Scotland;
(cc) in relation to each Mortgage Deed for Mortgaged Property where
registration is pending at H.M. Land Registry, there is no
caution, notice or other entry which would prevent the
registration of the Mortgage Deed as a charge by way of first
or, as the case may be, second or third subsequent legal
mortgage;
(dd) none of the Mortgagors which pay interest is a company;
(ee) the Mortgage Loan Documents applicable to each Mortgage Loan
require the relevant Mortgagor to make all payments thereunder
directly into the Servicer Collection Account.
15.5 It is acknowledged and agreed that references in this clause 15 to
Mortgage Loans shall include reference to their Related Security, as
appropriate.
16. BREACH OF REPRESENTATIONS AND WARRANTIES
16.1 lt is understood and agreed that the representations and warranties set
forth in clauses 15.1, 15.2 and 15.4 shall survive the charging of
Mortgage Loans to the Lender and shall enure to the benefit of the
Lender notwithstanding the examination by the Lender or failure by the
Lender to examine any Mortgage File.
16.2 The Borrower shall notify the Lender of any breach of any
representation and warranty (relating to the Borrower) given under
clause 15.1 forthwith upon becoming aware of the same.
16.3 OFC shall notify the Lender of any breach of any representation and
warranty (relating to OFC) given under clause 15.1 forthwith upon
becoming aware of the same.
16.4 The Borrower shall notify the Lender, forthwith upon becoming aware of
the same, of any breach of any representation and warranty given under
clause 15.4 which would have (or has) a material and adverse effect on
the value of relevant Mortgage Loan.
17. UNDERTAKINGS AND COVENANTS
17.1 The Borrower and (but only where the covenant or undertaking relates to
OFC) OFC hereby undertake with the Lender that from and after the date
hereof and until all sums due and to become due hereunder have been
paid or repaid in full and the Loan Facility shall no longer exist:
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(a) the Borrower and OFC shall obtain, comply with the terms of
and do all that is necessary to maintain in full force and
effect all authorisations, approvals, licences and consents
required in or by the laws and regulations of England,
Scotland and (in the case of OFC) Florida to enable it
lawfully to enter into and perform its obligations under this
Agreement and each Transaction Document and to ensure the
legality, validity, enforceability or admissibility in
evidence in England and in Scotland of this Agreement and each
Transaction Document and shall ensure that none of the
foregoing are revoked or modified;
(b) the Borrower shall promptly inform the Lender of the
occurrence of any Event of Default or Potential Event of
Default and, upon receipt of a written request to that effect
from the Lender, confirm to the Lender that, save as
previously notified to the Lender or as notified in such
confirmation, no such event has occurred;
(c) to the extent that the Event of Default or Potential Event of
Default relates to the conduct, omission, status or condition
or otherwise relates to OFC, OFC shall promptly inform the
Lender of the occurrence of any Event of Default or Potential
Event of Default and shall also (unless it is aware that the
Lender has received notification thereof) notify the Lender of
any Event of Default or Potential Event of Default arising
from any other fact or circumstance forthwith upon becoming
aware thereof;
(d) the Borrower shall ensure that at all times the claims of the
Lender against it under this Agreement are secured as provided
in the Security Documents and that the security thereunder
will be of the nature and will rank in the priority it is
expressed to have in the Security Documents;
(e) the Borrower shall not, without the prior written consent of
the Lender, create or permit to subsist any Security over all
or any of its present or future revenues or assets save for
security created (or permitted) under the Security Documents;
(f) the Borrower shall not, without the prior written consent of
the Lender, make any loans, grant any credit or give any
guarantee or indemnity (except (i) as contemplated in the
Transaction Documents; or (ii) to OFC or any of its subsidiary
companies or affiliates) to or for the benefit of any person
or otherwise voluntarily assume any liability, whether actual
or contingent, in respect of any obligation of any other
person;
(g) the Borrower shall not, without the prior written consent of
the Lender, sell, lease, transfer or otherwise dispose of, by
one or more transactions or series of transactions (whether
related or not), the whole or any part of its revenues or its
assets except as permitted under the Debenture;
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(h) the Borrower undertakes to continue to endeavour to settle all
matters outstanding and pending with the OFT from time to time
as expeditiously as reasonably practicable;
(i) the Borrower will procure that the origination, administration
and enforcement of each Mortgage Loan does not violate in any
material respect:-
(i) OFT Guidelines for Non-Status Lending; and
(ii) any undertakings or agreements from time to time
between the Borrower, any holding company or any
subsidiary of the Borrower and the OFT;
(j) the Borrower will procure that the Lender is:-
(i) promptly notified on the receipt by Ocwen UK plc or
any of its Affiliates of any correspondence (other
than correspondence which is of a routine nature)
received from the OFT on or after the date hereof
relating to Ocwen UK plc's or any of its Affiliates'
mortgage lending business and/or mortgage servicing
business (insofar as it relates to mortgage loans
owned (whether legally or beneficially) by Ocwen UK
plc or any of its Affiliates) and/or the
enforceability or servicing of mortgage loans which
are owned (whether legally or beneficially) by Ocwen
UK plc or any of its Affiliates; and
(ii) all correspondence sent by the Borrower to the OFT
(other than any correspondence of a routine nature)
provided that nothing in this or any other
undertaking shall entitle the Lender to receive
access to or copies of privileged correspondence
between the Borrower and its counsel.
Upon the Lender being notified of the receipt of any
correspondence from the OFT under clause 17.1 (j)(i), the
Lender shall be entitled, upon giving reasonable prior notice
to the Borrower and at reasonable times, to inspect the
Borrower's files at the Borrower's offices relating to the
matter which is the subject of such correspondence;
(k) the Borrower will procure that:
(i) all Mortgage Loan Documents are delivered to Hays
Business Services Limited or such other storer as the
Lender may have approved (acting reasonably) from
time to time (subject always to clause 3.10(d) of the
Debenture) as soon as reasonably practicable
following receipt thereof by the Borrower or the
Solicitors acting on behalf of the Borrower in
connection with the relevant Mortgage Loan and shall
use reasonable endeavours to procure that the Lender
has, upon 1 Business Day's notice, access to the
offices of all Solicitors, Hays Business Services
Limited or other storage provider aforesaid) during
normal business hours and shall procure that the
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Solicitors are instructed to allow the Lender to take
possession of any Mortgage Loan Documents in relation
to any Mortgage Loan financed or to be financed
hereunder; and
(ii) all Mortgage Loan Files (other than the Mortgage Loan
Documents referred to in (i) are delivered to the
Servicer as soon as reasonably possible after the
origination of the relevant Mortgage Loan;
(l) immediately on becoming aware thereof, the Borrower will
provide the Lender with full and accurate details of any
litigation (subsisting or pending) and of any dispute or
complaint (other than any dispute or complaint which is
frivolous or vexatious (but only if the subject matter or
nature of the dispute or complaint (which includes, without
limitation, any particular provision or provisions in the
mortgage loan documentation to which the claim or dispute
relates) is not of a type as has been subject to prior
actions, disputes or complaints in relation to mortgage loans
owned legally and/or beneficially by the Borrower or its
Affiliates on at least five occasions) or is remedied within
ten Business Days of it first being made) which may affect the
value to the Lender of the security created by the Security
Documents. Following notification of any such litigation,
dispute or complaint and prior to any settlement thereof
(other than any settlement thereof through the 10 Business Day
remedy as permitted by this clause), the Borrower shall
consult with the Lender and shall take due account of the
Lender's representations (whether made in its capacity as
Lender hereunder or as lead manager of the Securitisations)
regarding how the litigation, dispute or complaint in question
is to be settled;
(m) the Borrower will not amend the Standard Form Documentation or
the Underwriting Guidelines without the prior written consent
of the Lender;
(n) the Borrower shall deliver to the Lender as soon as the same
are available, and in any event within one hundred and twenty
(120) days after the end of each of their respective financial
years
(i) a copy of the Borrower's audited annual financial
statements; and
(ii) a copy of Ocwen UK plc's consolidated audited
financial statements.
(o) the Borrower shall provide the Lender promptly upon request
with any information relating to it and/or its financial
condition and with any information relating to OFC and/or
OFC's financial condition as the Lender may from time to time
reasonably require in connection with this Agreement;
(p) the Borrower shall ensure that each set of audited annual
financial statements delivered pursuant to sub-clause (n) are
prepared in accordance with generally accepted accounting
principles and on the same basis every year and half year
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(save as may be required from time to time as a result of
changes in law or regulation or generally accepted accounting
principles);
(q) the Borrower shall, promptly upon receipt of the same, deliver
to the Lender a copy of any independent accountants'
management letters received by it relating to it;
(r) the legal and equitable title of each Mortgage Loan financed
hereunder and not sold or otherwise disposed of (whether
through a securitisation, whole loan sale or otherwise) by the
Borrower will be held in the name of the Borrower and the
Borrower shall procure that in each case all necessary steps
are undertaken to protect the Borrower's title to the Related
Security including as appropriate registration or recording of
the relevant Mortgage Deeds in the name of the Borrower at HM
Land Registry or the Registers of Scotland and shall take all
reasonable steps within its power to ensure that (i) such
registration or recording shall be completed within 6 months
from the date of application to the relevant registry and will
submit each such application promptly (and within any
applicable priority time periods) and (ii) the Solicitors will
comply with the Solicitor's Undertakings and the Borrower
shall be responsible for and meet any registration fees and
other costs in connection therewith, provided that breach by
the Borrower of this provision in relation to any one or more
Mortgage Loans, shall not constitute an Event of Default but
shall entitle the Lender to require (i) repayment of the
Advance, or part thereof, (and all interest accrued thereon)
which funded the acquisition of the relevant Mortgage Loan
against release by the Lender of the relevant Mortgage Loan
from the security created by the Debenture or (ii) if the
relevant Mortgage Loan was specified in an Eligible Collateral
Schedule, the provision by the Borrower of replacement
Eligible Collateral in accordance with clause 8;
(s) the Borrower shall procure that where any retention is made in
respect of a Mortgage Loan funded hereunder, the amount
retained is, pending advance of the same against the relevant
certificate (or other evidence) of completion of the relevant
works, held either in the Borrower Funding Account or with the
relevant Solicitor under the terms of the Solicitor's
Undertaking.
(t) the Borrower shall procure that the Mortgage Loans are
administered at all times in accordance with the standards of
a Reasonably Prudent Mortgage Lender and, in particular but
without limitation, that all computer and electronic systems
required to administer the Mortgage Loans in accordance with
such standards are Y2K compliant;
(u) the Borrower undertakes that:
(i) (subject as set out in (v) below the aggregate
Outstanding Principal Balance of Junior Mortgage
Loans shall not at any time exceed 55% of the Loan
Amount;
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(ii) the aggregate Outstanding Principal Balance of
Mortgage Loans secured by third or subsequent ranking
Mortgages shall not at any time exceed 3% of the Loan
Amount;
(iii) if the amount of mortgage loans secured by second or
subsequent ranking mortgages or standard securities
("Junior Loans") and originated by the Borrower and
its Affiliates over any period of 3 consecutive
months as a proportion of all mortgage loans so
originated falls significantly below such proportion
over the preceding 6 months, the Borrower will
endeavour to ensure that such a fall is reflected in
the proportion of Junior Loans funded out of the Loan
Facility thereafter;
(iv) in determining the ranking of a Mortgage, for the
purposes of this clause 17.1(u) any Mortgage ranking
immediately in priority shall be disregarded;
(v) this clause shall have no effect in relation to
Junior Mortgage Loans already funded out of the Loan
Facility as at close of business on the Closing Date.
17.2 The Borrower shall procure that the Servicer provides such certificates
as required by the Lender pursuant to the Servicing Agreement.
17.3 The Borrower shall not originate any MIRAS loans without the prior
written consent of the Lender.
17.4 Subject to clauses 17.5 and 17.6 the Borrower shall take all reasonable
steps within its power to procure that all payments made in respect of
each Mortgage Loan shall be paid directly into the Servicer Collection
Account.
17.5 The Borrower shall, if required by the Lender, give notice to
Mortgagors requiring the Mortgagors to redirect payment so as to pay
direct to the Borrower Collection Account, or such other account of the
Borrower or (following an Acceleration) such other Account as the
Lender shall specify.
17.6 In the event that any payments under Mortgage Loans financed hereunder
("Mortgage Proceeds") are paid to or for the account of the Borrower
other than by way of a direct credit to the Servicer Collection
Account, the Borrower shall transfer such Mortgage Proceeds (or shall
procure that such Mortgage Proceeds are transferred) to the Servicer
Collection Account forthwith.
17.7 The Guarantor shall, for so long as this Agreement is in effect :
(a) maintain a minimum Consolidated Tangible Net Worth of
$320,000,000.00 (three hundred and twenty million United
States dollars);
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(b) not permit the ratio of its Consolidated Indebtedness to
Consolidated Tangible Net Worth to exceed 12:1; and
(c) maintain liquid assets consisting of cash and cash equivalents
on an unconsolidated basis of not less than $15,000,000.00
(fifteen million United States dollars).
17.8 The Borrower shall, forthwith upon becoming aware of the same, notify
the Lender (in writing) of each of the following:
(a) any termination of the Barclays Facility or servicing
agreement with the Servicer relating to the Barclays Facility
(the "Barclays Servicing Agreement");
(b) the occurrence of any event which entitles any person to
terminate the Barclays Facility or the appointment of the
Servicer as servicer under the Barclays Servicing Agreement;
(c) the occurrence of any event which, with the passing of time,
fulfilment of any condition or both would entitle any person
to terminate the Barclays Facility or appointment of the
Servicer as servicer under the Barclays Servicing Agreement;
and
(d) Ocwen 2 Limited negotiating or agreeing with Barclays Bank Plc
to terminate the Barclays Facility or significantly reduce the
amount available to be drawn by Ocwen 2 Limited thereunder.
17.9 The Borrower undertakes with the Lender that it will use all reasonable
endeavours to avoid securitising Mortgage Loans during the period from
15 December 1999 to 16 January 2000 without the Lender's prior consent
and the Lender agrees with the Borrower that it will endeavour to
co-operate with the Borrower to facilitate it in complying with such
undertaking.
18. DEFAULT
18.1 In the event of:-
(a) any default by the Borrower in the payment of any amount due
for payment hereunder or under any Transaction Document within
two Business Days after receipt of written notice by the
Lender requiring payment of the same; or
(b) the Borrower failing to observe or perform any other
covenants, obligations or agreements of the Borrower under
this Agreement or any Transaction Document which, if (in the
good faith opinion of the Lender) capable of remedy shall not
have been remedied (to the satisfaction of the Lender) within
thirty days of being required by the Lender to do so; or
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(c) any representation or warranty made or repeated by the
Borrower under this Agreement (other than any representation
or warranty made or deemed to be made pursuant to clause 15.4)
or under any other Transaction Document or any representation
and warranty made or repeated by OFC hereunder being or
proving to be or have been untrue or incorrect or misleading
in any material respect as at the date at which it was made or
repeated, and in the case of any such breach which is (in the
good faith opinion of the Lender) capable of remedy, the
relevant breach not having been remedied within thirty days of
the Lender requiring the Borrower or, as the case may be, OFC
to do so; or
(d) any default by OFC in the payment of any amount due for
payment hereunder or under the Indemnity on the due date
therefor; or
(e) OFC failing to observe or perform any other covenant,
obligation or agreement contained hereunder or in the
Indemnity which, if (in the good faith opinion of the Lender)
is capable of remedy has not been remedied (to the
satisfaction of the Lender) within thirty days of the Lender
requiring OFC to do so; or
(f) the Servicing Agreement being terminated, or becoming capable
of being terminated (after expiration of any applicable grace
periods) in accordance with its terms other than by reason of
a disposal that by its terms is conditional upon a release of
servicing in respect of such Mortgage Loans; or
(g) OFC or the Servicer failing to observe or perform any material
covenant, obligation or agreement (including any obligation to
make any payment) on its part to be observed or performed
under any Transaction Document (other than, in the case of
OFC, this Agreement, or the Indemnity and, in the case of the
Servicer the Servicing Agreement) which is (in the good faith
opinion of the Lender) capable of remedy shall not have been
remedied (to the satisfaction of the Lender) within thirty
days (or such shorter or longer grace period as may apply in
respect of the relevant breach under the relevant Transaction
Document) of the Lender requiring remedy of the same; or
(h) any representation or warranty made or repeated by OFC or the
Servicer under any Transaction Document (other than, in the
case of OFC, this Agreement and the Indemnity and in the case
of the Servicer, the Servicing Agreement) being or becoming
untrue or misleading as of the date on which made or repeated
and, in the case of any such breach which is (in the good
faith opinion of the Lender) capable of remedy, the relevant
breach not having been remedied to the satisfaction of the
Lender within thirty days (or such shorter or longer grace
period as may apply in respect of the relevant breach under
the relevant Transaction Document) of the Lender requiring OFC
or the Servicer, as the case may be, to do so; or
(i) the loss by the Borrower or the Servicer of its Consumer
Credit Act Licence; or
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(j) an adverse determination being made by the OFT in respect of
any Minded to Revoke Notice served by the OFT on any of the
Borrower or the Servicer in respect of the Consumer Credit Act
Licence of the Borrower or the Servicer irrespective of any
right to appeal (or other right) which the Borrower, or the
Servicer may have thereafter, a "determination" being the
decision or determination made by the Director (as defined
under the CCA) under section 34(3) CCA in respect of the
relevant Minded to Revoke Notice; or
(k) an injunction or interdict which relates to its residential
mortgage lending business including, without limitation,
Mortgage Loans financed hereunder being obtained by (or on
behalf of) the OFT against the Servicer or the Borrower which
remains in effect for more than 60 days;
(l) an order being made or an effective resolution being passed
for winding up of the Borrower, the Servicer or OFC or any
analogous provision or order being made under any applicable
jurisdiction; or
(m) the Borrower, the Servicer or OFC ceasing or threatening to
cease to carry on business or a substantial part of such
business or stopping payment or threatening to stop payment of
its debts or being or becoming unable to pay its debts within
the meaning of Section 123(1)(a), (b), (c) or (d) of the
Insolvency Act 1986, as that section may be amended, (or as
the case may be any analogous provision under any applicable
jurisdiction) or otherwise becoming unable to pay its debts as
they fall due or the value of its assets falling to less than
the amount of its liabilities (taking into account for both
these purposes its contingent and prospective liabilities) or
the Borrower, the Servicer or OFC otherwise becoming
insolvent;
(n) proceedings being initiated against the Borrower, the Servicer
or OFC under any applicable liquidation, insolvency,
composition, bankruptcy, reorganisation (other than a
reorganisation the terms of which have been approved by the
Lender and where the Borrower, the Servicer or OFC is solvent)
or other similar laws, or a petition for an administration
order being presented against the Borrower, or the Servicer or
OFC or an administrative or other receiver, administrator or
other similar official in any applicable jurisdiction being
appointed in relation to the Borrower, or the Servicer or OFC
or in relation to the whole or any substantial part of the
undertaking of or assets of the Borrower, or the Servicer or
OFC or an encumbrancer taking possession of the whole or any
substantial part of the undertaking or assets of the Borrower,
or the Servicer or OFC or a distress, diligence or execution
or other process being levied or enforced upon or sued out
against the whole or any substantial part of the undertaking
or assets of the Borrower, or the Servicer or OFC or the
Borrower, or the Servicer or OFC initiating or consenting to
judicial proceedings relating to itself under any applicable
liquidation, insolvency, composition, reorganisation or other
similar laws or making a conveyance or assignment for the
benefit of its creditors generally; or
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(o) any material adverse change in the condition (financial,
business, prospects or otherwise) of any of the Borrower or
OFC occurring, which, in the reasonable judgment of the Lender
is reasonably likely to prevent the Borrower or OFC, as the
case may be, from performing its respective material
obligations under any Transaction Document or is likely to
adversely affect the value (to the Lender) of its security
whether by adversely affecting the value of such security, the
prospects of a sale thereof or otherwise; or
(p) the Borrower ceasing to be a wholly owned subsidiary of the
Guarantor; or
(q) any Indebtedness, arising under any one or more transactions
of the Guarantor and/or the Borrower, in excess (in aggregate)
of $5,000,000 or the equivalent thereof in any other currency
(determined by translating the other currency into dollars at
the mean of National Westminster Bank Plc's spot buying and
selling rates (based on the market rates prevailing at the
relevant time) for the exchange of dollars and such currency
at the relevant time):
(i) not being paid on its due date or within any
applicable grace period; or
(ii) if payable on demand, not being paid on demand or
within any applicable grace period; or
(iii) becoming due by reason of a declared (or automatic)
event of default (howsoever described) prior to its
original maturity date and not being paid within 5
days of its required date of payment;
(each of the foregoing an "EVENT OF DEFAULT"), the Lender may, for so
long as such event is continuing unwaived by the Lender do each or any
of the following:
(A) declare, by notice in writing to the Borrower, any
undrawn portion of the Loan Commitment or any of it to
be no longer available to the Borrower; and/or
(B) declare, by written notice to the Borrower, all
Advances outstanding together with all interest
accrued thereon and all other sums then due and
outstanding hereunder from the Borrower to be
immediately due and payable, whereupon the same shall
become immediately due and payable; and/or
(C) enforce all or any of its security under the Security
Documents; and/or
(D) terminate the Servicing Agreement pursuant to its
terms; and/or
(E) terminate this Agreement,
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whereupon the Lender shall cease to be obliged to make Advances
hereunder.
18.2 If any Advance shall be declared immediately due and payable as
aforesaid, the Borrower shall pay to the Lender such amount as the
Lender certifies to be necessary to compensate it for any loss incurred
(excluding loss of Margin) or to be incurred on account of deposits
acquired or arranged in order to fund such Advances as a consequence of
such Event of Default.
18.3 The rights conferred on the Lender pursuant to this clause 18 shall be
in addition to whatever rights the Lender may have both at law and in
equity.
18.4 The Lender may waive any default by the Borrower in the performance of
its obligations hereunder and its consequences. Upon any such waiver of
a past default, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been remedied for
every purpose of this Agreement. No such waiver shall extend to any
subsequent or other default or impair any right consequent thereon
except to the extent expressly so waived.
18.5 The Borrower agrees to indemnify and keep indemnified the Lender, GNW
and every Receiver, delegate, attorney, manager or agent or other
person appointed by the Lender hereunder or acting on behalf of the
Lender in connection with any Transaction Document from and against any
loss, cost (including, without limitation, any cost of enforcement),
liability (including, without limitation, any tax liability), claim or
damage which any such person incurs or suffers (other than through that
person's own gross negligence or wilful default):
(a) as a consequence of any breach of any representation and
warranty contained in clause 15;
(b) as a consequence of any breach of any undertaking and covenant
contained in clause 17;
(c) as a consequence of any Event of Default or any Potential
Event of Default; and
(d) in connection with any actions, proceedings, claims or demands
whether brought or made (directly or indirectly) by Mortgagors
(of Mortgage Loans financed or previously financed hereunder)
or other third parties, in each case in respect of or relating
to any Mortgage Loan at any time financed hereunder whether
such Mortgage Loan or Mortgage Loans continue to be financed
hereunder at the time any such action, claim, proceeding or
demand is made (or concluded) and irrespective of the status
of such Mortgage Loan or Mortgage Loans, at the relevant time,
(including, without limitation, whether the same had been
previously redeemed) including, without limitation, any claim,
demand, proceeding or action for repayment or recovery (or
compensation or damages in respect) of amounts paid under the
relevant Mortgage Loan or Mortgage Loans.
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The indemnity contained in this clause 18.5 may, without limiting the
Lender's rights, be claimed as a debt or liquidated demand.
19. DEFAULT INTEREST
19.1 If any sum due and payable by the Borrower hereunder is not paid on the
due date therefor or if any sum due and payable by the Borrower under
any judgement or decree of any court in connection herewith is not paid
on the date of such judgement or decree, the period beginning on the
date seven days after such due date (in the case of non payment by the
Borrower of an amount due hereunder) or, as the case may be, the date
of such judgement or decree and ending on the date upon which the
obligation of the Borrower to pay such sum (the balance thereof for the
time being unpaid being herein referred to as an "UNPAID SUM") is
discharged shall be divided into successive periods, each of which
(other than the first) shall start on the last day of the preceding
such period and the duration of each of which shall (except as
otherwise provided in this clause 19) be selected by the Lender.
19.2 During each such period relating thereto as is mentioned in clause 19.1
an unpaid sum shall bear interest at the rate per annum which is the
sum from time to time of two per cent and the Margin and the Associated
Costs Rate in respect thereof at such time and LIBOR on the first day
of the relevant period provided that:
(a) if, for any such period, LIBOR cannot be determined, the rate
of interest applicable to such unpaid sum shall be the rate
per annum which is the sum of two per cent and the Margin and
the Associated Costs Rate in respect thereof at such time and
the rate per annum determined by the Lender to be equal to the
rate which expressed as a percentage rate per annum equals the
cost to it of funding such unpaid sum for such period from
whatever sources it may select; and
(b) if such unpaid sum is all or part of an Advance which became
due and payable on a day other than the Repayment Date
therefor, the first such period applicable thereto shall be of
a duration equal to the unexpired portion of that Term and the
rate of interest applicable thereto from time to time during
such period shall be that which exceeds by two per cent the
rate which would have been applicable to it had it not so
fallen due.
19.3 Any interest which shall have accrued under clause 19 in respect of an
unpaid sum shall be due and payable and shall be paid by the Borrower
at the end of the period by reference to which it is calculated or on
such other dates as the Lender may specify by written notice to the
Borrower.
20. CALCULATIONS AND PORTFOLIO INFORMATION
20.1 On each Determination Date, the Borrower shall calculate the Borrowing
Base Deficiency for the next Interest Payment Date and shall notify the
same to the Lender by data tape, immediately upon calculation of the
same.
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20.2 By close of business on the second Business Day prior to each
Determination Date, the Lender shall, for the purposes of the
calculation under clause 20.1, notify the Borrower of the Market Value
Percentage of all Mortgage Loans which have not, at the relevant time,
been sold or otherwise disposed of by the Borrower.
20.3 The Lender's determination of the matters to be notified to the
Borrower under clause 20.2 shall, in the absence of manifest error or
bad faith, be final and binding on the parties hereto.
20.4 The Borrower's determination of the Borrowing Base Deficiency once
agreed by the Lender under clause 20.5 shall, in the absence of
manifest error or bad faith (on the part of either party), be final and
binding on the parties hereto.
20.5 The Lender shall use reasonable endeavours to agree the Borrower's
determinations of the Borrowing Base Deficiency within three Business
Days of notification of the same to the Lender.
20.6 On each Determination Date, the Borrower shall provide a data tape to
the Lender setting out the information specified in Schedule 6 in
respect of each Mortgage Loan as at that date, such information to be
correct as at close of business on the last day of the Collection
Period immediately preceding such Determination Date.
21. CURRENCY OF ACCOUNT
21.1 Sterling is the currency of account and payment for each and every sum
at any time due from the Borrower hereunder provided that each payment
in respect of costs and expenses shall be made in the currency in which
the same were incurred.
21.2 If any sum due from the Borrower under this Agreement or any order or
judgement given or made in relation hereto has to be converted from the
currency (the "FIRST CURRENCY") in which the same is payable hereunder
or under such order, decree or judgement into another currency (the
"SECOND CURRENCY") for the purpose of (a) making or filing a claim or
proof against the Borrower, (b) obtaining an order, decree or judgement
in any court or other tribunal or (c) enforcing any order, decree or
judgement given or made in relation hereto, the Borrower shall
indemnify and hold harmless each of the persons to whom such sum is due
from and against any loss suffered as a result of any discrepancy
between (i) the rate of exchange used for such purpose to convert the
sum in question from the first currency into the second currency and
(ii) the rate or rates of exchange at which such person may in the
ordinary course of business purchase the first currency with the second
currency upon receipt of a sum paid to it in satisfaction, in whole or
in part, of any such order, judgement, decree, claim or proof.
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22. SET-OFF
22.1 The Borrower authorises the Lender to apply any credit balance to which
the Borrower is entitled on any account of the Borrower with the Lender
in satisfaction of any sum due and payable from the Borrower to the
Lender hereunder but unpaid.
22.2 All payments required to be made by the Borrower hereunder shall be
calculated without reference to any set-off, deduction or counterclaim
and shall be made free and clear of and without any deduction for or on
account of any set-off, deduction or counterclaim.
23. CALCULATION OF INTEREST
Interest shall accrue from day to day and shall be calculated on the
basis of a year of 365 days and the actual number of days elapsed.
24. COSTS AND EXPENSES
24.1 The Borrower shall, save where expressed to the contrary in any other
Transaction Document, from time to time on demand of the Lender,
reimburse the Lender for all reasonable costs and expenses (including
legal fees) together with any VAT thereon incurred by it in connection
with the negotiation, preparation and execution of this Agreement, the
Transaction Documents and the completion of the transactions pursuant
to this Agreement and the Transaction Documents or in connection with
the preservation and/or enforcement of any of the rights of the Lender
under this Agreement and the Transaction Documents.
24.2 The Borrower shall pay all stamp, registration and similar taxes to
which this Agreement or any other Transaction Document or any judgement
or decree given in connection herewith is or at any time may be subject
(including in relation to the perfection of security granted by the
Security Documents) and shall, from time to time on demand of the
Lender, indemnify the Lender against any liabilities, costs, claims and
expenses resulting from any failure to pay or any delay in paying any
such tax.
24.3 The Borrower shall, from time to time on demand of the Lender
compensate the Lender at such daily and/or hourly rates as the Lender
shall from time to time reasonably determine for the time and
expenditure, all costs and expenses (including telephone, fax, copying,
travel and personnel costs) incurred by the Lender in connection with
its taking such action as it may deem appropriate or in complying with
any request by the Borrower in connection with (a) the granting or
proposed granting of any waiver or consent requested hereunder by the
Borrower; (b) any actual, potential or reasonably suspected breach by
the Borrower of its obligations hereunder; (c) the occurrence of any
event which is an Event of Default or a Potential Event of Default; or
(d) any amendment or proposed amendment hereto requested by the
Borrower.
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25. REMEDIES AND WAIVERS
No failure to exercise, nor any delay in exercising, on the part of the
Lender, any right or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any right or
remedy prevent any further or other exercise thereof or the exercise of
any other right or remedy. Save as otherwise expressly provided herein
the rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies provided by law.
26. CONFIDENTIALITY
The Borrower shall not, without the prior written consent of the
Lender, disclose to any person the existence or any details concerning
the Transaction Documents except to the extent such disclosure is
contemplated in any Transaction Document, or is required pursuant to
the application of any applicable law or an order of a court of
competent jurisdiction, or is made to the Borrower's auditors or other
professional advisors who are subject to confidentiality restrictions
imposed by a professional body which are substantially similar to those
set forth above.
27. NOTICES
27.1 WRITTEN NOTICES
Any notice or other communication, information or document to be made
or delivered under this Agreement (save for any communication required
to be made by data tape) shall be made or delivered by fax or otherwise
in writing. Each such notice, communication information or other
document to be delivered to any party to this Agreement shall (unless
that other person has by fifteen days' written notice to the other
party specified another address or fax number) be made or delivered to
that person at the address(es) or fax number (if any) set out below:-
(a) in the case of the Lender, to GNW's branch office in the
United Kingdom, facsimile number: 0171 375 5395, attention
Caroline Bishop with a copy to:
Office of the General Counsel,
600 Steamboat Road,
Greenwich,
Connecticut 06830,
USA
Facsimile number: 001 203 629 4571
Attention General Counsel
(b) in the case of the Borrower, to its offices at Malvern House,
Croxley Business Park, Watford WD1 8YF facsimile number: 01923
426456, attention Chief Executive, with a copy to:
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John Erbey
Company Secretary
Ocwen Financial Corporation
The Forum
1675 Palm Beach Lakes Boulevard
Suite 1002
West Palm Beach, Florida 33401
Telephone No: 561-682-8661
Telefax No: 561-682-8163
(c) in the case of OFC, to its offices at:
The Forum
1675 Palm Beach Lakes Boulevard
Suite 1002
West Palm Beach, Florida 33401
Attention: John R. Erbey, Corporate Secretary
Telephone No: 561-682-8000
Telefax No: 561-682-8177
27.2 ELECTRONICALLY TRANSMITTED NOTICES
Any communication, document or information required to be made or
delivered by the Borrower under this Agreement by data tape shall be
transmitted by electronic mail to the following addresses (or such
other addresses as the Lender may notify to the Borrower from time to
time not later than the Business Day prior to the day on which the data
tape is required to be received by the Lender in accordance with this
Agreement):
[email protected]
[email protected]
with a copy to:
[email protected]
27.3 In the event that any attempted transmission of data by electronic mail
fails, for whatever reason, the Borrower shall procure the delivery to
the Lender of the relevant data in disk format, to be delivered to the
Lender at the address specified in clause 27.1, marked for the
attention of Nick Kent by 9.30 a.m on the day following the day on
which the Borrower is informed that the electronic transmission failed.
27.4 DEEMED DELIVERY
Any notice, communication, information, document or data type to be
delivered to any person shall be deemed to have been delivered:-
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(a) in the case of personal delivery, at the time of such
delivery;
(b) in the case of delivery by post, on the business day following
the day on which it was posted and in proving such delivery it
shall be sufficient to prove that the relevant notice,
communication or document was properly addressed, stamped and
posted (by airmail, if to another country) in the United
Kingdom or, in the case of service to or from an address
outside the United Kingdom at 9.00 a.m. on the fourth day
following the day on which it was posted;
(c) in the case of any notice or other communication by fax, (a)
on the business day the same was transmitted so long as there
is evidence that such fax message was received prior to 5.00
p.m. local time of the recipient on such day and such day is a
business day for the recipient, otherwise (b) on the business
day following the day on which it was transmitted and, in
either case, in proving such delivery it shall be sufficient
to prove that the whole of the fax message was received on any
fax machine of the recipient and that there was no evidence
that such transmission had been interrupted.
(d) In the case of any data tape to be transmitted by electronic
mail or disk, on actual receipt thereof by the Lender.
28. SEVERABILITY
If at any time any provision of this Agreement is or becomes illegal,
invalid or unenforceable in any respect under the law of any
jurisdiction, that shall not affect or impair:-
(a) the legality, validity or enforceability in that jurisdiction
of any other provision of this Agreement; or
(b) the legality, validity or enforceability under the law of any
other jurisdiction of that or any other provision of this
Agreement.
29. ASSIGNMENT AND SUB PARTICIPATION
29.1 The Lender may at any time:-
(a) sub-participate all or any part of its rights or benefits
under this Agreement; and
(b) assign or transfer all or any part of its rights or benefits
under this Agreement
provided that:-
(i) if such sub-participation, assignment or transfer is
of 51% or more of the total Loan Facility and is to
any person other than a subsidiary, holding company
of or other member of the Lender's group such sub
participation, assignment or transfer shall require
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the prior consent of the Borrower (such consent not
to be unreasonably withheld) provided that if any
such member of the Lender's group who, at the
relevant time, holds (whether as sub-participant,
assignee or transferee) 51% or more of the total Loan
Facility ceases to be a member of the group it shall,
unless the Borrower shall have consented to the said
member retaining its interest after it ceases to be a
member of the group, immediately upon it ceasing to
be a member of the group assign transfer its interest
to any subsidiary, holding company or other member of
the Lender's group; and
(ii) if, at the time and as a result of any proposed
transfer or assignment, the Borrower would incur any
increased cost or be liable to make payments in
excess of those required to be made hereunder
immediately prior thereto (other than any minimum
liquid asset costs) such assignment or transfer is on
terms that the Borrower is not and will not be liable
for any such increased cost or liability.
29.2 The Borrower shall not be entitled to assign, transfer or otherwise
dispose of all or any of its rights or benefits under this Agreement
without the prior written consent of the Lender.
29.3 The Lender may disclose to a proposed assignee, transferee or
sub-participant information in its possession relating to the
provisions of this Agreement and the Transaction Documents which it
considers necessary or desirable to disclose for the purposes of the
proposed assignment, transfer or sub-participation, notwithstanding the
provisions of clause 26 (Confidentiality) provided that the Lender
obtains from such assignee, transferee or sub-participant a
confidentiality undertaking on substantially the same terms as clause
26 (but substituting references to such proposed assignee, transferee
or sub-participant for references therein to the Borrower) or on such
other terms as may be agreed between the Borrower and the Lender.
29.4 This Agreement shall bind and inure to the benefit of and be
enforceable by the Lender and its respective successors, transferees
and assigns and references to the Lender shall be deemed to include
references to each of the foregoing.
30. FURTHER ASSURANCE
The Borrower shall, from time to time on being required to do so by the
Lender, now or at any time in the future, do or procure the doing of
all such acts and/or execute or procure the execution of all such
documents in a form satisfactory to the Lender as the Lender may
consider necessary for giving full effect to this Agreement and the
Transaction Documents and securing to the Lender the full benefit of
the rights, powers and remedies conferred upon the Lender in this
Agreement or any Transaction Documents.
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32. ENTIRE AGREEMENT
This Agreement (together with the Transaction Documents entered into on
or after the date hereof) constitutes the whole and only agreement
between the parties relating to the secured, guaranteed facility
provided by the Lender to the Borrower described herein and supersedes
and extinguishes any prior drafts, agreements, undertakings,
representations, warranties and arrangements of any nature whatsoever.
32.1 AGENT FOR SERVICE
32.2 OFC irrevocably agrees that any Service Document may be sufficiently
and effectively served on it in connection with Proceedings, whether
pursuant to this Agreement or any other Transaction Document, in
England and Wales by service on its agent Ocwen Limited, if no
replacement agent has been appointed and notified to the Lender
pursuant to sub-clause 32.4, or on the replacement agent if one has
been appointed and notified to the Lender.
32.3 Any Service Document served pursuant to this clause shall be marked for
the attention of:
(a) Ocwen Limited at Malvern House, Croxley Business Park, Watford
WD1 8YF or such other address within England and Wales as may
be notified to the Lender by OFC; or
(b) such other person as is appointed as agent for service
pursuant to sub-clause 32.4 at the address notified pursuant
to sub-clause 32.4.
32.4 Any document addressed in accordance with sub-clause 32.2 shall be
deemed to have been duly served if:-
(a) left at the specified address, when it is left; or
(b) sent by first class post, two clear Business Days after the
date of posting.
32.4 If the agent referred to in sub-clause 32.4 (or any replacement agent
appointed pursuant to this sub-clause) at any time ceases for any
reason to act as such, OFC shall appoint a replacement agent to accept
service having an address for service in England or Wales and shall
notify the Lender of the name and address of the replacement agent;
failing such appointment and notification, the Lender shall be entitled
by notice to OFC to appoint such a replacement agent to act on OFC's
behalf.
32.5 A copy of any Service Document served on an agent pursuant to this
clause shall be sent by post to OFC at its address for the time being
for the service of notices and other communications under clause 27 but
no failure or delay in so doing shall prejudice the effectiveness of
service of the Service Document in accordance with the provisions of
sub-clause 32.1.
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33 GOVERNING LAW AND JURISDICTION
33.1 This Agreement shall be governed by and construed in accordance with
the laws of England, provided that any terms hereof which are
particular to Scots law shall be construed in accordance with the laws
of Scotland.
33.2 The parties to this Agreement irrevocably agree that the courts of
England are to have jurisdiction to settle any dispute which may arise
out of or in connection with this Agreement and each other Transaction
Document and that accordingly any proceeding, suit, or action arising
out of or in connection with this Agreement or any other Transaction
Document ("PROCEEDINGS") may be brought in such courts.
33.3 Without prejudice to clause 33.2, all the parties further irrevocably
agree that any Proceedings may be brought in any court of the State of
New York, or the State of Florida or any other state of the United
States, where any party has its chief executive office (all of such
states being the "SUBMITTED STATES") or federal court sitting in the
Submitted State and any court having jurisdiction over appeals of
matters heard in such courts and each of the parties hereto irrevocably
submits to the non-exclusive jurisdiction of such courts. Each of OFC
and the Lender irrevocably consent to the service of process of any of
the aforesaid courts in Submitted States in any such action or
Proceeding by the mailing of copies thereof by registered or certified
mail, postage prepaid to the party's notice address specified above,
such service to become effective upon receipt of evidence of the
receipt thereof.
33.4 Each of the parties hereto irrevocably waives any objection it may have
now or hereafter to the laying of the venue of any Proceedings in any
such court as is referred to in this clause and any claim of FORUM NON
CONVENIENS and further irrevocably agrees that a judgment in any
Proceedings brought in any court referred to in this clause shall be
conclusive and binding upon it and may be enforced in the courts of any
other jurisdiction.
IN WITNESS WHEREOF this Agreement is duly executed the date and year first above
written.
/s/ JOSEPH A. DLUTOWSKI
.......................................................
for and on behalf of
OCWEN LIMITED
/s/ (authorized signatory)
.......................................................
for and on behalf of
GREENWICH NATWEST LIMITED,
acting as duly authorised agent for
NATIONAL WESTMINSTER BANK, PLC
/s/ John R. Erbey
.......................................................
for and on behalf of OCWEN FINANCIAL
CORPORATION
55
<PAGE>
The following schedules have been deleted herefrom, but are available
to the Commission upon request:
SCHEDULE
PART 1 - FORM OF CLOSING DATE ADVANCE REQUEST
PART 2 - FORM OF DRAWDOWN REQUEST
PART 3 - MORTGAGE LOAN SCHEDULE
SCHEDULE 2
FORM OF SOLVENCY CERTIFICATE
SCHEDULE 3
ENGLISH MORTGAGE LOAN DOCUMENTS
SCOTTISH MORTGAGE LOAN DOCUMENTS
SCHEDULE 4
ASSOCIATED COSTS RATE
SCHEDULE 5
PART 1 - FORM OF ADVANCE MONIES UNDERTAKING
PART 2 - FORM OF EXISTING MORTGAGE LOANS UNDERTAKING
PART 3 - FORM OF NEW MORTGAGE LOANS UNDERTAKING
SCHEDULE 6
PART 1 - DAILY FUNDING FILE TO BE PROVIDED
UNDER CLAUSE 4.2(c)(iii)
PART 2 - MONTH END FILES TO BE PROVIDED UNDER CLAUSE 20.6
<PAGE>
PART 3 -INTEREST PAYMENT DATE FILE TO BE PROVIDED
UNDER CLAUSE 7.2
SCHEDULE 7
PIPELINE LOANS
SCHEDULE 8
LETTER FROM GNW TO OFC OF 5 MARCH 1999
SCHEDULE 9
UNDERWRITING GUIDELINES
EXHIBIT 99.1
RISK FACTORS
Each of the factors set forth below could, directly or indirectly,
affect the Company's results of operations and financial condition. Capitalized
terms that are not defined herein shall have the meaning ascribed in the Annual
Report on Form 10-K of the Company to which this Exhibit relates.
CHANGING NATURE OF RISKS; NO ASSURANCES AS TO CONSISTENCY OF EARNINGS
CHANGING NATURE OF RISKS. The Company's corporate strategy emphasizes
the identification, development and management of specialized businesses which
the Company believes are not accurately evaluated and priced by the marketplace
due to market, economic and competitive conditions. This strategy can result in
the entry into or development of businesses and investment in assets which
produce substantial initial returns, which may be followed by an exit from any
of those businesses or the sale of those assets if, for example, results
decrease because markets become more efficient in the evaluation and pricing of
such businesses and assets. For example, in recent years, the Company's efforts
have focused on lending, the acquisition and resolution of discounted loans, and
investment in various types of mortgage- related securities. However, on October
26, 1998, the Company announced that it would refocus its resources on its core
competencies, namely the acquisition and management of servicing-intensive
assets and the development of exportable loan serving technology for the
mortgage and real estate industries. Given that this strategy involves the
potential of entering and exiting different businesses, past financial
performance may not be considered a reliable indicator of future performance and
historical trends may not be reliable indicators of anticipated results or
trends in future periods. In addition, there can be no assurance that the
Company will be able to accomplish its strategic objectives as a result of
changes in the nature of the Company's operations over time or that such changes
will not have a material adverse effect from time to time or generally on the
Company's business, financial condition or results of operations.
INCONSISTENCY OF RESULTS AND NON-RECURRING ITEMS. In addition to
inconsistency in results caused by the entry or exit of businesses by the
Company, the consistency of the operating results of the Company has and may
continue to be significantly affected by inter-period variations in its current
operations, including in respect of (i) the amount of assets acquired,
particularly discounted loans; (ii) the amount of resolutions of discounted
loans, particularly large multi-family residential and commercial real estate
loans; (iii) the amount of multi-family residential and commercial real estate
loans which mature or are prepaid, particularly loans with terms pursuant to
which the Company participates in the profits of the underlying real estate; and
(iv) sales by the Company of loans and/or securities acquired from the Company's
securitization of loans. In addition, the Company's operating results have been
significantly affected by certain non-recurring items. For example, the Company
has earned significant non-interest income from gains on sales of
interest-earning assets and real estate owned. Gains on sales of
interest-earning assets and real estate owned generally are dependent on various
factors which are not within the control of the Company, including market and
economic conditions and accounting regulations. In addition, during 1998, the
Company took charges related to its portfolio of AAA-rated agency interest-only
("IO") strips, residual and subordinate securities available for sale,
curtailment of its domestic operations and investments in OAC and OPLP. There
can be no assurance that the level of gains on sales of interest-earning assets
and real estate owned reported by the Company in prior periods will be repeated
in future periods or that there will not be substantial inter-period variations
in the results from such activities or as a result of other non-recurring items.
RISKS RELATED TO NON-TRADITIONAL OPERATING ACTIVITIES
As discussed below, the Company is engaged in a variety of
businesses which generally involve more uncertainties and risks than
the single-family residential lending activities historically
emphasized by savings institutions. In addition, many of the Company's
business activities, including its lending activities, are conducted on
a nationwide basis, which reduces the risks associated with
concentration in any one particular market area but involves other
risks because, among other things, the Company may not be as familiar
with market conditions and other relevant factors as it would be in the
case of activities which are conducted in the market areas in which its
executive offices and branch office are located.
DISCOUNTED LOAN ACQUISITION AND RESOLUTION ACTIVITIES. The
Company's lending activities include the acquisition and resolution of
non-performing or underperforming single-family (one to four units)
residential loans, multi-family (over four units) residential loans and
commercial real estate loans which are purchased at a discount.
Non-performing and subperforming mortgage loans may presently be in
default or may have a greater than normal risk of future defaults and
delinquencies, as compared to newly-originated, high-quality loans of
comparable type, size and geographic concentration. Returns on an
investment of this type depend on the borrower's ability to make
required payments or, in the event of default, the ability of the
loan's servicer to foreclose and liquidate the mortgage loan. There can
be no assurance that the servicer can liquidate a defaulted mortgage
loan successfully or in a timely fashion.
1
<PAGE>
The Company acquires discounted loans from governmental agencies,
which in the early years of the program consisted primarily of the
Federal Deposit Insurance Corporation (the "FDIC") and the Resolution
Trust Corporation, a federal agency formed to resolve failed savings
institutions which has since ceased operations, and in recent years has
consisted primarily of the U.S. Department of Housing and Urban
Development. In addition to governmental agencies, the Company acquires
discounted loans from various private sector sellers, such as banks,
savings institutions, mortgage companies and insurance companies.
Although the Company believes that a permanent market for the
acquisition of non-performing and underperforming mortgage loans at a
discount has emerged in recent years, there can be no assurance that
the Company will be able to acquire the desired amount and type of
discounted loans in future periods or that there will not be
significant inter-period variations in the amount of such acquisitions.
There also can be no assurance that the discount on the non-performing
and underperforming loans acquired by the Company will enable the
Company to resolve discounted loans in the future as profitably as in
prior periods. Adverse changes in national economic conditions or in
the economic conditions in regions in which the Company acquires pools
of loans could impair its ability to resolve successfully loans and
could have an adverse effect on the value of those loan pools. The
yield on the Company's discounted portfolio also is subject to
significant inter-period variations as a result of the timing of
resolutions of discounted loans, particularly multi-family residential
and commercial real estate loans and non-performing single-family
residential loans, interest on which is recognized on a cash basis, and
the mix of the overall portfolio between performing and non-performing
loans. In addition, the volume of discounted loans acquired by the
Company may vary over time, thereby affecting results of operations in
future periods as the quantity of loans resolved in any one time period
may be affected.
MULTI-FAMILY RESIDENTIAL, COMMERCIAL REAL ESTATE AND CONSTRUCTION
LENDING ACTIVITIES. The Company's lending activities currently include
(though to a lesser extent than in previous years) nationwide loans
secured by existing commercial real estate, particularly hotels and
office buildings, and existing multi-family residential real estate. In
addition, from time to time the Company originates loans for the
construction of multi-family residential real estate and land
acquisition and development loans (again, to a lesser extent than in
previous years). Multi-family residential real estate, commercial real
estate and construction lending generally are considered to involve a
higher degree of risk than single-family residential lending due to a
variety of factors, including generally larger loan balances, the
dependency on successful completion or operation of the project for
repayment, the difficulties in estimating construction costs and loan
terms which often require little or no amortization of the loan over
its term (typically five years) and, instead, provide for a balloon
payment at stated maturity. Furthermore, mezzanine loans, which are
subordinate to senior loans, and construction loans generally have
higher loan-to-value ratios than conventional loans. Although the
Company's borrowers generally have an equity investment of 10% to 15%
of total project costs, such equity may not be sufficient to protect
the Company's investment in these higher-yielding loans. There can be
no assurance that any multi-family residential, commercial real estate
and construction lending activities engaged in by the Company risks
also related to loans already made will not be adversely affected by
these and the other risks related to such activities.
SUB-PRIME FAMILY RESIDENTIAL LENDING ACTIVITIES. The Company's
lending activities also continue to include the origination or purchase
on a nationwide basis of single-family residential loans made to
borrowers who have significant equity in the properties which secure
the loans but who, because of prior credit problems, the absence of a
credit history or other factors, are unable or unwilling to qualify as
borrowers under federal agency guidelines. These loans are offered
pursuant to various programs, including programs which provide for
reduced or no documentation for verifying a borrower's income and
employment. Sub-prime loans present a higher level of risk of
delinquency or default than loans made to more creditworthy borrowers,
and may not be as saleable as loans which conform to the guidelines
established by various federal agencies. While the Company believes
that the business practices it employs enable it to reduce higher risks
inherent in these loans, no assurance can be given that such practices
will afford adequate protection against higher delinquencies,
foreclosures or losses than anticipated, and as a result, the Company's
financial condition or results of operation could be adversely
affected.
2
<PAGE>
ENVIRONMENTAL RISKS OF LOAN ACQUISITION AND LENDING ACTIVITIES.
The Company evaluates the potential for significant environmental
problems prior to acquiring or originating a loan because there is a
risk for any mortgage loan, particularly a multifamily residential and
commercial real estate loan, that hazardous substances or other
environmentally restricted substances could be discovered on the
related real estate. Through foreclosure, the Company could become the
owner of the real estate that secured its loan and might be required to
remove such substances from the affected properties or to engage in
abatement procedures at its sole cost and expense. There can be no
assurance that the cost of such removal or abatement will not
substantially exceed the value of the affected properties or the loans
secured by such properties, that the Company would have adequate
remedies against the prior owners or other responsible parties or that
the Company would be able to resell the affected properties either
prior to or following completion of any such removal or abatement
procedures. If such environmental problems are discovered prior to
foreclosure, the Company generally will not foreclose on the related
loan; however, the value of such property as collateral will generally
be substantially reduced, and as a result, the Company may suffer a
loss upon collection of the loan.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. The
Company invests in low-income housing tax credit interests (generally
limited partnerships) in order to obtain federal income tax credits
which are allocated pursuant to Section 42 of the Internal Revenue Code
of 1986, as amended (the "Code"). There are many uncertainties and
risks associated with an investment in low-income housing tax credit
interests, including the risks involved in the construction, lease-up
and operation of multi-family residential real estate, the investor's
ability to earn sufficient income to utilize the tax credits resulting
from such investments in accordance with the requirements of the Code
and the possibility of required recapture of previously-earned tax
credits. In addition, there are numerous tax risks associated with tax
credits resulting from potential changes to the Code.
INVESTMENTS IN MORTGAGE-RELATED SECURITIES. From time to time the
Company invests in a variety of mortgage-related securities, such as
senior, subordinate and residual interests in collateralized mortgage
obligations ("CMOs"), including CMOs which have qualified as Real
Estate Mortgage Investment Conduits. These investments include
so-called stripped mortgage-related securities, in which interest
coupons may be stripped from a mortgage security to create an
interest-only strip, where the investor receives all of the interest
cash flows and none of the principal, and a principal-only ("PO")
strip, where the investor receives all of the principal cash flows and
none of the interest. Some mortgage-related securities, such as IO
strips, PO strips and residual interests, exhibit considerably more
price volatility than mortgages or ordinary mortgage pass-through
securities, due in part to the uncertain cash flows that result from
changes in the prepayment rates of the underlying mortgages. Other
mortgage-related securities, such as subordinate interests, also
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 such senior classes. The Company
generally acquires subordinate and residual interests primarily in
connection with the securitization of its loans, particularly
single-family residential loans to non-conforming borrowers and
discounted loans, and under circumstances in which it continues to
service the loans which back the related securities. The Company has
sought to offset the risk of changing interest rates on certain of its
mortgage-related securities by selling U.S. Treasury futures contracts
and through other hedging techniques, and believes that the resulting
interest-rate sensitivity profile compliments the Company's overall
exposure to changes in interest rates. See "--Economic Conditions"
below. Although generally intended to reduce the effects of changing
interest rates on the Company, investments in certain mortgage-related
securities and hedging transactions could cause the Company to
recognize losses depending on the terms of the instrument and the
interest rate environment.
RISK OF FUTURE ADJUSTMENTS TO ALLOWANCES FOR LOSSES
The Company believes that it has established adequate allowances
for losses for each of its loan portfolio and discounted loan portfolio
in accordance with generally accepted accounting principles. Future
additions to these allowances, in the form of provisions for losses on
loans and discounted loans, may be necessary, however, due to changes
in economic conditions, increases in loans and discounted loans and the
performance of the Company's loan and discounted loan portfolios.
3
<PAGE>
In addition, the OTS, as part of its examination process, periodically
reviews the Company's allowances for losses and the carrying value of
its assets. As a result of OTS reviews, the Company in the past has
increased its allowances for losses on loans and discounted loans and
written down the carrying value of certain loans. There can be no
assurance that the Company will not determine, at the request of the
OTS or otherwise, to further increase its allowances for losses on
loans and discounted loans or adjust the carrying value of its real
estate owned or other assets. Increases in the Company's provisions for
losses on loans would adversely affect the Company's results of
operations.
RISKS RELATED TO REAL ESTATE OWNED
GENERAL. The Company's real estate owned consists almost entirely
of single-family residential real estate and multi-family residential
and commercial real estate acquired by foreclosure or deed-in-lieu
thereof on loans in the Company's discounted loan portfolio. Generally,
real estate owned properties are non-earning assets, although
multi-family residential and commercial real estate owned may provide
some operating income to the Company depending on the circumstances.
Such operating income may be affected by problems experienced by
lessees, which may weaken their financial condition and result in
failure to make rental payments when due. At any time, a lessee of the
Company's properties may seek the protection of bankruptcy laws, which
could result in rejection and termination of the lessee's lease and
thereby cause a reduction in cash flow available for distribution to
the Company. Moreover, the value of real estate can be significantly
affected by adverse changes in national or local economic conditions,
competition from other properties offering the same or similar
services, changes in interest rates and in the availability, cost and
terms of mortgage funds, acts of nature, including earthquakes,
hurricanes and other natural disasters, and other factors which are
beyond the control of the Company. These factors may require the
establishment of provisions for losses to ensure that real estate owned
properties are carried at the lower of cost or fair value, less
estimated costs to dispose of the properties, which may adversely
affect operations. Real estate owned also requires increased allocation
of resources and expense to the management and work out of the asset,
property taxes and compliance with respect to environmental laws and
the Americans with Disabilities Act of 1990, which can also adversely
affect operations. There can be no assurance that the amount of the
Company's real estate owned will not increase in the future as a result
of the Company's discounted loan acquisition and resolution activities
and the Company's single-family residential, multi-family residential,
commercial real estate and construction lending activities.
ENVIRONMENTAL RISKS. Operating costs and the value of real
property may be affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and regulations,
as well as the cost of future legislation. Under various federal, state
and local environmental laws, ordinances and regulations, a current or
previous owner or operator of real property may be liable for the costs
of removal or remediation of hazardous or toxic substances on, under or
in such property. Such laws often impose liability whether or not the
owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Therefore, an environmental liability
could have a material adverse effect on the underlying value of a real
property, and the revenue therefrom. Although the Company believes that
its pre-acquisition due diligence identified all material environmental
concerns which relate to its current investments in real estate and
accurately assessed the costs and liabilities to be concurred by it in
this regard, there can be no assurance that such investments will not
raise material unanticipated environmental concern or costs in the
future.
RISKS ASSOCIATED WITH ACQUISITIONS AND DIVESTITURES
Acquiring businesses and assets has been and may continue to be
an important focus of the Company's strategic efforts. Any acquisitions
could vary in size and may include those that are large relative to the
Company. There can be no assurance that suitable acquisition candidates
can be identified, that financing for such acquisitions would be
available on satisfactory terms, that the Company would be able to
accomplish its strategic objectives as a result of any such
acquisitions, that any business or assets acquired by the Company would
be integrated successfully or that integration of acquired businesses
would not divert management resources or otherwise have a material
adverse effect on the Company's business, financial condition or
results of operations. The Company is continually evaluating possible
acquisitions and engages in discussions with acquisition candidates
from time to time.
4
<PAGE>
In addition, in the event that the Company chooses to divest any
business or sell any asset in the future, there can be no assurance
that a suitable purchaser could be identified, that the Company would
be able to accomplish its strategic objectives as a result of any such
sale, that any proposed asset or business sold by the Company would be
completed or that the separation of any such asset or business from the
Company would not diminish management resources or otherwise have a
material adverse effect on the Company's business, financial condition
or results of operations.
ABILITY TO MANAGE GROWTH
The Company has grown rapidly in the past and may continue to
grow rapidly in the future. If so, continued growth can be expected to
place a significant strain on the Company's management operations,
employees and resources. The Company's ability to support, manage and
control continued growth is dependent upon, among other things, its
ability to hire, train, supervise and manage its workforce and to
continue to develop the skills necessary for the Company to compete
successfully. There can be no assurance that the Company will be able
to manage effectively its expanding operations or achieve growth as
planned on a timely or profitable basis. If the Company is unable to
manage growth effectively, its business, results of operations or
financial condition could be materially adversely affected.
RISKS ASSOCIATED WITH PARTNERING
On July 28, 1998, the Company announced that it has engaged an
investment bank to identify potential business partners who can enable
the Company to expand its franchise both domestically and
internationally. Any transaction resulting therefrom could take on many
different forms, including a merger. No assurance can be given that the
Company will identify a business partner and transaction that will
satisfy its objectives or, if so identified, that such objectives will
be achieved.
INTERNATIONAL OPERATIONS
The Company conducts business in the United States and the United
Kingdom and may explore opportunities outside of these markets. The
Company's U.K. operations are subject to most of the same risks
associated with its U.S. operations, as well as additional risks, such
as unexpected changes in U.K. and European regulatory requirements,
difficulties in managing international operations, potentially adverse
tax consequences, enhanced accounting and control expenses and the
burden of complying with foreign laws. Changes in foreign currency
exchange rates may also affect the value of the Company's U.K. assets
and the gains realized from the sale of such assets. Although the
Company implements hedging strategies to limit the effects of currency
exchange rate fluctuations on the Company's results of operations,
currency hedging strategies, like those for interest rates, may not
perform their intended purpose. See "--Economic Conditions". There can
be no assurance that such factors will not have a material adverse
effect on the Company's business, results of operations or financial
condition. In addition, the Company's management has only limited
international experience outside of the U.S. and the U.K, which could
limit the Company's ability to capitalize on investment opportunities
that may arise elsewhere.
REGULATION AND REGULATORY CAPITAL REQUIREMENTS
Both the Company, as a savings and loan holding company, and the
Bank, as a federally-chartered savings institution, are subject to
significant governmental supervision and regulation, which is intended
primarily for the protection of depositors. Statutes and regulations
affecting the Company and the Bank may be changed at any time, and the
interpretation of these statutes and regulations by examining
authorities also is subject to change. There can be no assurance that
future changes in applicable statutes and regulations or in their
interpretation will not adversely affect the business of the Company.
The applicable regulatory authorities may, as a result of such
regulation and examination, impose regulatory sanctions upon the
Company or the Bank, as applicable, as well as various requirements or
restrictions which could adversely affect their business activities.
5
<PAGE>
A substantial portion of the Bank's operations involves businesses that
are not traditionally conducted by savings institutions and, as a
result, there can be no assurance that future actions by applicable
regulatory authorities, or future changes in applicable statutes or
regulations, will not limit or otherwise adversely affect the Bank's
ability to engage in such activities.
Following an examination of the Bank in late 1996 and early 1997,
the staff of the Office of Thrift Supervision (the "OTS") expressed
concern about many of the Bank's non-traditional operations (which are
discussed under "--Risks Related to Non-Traditional Operating
Activities" above) and the adequacy of the Bank's capital in light of
the Bank's lending and investment strategies. As a result of such
examination, the Bank committed to the OTS to maintain, commencing on
June 30, 1997, regulatory capital ratios which significantly exceed the
requirements which are generally applicable to federally-chartered
savings institutions such as the Bank. Specifically, the Bank has
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 requirements of general applicability are 3% and 8%,
respectively). At December 31, 1998, the Bank's core capital, Tier 1
risk-based capital and total risk-based capital ratios amounted to
9.07%, 11.71% and 17.26%, respectively. 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 that it committed
to maintain. Under applicable laws and regulations, an institution is
considered to be "well-capitalized" if it maintains a total risk-based
capital ratio of 10.0% or more, a Tier 1 risk-based capital ratio of
6.0% or more and a core capital (leverage) ratio of 5.0% or more and is
not subject to a written agreement, order or directive issued by an
appropriate agency to meet and maintain a specific capital level for
any capital measure.
There can be no assurance that in the future the OTS either will
agree to a decrease in the 9% core capital (leverage) ratio and the 13%
total risk-based capital ratio committed to be maintained by the Bank
or will not seek an increase in such requirements. Unless and until
these regulatory capital requirements are decreased, the Bank's ability
to leverage its capital through future growth in assets (including its
ability to continue growing at historical rates) will be adversely
affected, as will the Company's ability to receive dividends from the
Bank, which are a primary source of payments on outstanding
indebtedness and other expenses of the Company. Although the Company
and its non-banking subsidiaries will not be restricted in their growth
by these capital requirements, because they do not have access to the
Bank's funding sources, their profitability may be different from the
Bank's for particular types of businesses. In addition, there can be no
assurance that the Bank will continue to meet the regulatory capital
requirements that it has committed to maintain or that the OTS will not
formally impose such requirements pursuant to a written agreement,
order or directive, which would cause the Bank to cease to be a
"well-capitalized" institution under applicable laws and regulations.
In the event that the Bank ceased to be a "well-capitalized"
institution, the Bank would be prohibited from accepting, renewing or
rolling over its brokered and other wholesale deposits, which are its
principal source of funding, without the prior approval of the FDIC,
and the Bank could become subject to other regulatory restrictions on
its operations.
ECONOMIC CONDITIONS
GENERAL. The success of the Company is dependent to a certain
extent upon the general economic conditions in the geographic areas in
which it conducts substantial business activities. Adverse changes in
national economic conditions or in the economic conditions of regions
in which the Company conducts substantial business likely would impair
the ability of the Company to collect on outstanding loans or dispose
of real estate owned and would otherwise have an adverse effect on its
business, including the demand for new loans, the ability of customers
to repay loans and the value of both the collateral pledged to the
Company to secure its loans and its real estate owned. Moreover,
earthquakes and other natural disasters could have similar effects.
Although such disasters have not significantly adversely affected the
Company to date, the availability of insurance for such disasters in
California, in which the Company conducts substantial business
activities, is severely limited. Moreover, changes in building codes
and ordinances, environmental considerations and other factors also
might render infeasible the use of insurance proceeds to replace
damaged or destroyed property. Under such circumstances, the insurance
proceeds received by a borrower or the Company might not be adequate to
restore the Company's economic position with respect to the affected
collateral or real estate.
6
<PAGE>
EFFECTS OF CHANGES IN INTEREST RATES. The Company's operating
results depend to a large extent on its net interest income, which is
the difference between the interest income earned on interest-earning
assets and the interest expense incurred in connection with its
interest-bearing liabilities. Changes in the general level of interest
rates can affect the Company's net interest income by affecting the
spread between the Company's return on interest-earning assets and the
Company's cost of interest-bearing liabilities, as well as, among other
things, the ability of the Company to originate loans; the value of the
Company's interest-earning assets and its ability to realize gains from
the sale of such assets; the average life of the Company's
interest-earning assets; the value of the Company's mortgage servicing
rights; and the Company's ability to obtain deposits in competition
with other available investment alternatives. Interest rates are highly
sensitive to many factors, including governmental monetary policies,
domestic and international economic and political conditions and other
factors beyond the control of the Company. Although management believes
that the maturities of the Company's assets are well balanced in
relation to its liabilities (which involves various estimates and
assumptions, including as to how changes in the general level of
interest rates will impact its assets and liabilities), there can be no
assurance that the profitability of the Company would not be adversely
affected during any period of changing interest rates.
POTENTIAL ADVERSE EFFECTS OF HEDGING STRATEGIES. The Company may
utilize a variety of financial instruments, including interest rate
swaps, caps, floors and other interest rate exchange contracts, in
order to limit the effects of interest rates on its operations. Among
the risks inherent with respect to the purchase and/or sale of such
derivative instruments are (i) interest rate risk, which consists of
the risks relating to fluctuating interest rates; (ii) basis risk,
which consists of the risk of loss associated with variations in the
spread between the asset yield and the funding and/or hedge costs;
(iii) credit or default risk, which consists of the risk of insolvency
or other inability of the counterparty to a particular transaction to
perform its obligations thereunder; (iv) prepayment risk, which
consists of reinvestment risk to the extent the Company is not able to
reinvest repayments, if any, at a yield which is comparable to the
yield being generated on the particular security; (v) liquidity risk,
which consists of the risk that the Company may not be able to sell a
particular security at a particular price; (vi) legal enforceability
risk, which consists of the risks related to the Company's ability to
enforce the terms of a particular instrument or to obtain or collect
upon a legal judgment in the United States in the event that the
counterparty to the transaction is a foreign entity or the underlying
collateral is located in a foreign jurisdiction; and (vii) volatility
risk, which consists of the risk that actual volatility (i.e., the
degree of uncertainty relating to the price of the underlying asset)
differs from the historical volatility or "implied" volatility of the
instrument.
RISKS RELATED TO RELIANCE ON BROKERED AND OTHER WHOLESALE DEPOSITS
The Company currently utilizes as its principal source of funds
certificates of deposit obtained through national investment banking
firms which obtain funds from their customers for deposit with the
Company ("brokered deposits") and, to a lesser extent, certificates of
deposit obtained from customers of regional and local investment
banking firms and direct solicitation efforts by the Company of
institutional investors and high net worth individuals. The Company
believes that the effective cost of brokered and other wholesale
deposits, as well as other non-branch dependent sources of funds, such
as securities sold under agreements to repurchase ("reverse repurchase
agreements") and advances from the Federal Home Loan Board ("FHLB") of
New York, generally is more attractive to the Company than deposits
obtained through branch offices after the general and administrative
costs associated with operating a branch office network are taken into
account. However, such funding sources, when compared to retail
deposits attracted through a branch network, are generally more
sensitive to changes in interest rates and volatility in the capital
markets and their availability and terms are more likely to be subject
to competitive pressures. In addition, such funding sources may be more
sensitive to significant changes in the financial condition of the
Company. There are also regulatory limitations on an insured
institution's ability to solicit and obtain brokered deposits in
certain circumstances, which currently are not applicable to the Bank
because of its status as a "well capitalized" institution under
applicable laws and regulations. See "--Regulation and Regulatory
Capital Requirements" above. As a result of the Company's reliance on
brokered and other wholesale deposits, significant changes in
prevailing interest rates, in the availability of alternative
investments for individual and institutional investors or in the
Company's financial condition, among other factors, could have a much
more significant effect on the Company's liquidity and results of
operations than might be the case with an institution that attracted a
greater portion of its funds from retail or core deposits obtained
through a branch network.
7
<PAGE>
RISKS ASSOCIATED WITH CURRENT SOURCES OF LIQUIDITY AND ADDITIONAL
FINANCING FOR GROWTH
CURRENT SOURCES OF LIQUIDITY. The Company's primary sources of
funds for liquidity consist of deposits, FHLB advances, reverse
repurchase agreements, lines of credit and maturities and principal
payments on loans and securities and proceeds from sales thereof. An
additional significant source of asset liquidity stems from the
Company's ability to securitize assets such as discount loans and
sub-prime loans. The Company believes that its existing sources of
liquidity 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 Company's ability to increase its liquidity position. The inability
of the Company to maintain adequate sources of liquidity, including as
a result of the failure to extend or replace existing lines of credit
or as a result of the factors described under "--Risks Related to
Reliance on Brokered and Other Wholesale Deposits" above or "Risks of
Securitization" below, could have a material adverse effect on the
Company's business, financial condition or results of operations.
ADDITIONAL FINANCING FOR GROWTH. The Company's ability to enter
into certain business lines as opportunities emerge depends to a
significant degree on its ability to obtain additional indebtedness,
obtain additional equity capital or have access to other sources of
capital (e.g., through partnering, joint venturing or other economic or
contractual relationships). The Company has no commitments for
borrowings in addition to those under its current debt securities and
lines of credit, no commitments for future sales of equity capital and
no commitments to provide access to other sources of capital. There can
be no assurance that the Company will be successful in consummating
future financing transactions, if any, on terms satisfactory to the
Company, if at all. Factors which could affect the Company's access to
the capital markets or other economic or contractual relationships, or
the conditions under which the Company could obtain additional
financing, involve the perception in the capital markets and the
financial services industry of the Company's business, results of
operations, leverage, financial condition and business prospects. Each
of these factors is to a large extent subject to economic, financial
and competitive factors beyond the Company's control. In addition,
covenants under the Company's current debt securities and lines of
credit do, and future ones may, significantly restrict the Company's
ability to incur additional indebtedness, to issue Preferred Stock and
to enter into certain other contractual relationships.
RISKS ASSOCIATED WITH HOLDING COMPANY STRUCTURE
As a holding company, the ability of the Company to pay
dividends, to pay indebtedness and to conduct its financial operating
activities directly or in non-banking subsidiaries will depend
significantly on the receipt of dividends or other distributions from
the Bank, as well as any cash reserves and other liquid assets held by
the Company, any proceeds from securities offerings or other borrowings
and any dividends from non-banking subsidiaries of the Company. The
ability of the Bank to pay dividends or make other distributions to the
Company generally is dependent on the Bank's compliance with applicable
regulatory capital requirements and regulatory restrictions.
The Bank's ability to make capital distributions as a Tier 1
association pursuant to the OTS capital distribution regulation are
limited by the regulatory capital levels which it has committed to the
OTS it would maintain, commencing on June 30, 1997. As a result of an
agreement between the Bank and the OTS to dividend subordinate and
residual mortgage-related securities resulting from securitization
activities conducted by the Bank, which had an aggregate carrying value
of $13.9 million at December 31, 1998, the Bank may be limited in its
ability to pay cash dividends to the Company.
8
<PAGE>
In addition to the foregoing limitations, there are certain
contractual restrictions on the Bank's ability to pay dividends set
forth in the Indenture, dated as of June 12, 1995, between the Bank and
the Bank of New York, as trustee, relating to the Bank's issuance in
June 1995 of $100 million of 12% Subordinated Debentures due 2005, and
there are certain contractual restrictions on the ability of the
Company and the Bank to pay dividends set forth in the Indenture, dated
as of September 30, 1996, between the Company and Bank One, Columbus,
NA, as trustee, relating to the Company's issuance in September 1996 of
$125 million of 11.875% Notes due 2003, as well as in the Indenture,
dated as of August 12, 1997, between the Company and The Chase
Manhattan Bank, as trustee, relating to the Company's issuance in
August 1997 of $125 million of 10.875% Junior Subordinated Debentures
due 2027. In addition, the right of the Company to participate in any
distribution of assets of any subsidiary, including the Bank, upon such
subsidiary's liquidation or reorganization or otherwise, will be
subject to the prior claims of creditors of that subsidiary, except to
the extent that any claims of the Company as a creditor of such
subsidiary may be recognized as such.
RISKS OF SECURITIZATION
The Company has historically generated a significant amount of
revenues, earnings and cash flows from its pooling and selling through
securitizations of mortgages and other loans originated or purchased by
the Company. Adverse changes in the secondary market for such loans
could impair the Company's ability to originate or sell mortgages and
other loans on a favorable or timely basis. Accordingly, such
impairments could have an adverse effect upon the Company's business
and results of operations. Market and other considerations, including
rating agency requirements, could also affect the timing of such
transactions. Any delay in the sale of loans beyond the reporting
period in which such sale is anticipated to take place would delay any
expected gains and adversely affect the Company's reported earnings for
such reporting period. In addition, the Company retains some degree of
credit risk on substantially all loans sold. During the period of time
that loans are held pending sale, the Company is at risk for loan
delinquencies and defaults and the risk that the rapid increase in
interest rates would result in a decline in the value of loans to
potential purchasers. Following the sale of loans through a
securitization, the Company's direct risk with respect to loan
delinquency or default on such loan is limited to those circumstances
in which it is required to repurchase such loan due to a breach of a
representation or warranty in connection with the securitization.
COMPETITION
The businesses in which the Company is engaged generally are
highly competitive. The acquisition of discounted loans is particularly
competitive, as acquisitions of such loans are often based on
competitive bidding. The Company also encounters significant
competition in connection with its other lending activities, its
investment activities, its deposit-gathering activities and its
servicing activities. Many of the Company's competitors are
significantly larger than the Company and have access to greater
capital and other resources. In addition, many of the Company's
competitors are not subject to the same extensive federal regulation
that govern federally-insured institutions such as the Bank and their
holding companies. As a result, many of the Company's competitors have
advantages over the Company in conducting certain businesses and
providing certain services.
POTENTIAL CONFLICTS OF INTEREST INVOLVING OCWEN ASSET INVESTMENT CORP.
The Company will be subject to various potential conflicts of
interest arising from the relationship between Ocwen Asset Investment
Corp. ("OAC"), a real estate investment trust that specializes in
investments in real estate and real estate-related assets in which the
Company also may invest, directly or indirectly, through the Bank, and
the Company and Ocwen Capital Corporation ("OCC"), a wholly-owned
subsidiary of the Company that manages OAC. Historically, OAC has
invested primarily in (i) subordinate and residual interests in
commercial and residential mortgage-backed securities; (ii) distressed
commercial and multi-family residential real estate, including
properties acquired by a mortgage lender by foreclosure or by
deed-in-lieu thereof and underperforming or otherwise distressed real
property (collectively, "Distressed Real Estate"); and (iii)
single-family residential loans, multi-family residential loans and
commercial real estate loans, including in each case loans that are
current in accordance with their terms or are non-performing or
underperforming. The Company does not intend to invest in subordinate
classes of mortgage-related securities which are not created in
connection with its securitization activities or Distressed Real Estate
and, as a result, the Company, the Bank and OCC generally have agreed
to give OAC an exclusive right to purchase such subordinated classes of
mortgage-related securities and Distressed Real Estate. Both the
Company and OAC may engage in the acquisition and resolution of
mortgage loans, including non-performing and underperforming mortgage
loans, and from time to time each such entity also may invest in
various non-subordinated classes of mortgage-related securities. In
this regard, OCC, which, in addition to managing OAC, conducts the
large multi-family residential and commercial real estate lending
activities of the Company, has in the past acquired loans for OAC (in
order to enable OAC to leverage the proceeds from its initial public
offering ) rather than for the Company. As a result of the similarity
of the Company's and OAC's strategies to invest in certain assets,
there can be no assurance that investment opportunities which
previously would have been taken by the Company will not be allocated
to OAC. In addition, from time to time the Company may sell loans,
securities and real estate owned to OAC, which also would involve
potential conflicts of interest. Although the Company and OAC have
established certain policies and procedures in order to ensure that
sales and other transactions between the Company, the Bank and/or OCC,
on the one hand, and OAC, on the other hand (including, without
limitation, the base compensation to be paid to OCC by OAC for managing
its day-to-day operations), are conducted on an arms'-length basis on
substantially the same terms as would be present in transactions with
unaffiliated parties, there can be no assurance that such procedures
will be sufficient in all situations to solve potential conflicts of
interest.
IMPORTANCE OF THE CHIEF EXECUTIVE OFFICER
William C. Erbey, Chairman and Chief Executive Officer of the
Company, has had, and will continue to have, a significant role in the
development and management of the Company's business. The loss of his
services could have an adverse effect on the Company. The Company and
Mr. Erbey are not parties to an employment agreement, and the Company
currently does not maintain key man life insurance relating to Mr.
Erbey or any of its other officers.
CONTROL OF CURRENT STOCKHOLDERS
As of March 15, 1999, the Company's directors and executive
officers and their affiliates in the aggregate beneficially owned or
controlled 51.9% of the outstanding Common Stock of the Company,
including 32.0% owned or controlled by William C. Erbey, Chairman and
Chief Executive Officer of the Company, and 15.4% owned or controlled
by Barry N. Wish, currently a director and formerly the Chairman of the
Company. As a result, these shareholders, acting together, would be
able effectively to control virtually all matters requiring approval by
the shareholders of the Company, including amendment of the Company's
Articles of Incorporation, the approval of mergers or similar
transactions and the election of all directors.
SOFTWARE PRODUCT DEVELOPMENT; TECHNOLOGICAL CHANGE
The Company's wholly-owned subsidiary, Ocwen Technology Xchange,
Inc. ("OTX"), licenses the Company's mortgage loan servicing resolution
and work flow technology to third parties in the mortgage and real
estate industries. The products offered by OTX have resulted from the
enhancement of software products acquired through the Company's
purchases of Amos, Inc., a developer of mortgage loan servicing
software, and DTS Communication, Inc., a real estate technology
company, with the Company's own proprietary technology. While the
Company believes it has developed products attractive to the mortgage
and real estate industries, the computer software industry is subject
to rapid technological change, changing customer requirements, frequent
new product introductions and evolving industry standards that may
render existing products and services obsolete.
9
<PAGE>
There can be no assurance that OTX will not experience future
difficulties that could delay or prevent the successful development,
introduction and marketing of its products, or that its products and
product enhancements will meet the requirements of the marketplace and
achieve market acceptance. If OTX is unable to develop and introduce
products of marketable quality in a timely manner in response to
changing market conditions or customer requirements, the Company's
business, operating results and financial condition could be adversely
affected.
DEPENDENCE ON PROPRIETARY INFORMATION
The Company's success is in part dependent upon its proprietary
information and technology. The Company relies on a combination of
copyright, trade secret and contract protection to establish and
protect its proprietary rights in its products and technology. The
Company generally enters into confidentiality agreements with its
management and technical staff and limits access to and distribution of
its proprietary information. There can be no assurance that the steps
taken by the Company in this regard will be adequate to deter
misappropriation of its proprietary rights or information or
independent third party development of substantially similar products
and technology. Although the Company believes that its products and
technology do not infringe any proprietary rights of others, the
growing use of copyrights and patents to protect proprietary rights has
increased the risk that third parties will increasingly assert claims
of infringement in the future.
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 the
objective of having 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.
During 1998, the Company substantially completed the systems
identification and evaluation phases of the project as well as
remediation and validation of its mission critical systems. During
1999, the Company is focusing on any remaining validation tasks,
including remediation and validation of its non-mission critical
systems and end-to-end testing with third parties.
Because the Company has validated the year 2000 readiness of its
mission critical systems and has developed business continuity plans to
accommodate unforeseen disruptions, the Company believes that its most
reasonably likely worst case year 2000 scenarios are characterized by
potential failures of non-critical vendor or customer computer systems
or end-to-end disruptions involving as yet unidentified, and hence
untested, third-party systems and records stored on those systems. The
Company could experience disruptions across all business segments as a
result of year 2000 systems failures at government agencies, utilities,
telecommunications providers, couriers and financial services vendors,
among others. Concerning specific Company business functions, data
acquired from third-parties might contain year 2000 incompatible
components, which could impact the timeliness of third-party loan
servicing functions such as payment processing or loan resolution. In
addition, loans acquired by the Company could experience increased
borrower or tenant defaults stemming from year 2000 related business
shortfalls, dislocations or delays. Such risks could also impact the
value of the Company's portfolio of mortgage-backed securities, as
these are dependent upon the underlying pool of mortgage loans. There
can be no assurance that such risks, if realized individually or
collectively, would not have a material adverse effect on the Company's
business, results of operations or financial condition.
10
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OCWEN
FINANCIAL CORPORATION'S CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND
STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS FROM ITS FILING ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998.
</LEGEND>
<CIK> 0000873860
<NAME> OCWEN FINANCIAL CORP.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 107,476
<INT-BEARING-DEPOSITS> 18,127
<FED-FUNDS-SOLD> 75,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 733,271
<INVESTMENTS-CARRYING> 10,825
<INVESTMENTS-MARKET> 10,825
<LOANS> 1,274,867 <F1>
<ALLOWANCE> 26,258 <F2>
<TOTAL-ASSETS> 3,012,267
<DEPOSITS> 1,874,553
<SHORT-TERM> 227,780 <F3>
<LIABILITIES-OTHER> 69,246
<LONG-TERM> 279,236
0
0
<COMMON> 608
<OTHER-SE> 435,379
<TOTAL-LIABILITIES-AND-EQUITY> 3,012,267
<INTEREST-LOAN> 89,744 <F4>
<INTEREST-INVEST> 33,883
<INTEREST-OTHER> 5,454
<INTEREST-TOTAL> 129,081
<INTEREST-DEPOSIT> 50,387
<INTEREST-EXPENSE> 76,636
<INTEREST-INCOME-NET> 52,445
<LOAN-LOSSES> 4,362
<SECURITIES-GAINS> 4,394
<EXPENSE-OTHER> 101,992 <F5>
<INCOME-PRETAX> 7,051
<INCOME-PRE-EXTRAORDINARY> 7,051
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,783
<EPS-BASIC> (.10)
<EPS-DILUTED> (.10)
<YIELD-ACTUAL> 12.29
<LOANS-NON> 553,381
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,330
<CHARGE-OFFS> 4,658
<RECOVERIES> 224
<ALLOWANCE-CLOSE> 26,258
<ALLOWANCE-DOMESTIC> 26,258
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> Includes Loans Available for Sale of $132,425, Loan Portfolio of
$133,678, and Discount Loan Portfolio of $1,008,764.
<F2> Includes Allowance for Loan Losses on Loan Portfolio of $5,853 and on
the Discount Loan Portfolio of $20,405.
<F3> Includes Securities sold under agreements to repurchase of $133,741 and
Obligations outstanding under lines of credit of $94,039.
<F4> Includes Interest Income on Loans Available for Sale of $19,144, Loan
Portfolio of $15,044, and Discount Loans of $55,556.
<F5> Includes Non-interest expense of $99,908 and Distributions on Company
obligated, Mandatorily Redeemable Securities of Subsidiary Trust
Holding Solely Junior Subordinated Debentures of the Company of $6,797.
</FN>
</TABLE>
