UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
November 11, 1999: 71,450,515.
<PAGE>
OCWEN FINANCIAL CORPORATION
FORM 10-Q
I N D E X
================================================================================
PART I - FINANCIAL INFORMATION Page
Item 1. Interim Consolidated Financial Statements (Unaudited)............... 3
Consolidated Statements of Financial Condition
at September 30, 1999 and December 31, 1998....................... 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1999 and 1998.................... 4
Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 1999 and 1998........... 5
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended September 30, 1999...................... 6
Consolidated Statements of Cash Flows for the nine
months ended September 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......................................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 58
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................... 63
Signature.................................................................... 65
2
<PAGE>
<TABLE>
<CAPTION>
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)
September 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Assets:
Cash and amounts due from depository institutions ............................... $ 94,517 $ 120,805
Interest earning deposits ....................................................... 161,991 49,374
Federal funds sold .............................................................. -- 275,000
Securities available for sale, at fair value .................................... 545,798 593,347
Loans available for sale, at lower of cost or market ............................ 66,829 177,847
Investment in capital stock of Federal Home Loan Bank, at cost .................. 10,825 10,825
Loan portfolio, net ............................................................. 127,026 230,312
Discount loan portfolio, net .................................................... 974,472 1,026,511
Investments in low-income housing tax credit interests .......................... 161,776 144,164
Investment in unconsolidated entities ........................................... 76,407 86,893
Real estate owned, net .......................................................... 178,349 201,551
Investment in real estate ....................................................... 15,165 36,860
Premises and equipment, net ..................................................... 49,083 33,823
Income taxes receivable ......................................................... 14,213 34,333
Deferred tax asset .............................................................. 98,548 66,975
Excess of purchase price over net assets acquired, net .......................... 16,746 12,706
Principal, interest and dividends receivable .................................... 9,555 18,993
Escrow advances on loans and loans serviced for others........................... 127,225 88,277
Other assets .................................................................... 72,916 99,483
----------- -----------
$ 2,801,441 $ 3,308,079
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ..................................................................... $ 1,776,646 $ 2,175,016
Securities sold under agreements to repurchase ............................... 109,383 72,051
Obligations outstanding under lines of credit ................................ 49,849 179,285
Notes, debentures and other interest bearing obligations ..................... 221,956 225,000
Accrued interest payable ..................................................... 36,924 33,706
Accrued expenses, payables and other liabilities ............................. 44,203 61,053
----------- -----------
Total liabilities .......................................................... 2,238,961 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 ............................................................... 86 592
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; 60,115,656 and
60,800,357 shares issued and outstanding at September 30, 1999
and December 31, 1998, respectively ........................................ 608 608
Treasury Stock, 690,800 shares at September 30, 1999 ......................... (5,302) --
Additional paid-in capital ................................................... 166,276 166,234
Retained earnings ............................................................ 275,730 257,170
Accumulated other comprehensive income, net of taxes:
Unrealized gain on securities available for sale ........................... 966 14,057
Net unrealized foreign currency translation loss ........................... (884) (1,693)
----------- -----------
Total stockholders' equity ................................................. 437,394 436,376
----------- -----------
$ 2,801,441 $ 3,308,079
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
For the periods ended September 30,
Interest income:
Federal funds sold and repurchase agreements ...................... $ 958 $ 2,508 $ 6,412 $ 4,944
Securities available for sale ..................................... 15,350 8,982 48,199 25,654
Loans available for sale .......................................... 6,233 11,391 25,376 46,185
Loans ............................................................. 3,941 13,771 18,985 31,688
Discount loans .................................................... 29,035 50,274 84,591 129,352
Investment securities and other ................................... 502 1,616 1,537 3,634
------------ ------------ ------------ ------------
56,019 88,542 185,100 241,457
------------ ------------ ------------ ------------
Interest expense:
Deposits .......................................................... 24,779 31,146 75,166 87,668
Securities sold under agreements to repurchase .................... 2,120 1,168 5,891 4,869
Obligations outstanding under lines of credit ..................... 3,164 8,777 12,219 28,496
Notes, debentures and other interest bearing obligations .......... 6,724 6,767 20,147 20,258
------------ ------------ ------------ ------------
36,787 47,858 113,423 141,291
------------ ------------ ------------ ------------
Net interest income before provision for loan losses .............. 19,232 40,684 71,677 100,166
Provision for loan losses ......................................... 826 1,806 5,188 13,734
------------ ------------ ------------ ------------
Net interest income after provision for loan losses ............... 18,406 38,878 66,489 86,432
------------ ------------ ------------ ------------
Non-interest income (loss):
Servicing fees and other charges .................................. 19,584 15,348 56,764 39,044
(Loss) gain on interest earning assets, net ....................... (21,075) 24,170 (6,800) 909
(Loss) gain on real estate owned, net ............................. (1,508) 1,216 1,798 12,763
Other income ...................................................... 65,105 14,209 80,731 29,857
------------ ------------ ------------ ------------
62,106 54,943 132,493 82,573
------------ ------------ ------------ ------------
Non-interest expense:
Compensation and employee benefits ................................ 29,451 32,474 80,991 83,721
Occupancy and equipment ........................................... 8,447 9,464 27,816 24,388
Loan expenses ..................................................... 3,992 9,131 10,773 18,826
Net operating loss on investments in real estate and
certain low-income housing tax credit interests ................ 958 2,695 4,179 4,988
Amortization of excess of purchase price over net assets acquired.. 284 2,670 771 3,604
Other operating expenses .......................................... 8,859 9,082 27,368 20,250
------------ ------------ ------------ ------------
51,991 65,516 151,898 155,777
------------ ------------ ------------ ------------
Distributions on Company-obligated, mandatorily redeemable
securities of subsidiary trust holding solely junior
subordinated debentures............................................ (3,400) (3,400) (10,196) (10,196)
Equity in (losses) earnings of investment in unconsolidated entities. (4,768) 2,915 (9,483) 3,459
------------ ------------ ------------ ------------
Income before income taxes .......................................... 20,353 27,820 27,405 6,491
Income tax (expense) benefit ........................................ (8,199) (2,922) (9,595) 2,888
Minority interest in net loss (income) of consolidated subsidiary ... 369 33 497 (2)
------------ ------------ ------------ ------------
Income before extraordinary gain .................................... 12,523 24,931 18,307 9,377
Extraordinary gain on repurchase of subordinated
debentures, net of tax ............................................ 253 -- 253 --
------------ ------------ ------------ ------------
Net income ........................................................ $ 12,776 $ 24,931 $ 18,560 $ 9,377
============ ============ ============ ============
Income per share:
Basic:
Net income before extraordinary gain ........................... $ 0.21 $ 0.41 $ 0.30 $ 0.15
------------ ------------ ------------ ------------
Extraordinary gain ............................................. -- -- .01 --
============ ============ ============ ============
Net income ..................................................... $ 0.21 $ 0.41 $ 0.31 $ 0.15
------------ ------------ ------------ ------------
Diluted:
Net income before extraordinary gain ........................... $ 0.21 $ 0.41 $ 0.30 $ 0.15
============ ============ ============ ============
Extraordinary gain ............................................. -- -- 0.01 --
------------ ------------ ------------ ------------
Net income ..................................................... $ 0.21 $ 0.41 $ 0.31 $ 0.15
============ ============ ============ ============
Weighted average common shares outstanding:
Basic.............................................................. 60,427,623 60,785,467 60,652,865 60,176,777
============ ============ ============ ============
Diluted............................................................ 60,460,314 61,074,499 60,691,416 61,249,163
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Nine Months
--------------------------- -----------------------
For the periods ended September 30, 1999 1998 1999 1998
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income.............................................................. $ 12,776 $ 24,931 $ 18,560 $ 9,377
Other comprehensive income, net of tax:
Unrealized (loss) gain on securities available for sale............... (7,308) (7,368) (8,805) 16,087
Less: Reclassification adjustment .................................... (1,673) -- (4,286) --
----------- ----------- ---------- ----------
Net change in unrealized gains on securities available for sale....... (8,981) (7,368) (13,091) 16,087
----------- ----------- ---------- ----------
Unrealized foreign currency translation adjustment
arising during the period........................................... (117) (972) (375) (2,509)
Less: Reclassification adjustment for
losses on foreign currency translation adjustments
included in net income.............................................. 1,184 -- 1,184 --
----------- ----------- ---------- ----------
Net change in unrealized foreign currency translation adjustment..... 1,067 (972) 809 (2,509)
----------- ----------- ---------- ----------
Other comprehensive (loss) income..................................... (7,914) (8,340) (12,282) 13,578
----------- ----------- ---------- ----------
Comprehensive income ................................................. $ 4,862 $ 16,591 $ 6,278 $ 22,955
=========== =========== ========== ==========
Disclosure of reclassification adjustment:
Unrealized holding losses arising during the period on securities sold. $ (32,871) $ (32,621)
Less: Adjustment for gains included in net income..................... 31,198 28,335
----------- ----------
Net reclassification adjustment for gains recognized in other
comprehensive income (loss) in prior years.......................... $ (1,673) $ (4,286)
=========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
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 .............................. -- -- -- -- 18,560 -- 18,560
Change in unearned directors'
compensation ............................ 6,099 -- 42 -- -- -- 42
Purchase of treasury shares ............. (690,800) -- -- (5,302) -- -- (5,302)
Other comprehensive income, net of taxes:
Change in unrealized gain on
securities available for sale ...... -- -- -- -- -- (13,091) (13,091)
Change in unrealized foreign
currency translation loss .......... -- -- -- -- -- 809 809
----------- --------- ----------- --------- --------- --------- -----------
Balances at September 30, 1999 .......... 60,115,656 $ 608 $ 166,276 $ (5,302) $ 275,730 $ 82 $ 437,394
=========== ========= =========== ========= ========= ========= ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the nine months ended September 30, 1999 1998
- --------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................................... $ 18,560 $ 9,377
Adjustments to reconcile net income to net cash provided
by operating activities:
Net cash provided by trading activities ............................................ 39,264 88,164
Proceeds from sale of loans available for sale ..................................... 557,865 1,198,872
Purchases of loans available for sale .............................................. (54,303) (374,368)
Origination of loans available for sale ............................................ (715,962) (661,664)
Principal payments received on loans available for sale ............................ 24,142 70,463
Premium amortization, net .......................................................... 18,462 70,011
Depreciation and amortization ...................................................... 6,264 13,513
Provision for loan losses .......................................................... 5,188 13,734
Provision for real estate owned .................................................... 21,334 12,561
Gain on sale of Ocwen UK ........................................................... (50,431) --
Loss (gain) on sale of interest-earning assets, net ............................... 6,800 (909)
Gain on sale of real estate owned, net ............................................. (29,591) (33,910)
Gain on sale of investment in real estate .......................................... (1,798) --
Gain on sale of low-income housing tax credit interests .......................... (5,542) (6,867)
Equity in losses (earnings) of unconsolidated entities, net ........................ 9,483 (3,459)
Decrease (increase) in principal, interest and dividends receivable ................ 5,389 (1,111)
Decrease (increase) in income taxes receivable ..................................... 18,741 (37,833)
Increase in deferred tax asset ..................................................... (24,708) (4,102)
Increase in escrow advances ........................................................ (38,948) (5,392)
Decrease (increase) in other assets, net ........................................... (12,059) (119,477)
(Decrease) increase in accrued expenses, interest payable and other liabilities .... 13,329 44,517
----------- -----------
Net cash (used) provided by operating activities ...................................... (188,521) 272,120
----------- -----------
Cash flows from investing activities:
Proceeds from sale of securities available for sale ................................ 633 269,828
Purchase of securities available for sale .......................................... (549,175) (864,280)
Maturities of and principal payments received on securities available for sale ..... 413,568 231,554
Proceeds from the sale of Ocwen UK ................................................. 122,101 --
Investment in low-income housing tax credit interests .............................. (13,720) (34,397)
Proceeds from sale of low income housing tax credit interests ...................... -- 33,828
Proceeds from sale of discount loans ............................................... 259,371 497,650
Proceeds from sale of loans held for investment .................................... 27,306 --
Purchase and origination of loans held for investment, net of
undisbursed loan funds ........................................................... (19,653) (160,046)
Purchase of discount loans ......................................................... (437,106) (730,163)
Increase in investment in unconsolidated entities................................... -- (74,406)
Decrease in real estate held for investment ........................................ 21,306 48,701
Principal payments received on loans held for investment ........................... 94,577 202,648
Principal payments received on discount loans ...................................... 130,401 399,065
Proceeds from sale of real estate owned ............................................ 192,821 224,967
Purchase of real estate owned in connection with discount loan purchases ........... (37,848) (14,850)
Acquisition of subsidiaries ........................................................ (5,196) (426,096)
Additions to premises and equipment ................................................ (20,561) (27,635)
----------- -----------
Net cash provided by (used) in investing activities ................................... 178,825 (423,632)
----------- -----------
</TABLE>
(Continued on next page)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the nine months ended September 30, 1999 1998
- -------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Cash flows from financing activities:
(Decrease) increase in deposits ............................................. $ (393,851) $ 93,715
Increase (Decrease) in securities sold under agreements to repurchase ...... 70,554 (47,452)
Repayment of short-term notes ............................................... -- (1,658)
Net (repayments) proceeds from issuance of obligations
under lines of credit ...................................................... 152,668 215,499
Repayments and repurchase of notes debentures and other, net................. (3,044) --
Issuance of shares of common stock, net .................................... -- 7,828
Exercise of common stock options ............................................ -- 3,305
Repurchase of common stock options .......................................... -- (6,334)
Repurchase of common stock (treasury stock) ................................. (5,302) --
Repurchase of common stock in connection with acquisition of subsidiary ..... -- (7,772)
----------- -----------
Net cash (used) provided by financing activities ............................... (178,975) 257,131
----------- -----------
Net (decrease) increase in cash and cash equivalents ........................... (188,671) 105,619
Cash and cash equivalents at beginning of period ............................... 445,179 152,244
----------- -----------
Cash and cash equivalents at end of period ..................................... $ 256,508 $ 257,863
=========== ===========
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions ........................... $ 94,517 $ 22,374
Interest earning deposits ................................................... 161,991 22,489
Federal funds sold and repurchase agreements ................................ -- 213,000
----------- -----------
$ 256,508 $ 257,863
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .................................................................. $ 83,024 $ 129,642
=========== ===========
Income taxes .............................................................. $ 575 $ 34,363
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Real estate owned acquired through foreclosure ............................ $ 120,591 $ 182,574
=========== ===========
Exchange of discount loans and loans available for sale for securities .... $ 758,032 $ 1,668,364
=========== ===========
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
=========== ===========
Sale of subsidiary:
Fair value of assets sold..................................................... $ 413,060
Liabilities sold ............................................................. (345,327)
Cash sold ................................................................. 3,936
Gain on sale ................................................................. 50,431
-----------
$ 122,101
===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
8
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in conformity with the instructions to Form 10-Q and Article 10, Rule
10-01 of Regulation S-X for interim financial statements. Accordingly, they do
not include all of the information and footnotes required by 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"), and Ocwen Technology Xchange, Inc. ("OTX"). OCN also
owns 98.7% of Ocwen Financial Services ("OFS"), with the remaining 1.3% owned by
shareholders of Admiral Home Loan ("Admiral") and reported in the consolidated
financial statements as a minority interest. On September 30, 1999, OCN sold all
the shares of its wholly-owned subsidiary, Ocwen UK Limited, formerly known as
Ocwen UK plc ("Ocwen UK"). See Note 3 below. 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 September 30, 1999
and December 31, 1998, the results of its operations for the three and nine
months ended September 30, 1999 and 1998, its comprehensive income for the three
and nine months ended September 30, 1999 and 1998, its cash flows for the nine
months ended September 30, 1999 and 1998, and its changes in stockholders'
equity for the nine months ended September 30, 1999. The results of operations
and other data for the nine month period ended September 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 September 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 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.
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:
9
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
o Gains or losses on derivative instruments not designated as hedging
instruments are recognized in the period of change in fair value.
o Gains or losses on derivative instruments designated as hedging the
exposure to changes in the fair value of a recognized asset, liability
or firm commitment are recognized in earnings in the period of the fair
value change, together with the offsetting fair value loss or gain on
the hedged item.
o Gains or losses on derivative instruments designated as hedging
exposure to variable cash flows arising from a forecasted transaction
are initially reported, to the extent the fair value change is offset
by the change in the forecasted cash flows, as a component of other
comprehensive income. The portion of the change in fair value in excess
of the offsetting change in forecasted cash flows is reported in
earnings in the period of the change.
o Gains or losses on derivative instruments designated as foreign
currency hedges of net investments in foreign operations are reported
in other comprehensive income as part of the foreign currency
translation adjustment.
SFAS No. 133 precludes the use of nonderivative financial instruments
as hedging instruments, except that nonderivative financial instruments
denominated in a foreign currency may be designated as a hedge of the foreign
currency exposure of an unrecognized firm commitment denominated in a foreign
currency or a net investment in a foreign operation.
Under SFAS No. 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
NOTE 3. ACQUISITIONS AND DISPOSITIONS
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 $10,000 of which $5,000 has been paid and $5,000
is a holdback which will be released over time if certain performance objectives
are attained. Synergy is in the final stages of developing its Synergy OPEN(TM)
software, a 32-bit, Microsoft(R) Windows-based commercial and multi-family
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-owned subsidiary of OTX.
On September 30, 1999, the Company sold all the shares of its
wholly-owned subsidiary, Ocwen UK Limited, formerly known as Ocwen UK, to
Malvern House Acquisition Limited for the pound sterling equivalent of $122,100
in cash. Ocwen UK was originally formed to acquire substantially all of the
assets, and certain of the liabilities, of the United Kingdom operations of
Cityscape Financial Corp., and commenced operations on April 24, 1998. As a
result of the transaction, the Company recorded a pretax gain on sale of
$50,400. See Item 6(b) for information regarding a Form 8-K filed by the Company
in connection with this transaction. See also Note 8 below.
On October 7, 1999, the Company acquired Ocwen Asset Investment Corp.
(OAC), a publicly-traded real estate investment trust. The terms of the
agreement call for OAC shareholders (except for OCN or its subsidiaries) to
receive 0.71 shares of OCN stock for each outstanding share of OAC common stock.
At September 30, 1999, the Company, through IMI, owned 1,540,000 or 8.12% of the
outstanding common stock of OAC and 1,808,733 units or 8.71% of the outstanding
partnership units of Ocwen Partnership L.P. ("OPLP"). OPLP is the operating
partnership subsidiary of OAC.
10
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
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.
In October 1999, the Company repurchased $13,500 of its Capital
Securities at prices below par, resulting in an extraordinary gain of $5,023
before taxes.
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.
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
11
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
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 monthly based
upon estimated prepayment rates. The Company had no interest rate swaps
outstanding at September 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 September 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
financial instruments at September 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 swaptions .................... $ 7,500 3/00 6.78% $ 206
5,800 5/00 6.72% 196
European 10-year treasury put options, 4.75%
due 11/05/08 ........................................ 5,700 11/99 $ 92.91 113
2,500 11/99 $ 91.25 32
------------- -----------
$ 21,500 $ 547
============= ===========
</TABLE>
FOREIGN CURRENCY MANAGEMENT
The Company enters into foreign currency derivatives to hedge its
equity investment in 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 this foreign entity.
The Company has determined that the local currency of its previously
owned foreign subsidiary, Ocwen UK, which was sold on September 30, 1999, and
its equity investment in Kensington, is the functional currency. In accordance
12
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
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.
Prior to the sale of Ocwen UK, the Company sold short foreign currency
futures contracts ("currency futures") to hedge its foreign currency exposure
related to its equity investment in Ocwen UK. Periodically, the Company adjusted
the amount of currency futures contracts it had entered into in response to
changes in its equity investment in Ocwen U.K. In connection with the sale of
Ocwen UK, these currency futures were closed in October.
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.
The following table sets forth the terms and values of these financial
instruments at September 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>
SEPTEMBER 30, 1999:
Currency swap...................... 2003 (pound) 27,500 $ 43,546 1.5835 $ 1,208 $ (1,730)
============== ========== ========= =========
British Pound currency futures.... 1999 (pound) 69,313 $ 111,642 1.611 n/a $ 2,454
1999 (pound) 2,875 4,662 1.6216 n/a 76
-------------- ---------- ---------
72,188 $ 116,304 $ 2,530
============== ========== =========
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
13
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
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 September 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.
At September 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 following table. The Bank's capital amounts and classification are subject
to review by federal regulators about components, risk-weightings and other
factors.
14
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
The following table summarizes the Bank's actual and required
regulatory capital at September 30, 1999:
<TABLE>
<CAPTION>
To Be Well
Minimum Capitalized for Committed
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.. 10.58% $ 244,029
Net unrealized gain on certain available for 351
sale securities................................
Non includible subsidiary........................ (4,957)
Excess mortgage servicing rights................. (902)
Acquired real estate............................. (9,534)
----------
Tangible capital, and ratio to adjusted total
assets......................................... 10.00% $ 228,987 1.50% $ 34,361
========== ===========
Tier 1 (core) capital, and ratio to adjusted
total assets.................................. 10.00% $ 228,987 3.00% $ 68,722 5.00% $ 114,536 9.00%
========== =========== ===========
Tier 1 capital, and ratio to risk-weighted
assets........................................ 12.27% $ 228,987 6.00% $ 112,017
========== ===========
Allowance for loan and lease losses............. 23,337
Subordinated debentures......................... 90,560
----------
Tier 2 capital.................................. 113,897
----------
Total risk-based capital, and ratio to
risk-weighted assets ......................... 18.37% $ 342,884 8.00% $ 149,356 10.00% $ 186,695 13.00%
========== =========== ===========
Total regulatory assets......................... $2,305,764
==========
Adjusted total assets........................... $2,290,722
==========
Risk-weighted assets............................ $1,866,953
==========
</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.
The OTS published amendments to its capital distribution regulation
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.
15
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
In addition to these OTS regulations governing capital distributions,
the indenture governing the 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 September 30, 1999, the Company had commitments to fund $4,919 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 $28,205 at September 30, 1999. The Company, through its investment in
subordinate securities and subprime residuals, which had a fair value of
$109,463 (amortized cost of $107,436) at September 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 putative classes of public shareholders of OAC
in the Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County,
Florida against OAC and certain directors of OAC. The plaintiffs in both
complaints sought to enjoin the acquisition of OAC by the Company. The cases
were consolidated, and on September 13, 1999, a consolidated amended complaint
was filed. The injunction was denied and on October 14, 1999, the Company was
dismissed as a party. Plaintiffs' remaining claims are for damages for alleged
breaches of common law fiduciary duties.
NOTE 8. EXTRAORDINARY GAIN
On September 29, 1999, the Company repurchased $7,440 of its 12%
Debentures at prices below par, resulting in an extraordinary gain of $389 ($253
net of taxes).
NOTE 9. 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:
16
<PAGE>
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================
<TABLE>
<CAPTION>
At or for the three months ended Net Interest Non-Interest Non-Interest Net (Loss) Total
ended September 30, 1999 Income Income Expense Income Assets
- -------------------------------------------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Discount loans:
Single family residential loans .......... $ 6,664 $ (5,061) $ 3,749 $ (3,555) $ 498,972
Commercial real estate loans ............. 7,017 2,663 5,404 (371) 725,415
----------- ----------- ----------- ----------- -----------
13,681 (2,398) 9,153 (3,926) 1,224,387
----------- ----------- ----------- ----------- -----------
Domestic mortgage loan servicing ............ 1,219 14,586 11,887 2,124 103,443
Investment in low-income housing tax credits. (2,600) 5,125 2,337 4,550 221,014
Commercial real estate lending .............. 1,446 (3,005) 72 (1,115) 32,451
UK operations:
Ocwen UK ................................. 6,396 60,532 13,200 35,763 --
Kensington ............................... 22 -- (53) (4,564) 42,024
----------- ----------- ----------- ----------- -----------
6,418 60,532 13,147 31,199 42,024
----------- ----------- ----------- ----------- -----------
OTX ......................................... 2 990 5,159 (4,167) 28,859
Domestic subprime single family
residential lending........................ 3,264 (15,187) 1,550 (8,453) 148,022
Investment securities ....................... 507 (260) 1,352 (1,831) 448,643
Equity investment in OAC .................... -- -- -- (120) 35,848
Other ....................................... (4,705) 1,723 7,334 (5,485) 516,750
----------- ----------- ----------- ----------- -----------
$ 19,232 $ 62,106 $ 51,991 $ 12,776 $ 2,801,441
=========== =========== =========== =========== ===========
At or for the nine months ended Net Interest Non-Interest Non-Interest Net (Loss) Total
ended September 30, 1999 Income Income Expense Income Assets
- -------------------------------------------- ------------ ------------ ------------ ----------- -----------
Discount loans:
<S> <C> <C> <C> <C> <C>
Single family residential loans .......... $ 18,916 $ (9,193) $ 11,684 $ (7,904) $ 498,972
Commercial real estate loans ............. 18,805 16,178 16,468 6,417 725,415
----------- ----------- ----------- ----------- -----------
37,721 6,985 28,152 (1,487) 1,224,387
----------- ----------- ----------- ----------- -----------
Domestic mortgage loan servicing ............ 3,755 42,066 30,960 8,854 103,443
Investment in low-income housing tax credits. (8,033) 7,493 8,609 7,570 221,014
Commercial real estate lending .............. 8,642 (1,903) 492 4,734 32,451
UK operations:
Ocwen UK ................................. 21,827 85,157 36,114 46,905 --
Kensington ............................... 115 -- 405 (6,360) 42,024
----------- ----------- ----------- ----------- -----------
21,942 85,157 36,519 40,545 42,024
----------- ----------- ----------- ----------- -----------
OTX ......................................... 14 1,696 13,136 (11,428) 28,861
Domestic subprime single family
residential lending........................ 10,545 (16,998) 11,689 (11,430) 148,022
Investment securities ....................... 2,958 (1,874) 4,553 (3,676) 448,643
Equity investment in OAC .................... -- -- -- (3,605) (35,848)
Other ....................................... (5,867) 9,871 17,788 (11,517) 588,444
----------- ----------- ----------- ----------- -----------
$ 71,677 $ 132,493 $ 151,898 $ 18,560 $ 2,801,441
=========== =========== =========== =========== ===========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
At or for the three months ended Net Interest Non-Interest Non-Interest Net (Loss) Total
ended September 30, 1998 Income Income Expense Income Assets
- -------------------------------------------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Discount loans:
Single family residential loans .......... $ 3,945 $ 17,631 $ 4,549 $ 7,629 $ 607,562
Commercial real estate loans ............. 23,281 9,878 6,076 14,544 868,102
----------- ----------- ----------- ----------- -----------
27,226 27,509 10,625 22,173 1,475,664
----------- ----------- ----------- ----------- -----------
Domestic mortgage loan servicing ............ 2,292 12,003 11,354 1,769 21,273
Investment in low-income housing tax credits. (2,528) 2,685 4,138 2,135 189,372
Commercial real estate lending .............. 7,465 5,062 525 7,767 79,345
UK operations:
Ocwen UK ................................. 1,632 5,719 15,446 (5,262) 264,174
Kensington ............................... (4) -- 166 2,595 51,262
----------- ----------- ----------- ----------- -----------
1,628 5,719 15,612 (2,667) 315,436
----------- ----------- ----------- ----------- -----------
OTX ......................................... 4 1,093 2,922 (1,826) 19,390
Domestic subprime single family
residential lending........................ 2,967 6,496 12,253 (2,826) 260,996
Investment securities ....................... (43) (1,103) 1,848 (2,992) 513,903
Other ....................................... 1,673 (4,521) 6,239 1,398 515,349
----------- ----------- ----------- ----------- -----------
$ 40,684 $ 54,943 $ 65,516 $ 24,931 $ 3,390,728
=========== =========== =========== =========== ===========
At or for the nine months ended Net Interest Non-Interest Non-Interest Net (Loss) Total
ended September 30, 1998 Income Income Expense Income Assets
- -------------------------------------------- ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Discount loans:
Single family residential loans .......... $ 16,934 $ 49,275 $ 13,416 $ 26,326 $ 607,562
Commercial real estate loans ............. 49,730 30,494 17,252 31,601 868,102
----------- ----------- ----------- ----------- -----------
66,664 79,769 30,668 57,927 1,475,664
----------- ----------- ----------- ----------- -----------
Domestic mortgage loan servicing ............ 4,936 14,486 29,632 4,129 21,273
Investment in low-income housing tax credits. (6,998) 7,371 8,120 8,529 189,372
Commercial real estate lending .............. 14,706 7,976 2,249 12,836 79,345
UK operations:
Ocwen UK ................................. 6,542 22,944 26,706 1,807 264,174
Kensington ............................... (4) -- 330 2,975 51,262
----------- ----------- ----------- ----------- -----------
6,538 22,944 27,036 4,782 315,436
----------- ----------- ----------- ----------- -----------
OTX ......................................... 4 1,604 7,682 (6,074) 19,390
Domestic subprime single family
residential lending........................ 10,090 31,484 32,216 (6,378) 260,996
Investment securities ....................... (1,842) (80,908) 5,451 (57,003) 513,903
Other ....................................... 6,068 (2,153) 12,723 (9,371) 515,349
----------- ----------- ----------- ----------- -----------
$ 100,166 $ 82,573 $ 155,777 $ 9,377 $ 3,390,728
=========== =========== =========== =========== ===========
</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.
18
<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 and sold on September 30, 1999.
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
During October 1999, the Company repurchased $13.5 million of its 10
7/8% Capital Securities at prices below par value, resulting in an extraordinary
gain of $5.0 million before taxes. Also during October 1999, the Company
repurchased an additional $3.4 million of its 12% Debentures at prices below
par, resulting in an extraordinary gain of $0.2 million before taxes.
On October 7, 1999 Ocwen Acquisition Company ("Acquisition Sub"), a
Virginia corporation and an indirect wholly-owned subsidiary of the Company
merged with and into OAC, in accordance with the Agreement of Merger (the
"Merger Agreement") dated as of July 25, 1999 among OAC, the Company and
Acquisition Sub. Under the terms of the Merger Agreement, each outstanding share
(other than those held by the Company and its wholly-owned subsidiaries) of
common stock, par value $0.01 per share, of OAC was converted into .71 shares of
the Company common stock.
During the period from October 12, 1999 to November 9, 1999, the
Company repurchased an additional 943,300 shares of its common stock for a total
of $6.5 million. As of November 9, 1999, a total of 1.6 million shares have been
repurchased on the open market at an average price of $7.20 per share,
representing 27% of the 6.0 million shares authorized for repurchase by the
Board of Directors.
On October 20, 1999, OAC merged into Small Commercial Properties
Corporation I ("SCP"), a Florida corporation and an indirect wholly-owned
subsidiary of the Company. Immediately thereafter, SCP changed its name to Ocwen
Asset Investment Corp.
On October 22, 1999, the Company announced the opening of its national
servicing center in Orlando, Florida. The 125,000 square foot facility will
house approximately 900 employees, most of whom will handle the incoming and
outgoing customer contact related to mortgage loan servicing.
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION September 30, December 31, Increase
1999 1998 (Decrease)
------------ ------------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA (Dollars in thousands)
Total assets ....................................................... $ 2,801,441 $ 3,308,079 (15)%
Securities available for sale, at fair value ....................... 545,798 593,347 (8)
Loans available for sale, at lower of cost or market ............... 66,829 177,847 (62)
Loan portfolio, net ................................................ 127,026 230,312 (45)
Discount loan portfolio, net ....................................... 974,472 1,026,511 (5)
Investment in low-income housing tax credit interests .............. 161,776 144,164 12
Investment in unconsolidated entities .............................. 76,407 86,893 (12)
Real estate owned, net ............................................. 178,349 201,551 (12)
Total liabilities .................................................. 2,238,961 2,746,111 (18)
Deposits ........................................................... 1,776,646 2,175,016 (18)
Obligations outstanding under lines of credit ...................... 49,849 179,285 (72)
Notes, debentures and other interest bearing obligations ........... 221,956 225,000 (1)
Capital Securities ................................................. 125,000 125,000 --
Stockholders' equity ............................................... 437,394 436,376 --
At or For the Three Months Ended September 30,
-----------------------------------------------
Increase
1999 1998 (Decrease)
------------ ------------- -----------
<S> <C> <C> <C>
OPERATIONS DATA (Dollars in thousands)
Net interest income ................................................ $ 19,232 $ 40,684 (53)%
Provision for loan losses .......................................... (826) (1,806) (54)
Non-interest income (loss) ......................................... 62,106 54,943 13
Non-interest expense ............................................... (51,991) (65,516) (21)
Equity in (losses) earnings of investment
in unconsolidated entities ....................................... (4,768) 2,915 (264)
Income tax expense ................................................. (8,199) (2,922) 181
Net income ......................................................... 12,776 24,931 (49)
PER COMMON SHARE
Net income:
Basic ........................................................... $ 0.21 $ 0.41 (49)%
Diluted ......................................................... 0.21 0.41 (49)
Stock price:
High ............................................................ $ 8.25 $ 27.50 (70)
Low ............................................................. 6.00 8.75 (31)
Close ........................................................... 6.19 8.75 (29)
Repurchase of common stock (treasury stock) (1) .................... 7.68 -- --
KEY RATIOS
Annualized return on average assets ................................ 1.66% 2.74% (39)%
Annualized return on average equity ................................ 11.93 23.58 (49)
Efficiency ratio (2) ............................................... 67.90 66.49 2
Core (leverage) capital ratio ...................................... 10.00 10.11 (1)
Risk-based capital ratio ........................................... 18.37 18.00 2
</TABLE>
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or For the Nine Months Ended September 30,
--------------------------------------------------------
Increase
1999 1998 (Decrease)
-------------- --------------- -----------
<S> <C> <C> <C>
OPERATIONS DATA (Dollars in thousands)
Net interest income.............................................. $ 71,677 $ 100,166 (28)%
Provision for loan losses........................................ (5,188) (13,734) (62)
Non-interest income.............................................. 132,493 82,573 60
Non-interest expense............................................. (151,898) (155,777) (2)
Equity in (losses) earnings of
investment in unconsolidated entities ......................... (9,483) 3,459 (374)
Income tax (expense) benefit..................................... (9,595) 2,888 (432)
Net income....................................................... 18,560 9,377 98
PER COMMON SHARE
Net income:
Basic......................................................... $ 0.31 $ 0.15 107%
Diluted....................................................... 0.31 0.15 107
Stock price:
High $ 12.31 $ 30.38 (59)
Low 6.00 8.75 (31)
Close......................................................... 6.19 8.75 (29)
Repurchase of common stock (treasury stock) (1) ................. 7.68 -- --
KEY RATIOS
Annualized return on average assets.............................. 0.78% 0.34% 129%
Annualized return on average equity.............................. 5.71 2.92 96
Efficiency ratio (2)............................................. 78.02 83.66 (7)
Core (leverage) capital ratio.................................... 10.00 10.11 (1)
Risk-based capital ratio......................................... 18.37 18.00 2
</TABLE>
(1) The Company repurchased 205,300 and 485,500 shares of its common stock
during the second and third quarters of 1999, respectively.
(2) 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) earnings of investment in unconsolidated
entities.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS: THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS
THREE AND NINE MONTHS ENDED SEPTEMBER 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 September 30, Nine Months Ended September 30,
--------------------------------- ----------------------------------
Increase Increase
For the periods ended September 30, 1999 1998 (Decrease) 1999 1998 (Decrease)
- ------------------------------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Discount loans:
Single family residential loans. $ (3,555) $ 7,629 $(11,184) $ (7,904) $ 26,326 $(34,230)
Commercial real estate loans ... (371) 14,544 (14,915) 6,417 31,601 (25,184)
-------- -------- -------- -------- -------- --------
(3,926) 22,173 (26,099) (1,487) 57,927 (59,414)
-------- -------- -------- -------- -------- --------
Domestic mortgage loan servicing .. 2,124 1,769 355 8,854 4,129 4,725
Low-income housing tax credits .... 4,550 2,135 2,415 7,570 8,529 (959)
Commercial real estate lending .... (1,115) 7,767 (8,882) 4,734 12,836 (8,102)
UK operations:
Ocwen UK ....................... 35,763 (5,262) 41,025 46,905 1,807 45,098
Kensington ..................... (4,564) 2,595 (7,159) (6,360) 2,975 (9,335)
-------- -------- -------- -------- -------- --------
31,199 (2,667) 33,866 40,545 4,782 35,763
-------- -------- -------- -------- -------- --------
OTX ............................... (4,167) (1,826) (2,341) (11,428) (6,074) (5,354)
Domestic subprime single family
residential lending .............. (8,453) (2,826) (5,627) (11,430) (6,378) (5,052)
Investment securities ............. (1,831) (2,992) 1,161 (3,676) (57,003) 53,327
Equity investment in OAC .......... (120) -- (120) (3,605) -- (3,605)
Other ............................. (5,485) 1,398 (6,883) (11,517) (9,371) (2,146)
-------- -------- -------- -------- -------- --------
Net income ........................ $ 12,776 $ 24,931 $(12,155) $ 18,560 $ 9,377 $ 9,183
======== ======== ======== ======== ======== ========
</TABLE>
o SINGLE FAMILY RESIDENTIAL DISCOUNT LOANS. Net losses in 1999 included $4.1
million and $27.0 million of pretax impairment charges on residential
subordinate securities recorded during the three and nine months ended
September 30, 1999, respectively. For the three and nine months ended
September 30, 1998, the Company recorded $2.0 million of pretax impairment
charges, all of which occurred during the second quarter. There were no
securitizations of loans executed by the Company during the third quarter
ended September 30, 1999. Securitization gains totaled $19.2 million for
the third quarter of 1998. For the nine months ended September 30, 1999 and
1998, securitization gains totaled $22.8 million and $48.1 million,
respectively. See "Non-Interest Income."
o COMMERCIAL REAL ESTATE DISCOUNT LOANS. Net income for the three and nine
months ended September 30, 1999 included $0.1 million and $4.2 million,
respectively, of pretax gains on real estate owned, net, as compared to
$5.5 million and $20.3 million for the three and nine months ended
September 30, 1998, respectively. Net income for 1999 included $4.2 million
of pretax gains on sales of commercial discount loans ($1.6 million during
the third quarter) and a $3.8 million gain on the sale of commercial
subordinate securities (first quarter) as compared to $8.4 million of
pretax gains on the sales of commercial discount loans ($3.6 million during
the third quarter).
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 $11.38 billion and $10.63
billion during the three and nine months ended September 30, 1999,
respectively, as compared to $9.13 billion and $7.47 billion during the
three and nine months ended September 30, 1998, respectively.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
o LOW-INCOME HOUSING TAX CREDITS. Net income for the nine months ended
September 30, 1999 included a $5.5 million gain on the sale of investments
in tax credit interests during the third quarter. This compares to gains of
$2.3 million and $6.9 million for the three and nine months ended September
30, 1998, respectively.
o COMMERCIAL REAL ESTATE LENDING. Net (loss) income for the three and nine
months ended September 30, 1999, includes $0.5 million and $6.1 million,
respectively, of additional interest received in connection with the
repayment of multifamily and nonresidential loans. Such additional interest
amounted to $7.1 million and $11.8 million during the three and nine months
ended September 30, 1998, respectively.
o UK OPERATIONS. Net income for 1999 includes a $50.4 million pretax gain on
the sale of Ocwen UK which occurred on September 30, for $122.1 million in
cash. See Note 3 to the Interim Consolidated Financial Statements included
in Item 1 hereof. Net income for 1999 also 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. There were no securitizations of loans by the Company during the
third quarter of 1999 or 1998. See "Non-Interest Income."
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 multi-family 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 included
pretax impairment on subprime residual securities of $15.1 million and $6.5
million during the third quarter of 1999 and 1998, respectively, and $19.2
million and $10.6 million for the nine months ended September 30, 1999 and
1998, respectively. 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. The Company shutdown the
remainder of its subprime single family residential loan origination
operations in the third quarter of 1999. There were no securitizations of
loans executed by the Company in the third quarter of 1999. In the third
quarter of 1998, the Company securitized loans with an aggregate unpaid
principal balance of $261.6 million for a gain of $13.3 million. See
"Non-Interest Income."
o INVESTMENT SECURITIES. The net losses on investment securities during 1998
were primarily due to $86.1 million of pretax impairment losses ($8.5
million during the first quarter; $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.
23
<PAGE>
<TABLE>
<CAPTION>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Three months ended September 30,
----------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
Average Annualized Average Annualized
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- ----------- ---------- ----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Federal funds sold and repurchase agreements... $ 74,761 $ 958 5.13% $ 185,765 $ 2,508 5.40%
Securities available for sale (1).............. 652,600 15,350 9.41 597,261 8,982 6.02
Loans available for sale (2)................... 231,216 6,233 10.78 467,449 11,391 9.75
Loan portfolio (2)............................. 141,759 3,941 11.12 255,113 13,771 21.59
Discount loan portfolio (2).................... 989,919 29,035 11.73 1,357,124 50,274 14.82
Investment securities and other................ 29,309 502 6.85 103,379 1,616 6.25
----------- ----------- ----------- -----------
Total interest-earning assets.................. 2,119,564 56,019 10.57 2,966,091 88,542 11.94
----------- -----------
Non-interest earning cash...................... 159,646 53,347
Allowance for loan losses...................... (26,466) (26,844)
Investments in low-income housing
tax credit interests........................ 184,989 138,716
Investment in unconsolidated entities.......... 78,280 1,132
Real estate owned, net......................... 179,585 153,474
Investment in real estate...................... 17,715 22,615
Other assets................................... 356,728 335,604
----------- -----------
Total assets................................ $ 3,070,041 $ 3,644,135
=========== ===========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits............... $ 25,474 286 4.49% $ 50,912 552 4.34%
Savings deposits............................... 1,593 10 2.51 1,606 9 2.24
Certificates of deposit........................ 1,610,378 24,483 6.08 1,887,969 30,585 6.48
----------- ---------- ----------- -----------
Total interest-bearing deposits............. 1,637,445 24,779 6.05 1,940,487 31,146 6.42
Securities sold under agreements to repurchase. 139,039 2,120 6.10 74,495 1,168 6.27
Obligations outstanding under lines of credit.. 205,136 3,164 6.17 461,735 8,777 7.60
Notes, debentures and other.................... 230,590 6,724 11.66 225,397 6,767 12.01
----------- ---------- ----------- -----------
Total interest-bearing liabilities......... 2,212,210 36,787 6.65 2,702,114 47,858 7.08
---------- -----------
Non-interest bearing deposits.................. 40,693 951
Escrow deposits................................ 205,175 201,221
Other liabilities.............................. 58,553 191,951
----------- -----------
Total liabilities........................... 2,516,631 3,096,237
Capital securities............................. 125,000 125,000
Stockholders' equity........................... 428,410 422,898
----------- -----------
Total liabilities and stockholders' equity.. $ 3,070,041 $ 3,644,135
=========== ===========
Net interest income before provision for
loan losses................................. $ 19,232 $ 40,684
========== ==========
Net interest rate spread....................... 3.92% 4.86%
Net interest margin............................ 3.63% 5.49%
Ratio of interest-earning assets to
interest-bearing liabilities................ 96% 110%
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Nine months ended September 30,
----------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
Average Annualized Average Annualized
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- ----------- ---------- ----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Federal funds sold and repurchase agreements... $ 177,971 $ 6,412 4.80% $ 130,421 $ 4,944 5.05%
Securities available for sale (1).............. 584,458 48,199 11.00 571,862 25,654 5.98
Loans available for sale (2)................... 291,956 25,376 11.59 601,708 46,185 10.23
Loan portfolio (2)............................. 174,953 18,985 14.47 273,979 31,688 15.42
Discount loan portfolio (2).................... 972,976 84,591 11.59 1,347,753 129,352 12.80
Investment securities and other................ 35,192 1,537 5.82 82,370 3,634 5.88
----------- ----------- ----------- -----------
Total interest-earning assets.................. 2,237,506 185,100 11.03 3,008,093 241,457 10.70
----------- -----------
Non-interest earning cash...................... 108,561 31,826
Allowance for loan losses...................... (26,589) (25,632)
Investments in low-income housing
tax credit interests........................ 167,649 128,089
Investment in unconsolidated entities.......... 82,819 1,081
Real estate owned, net......................... 196,840 167,346
Investment in real estate...................... 33,313 46,521
Other assets................................... 353,460 271,620
----------- -----------
Total assets................................ $ 3,153,559 $ 3,628,944
=========== ===========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits............... $ 44,872 1,178 3.50% $ 36,901 1,166 4.21%
Savings deposits............................... 1,565 28 2.39 1,695 29 2.28
Certificates of deposit........................ 1,626,920 73,960 6.06 1,840,767 86,473 6.26
----------- ----------- ----------- ----------
Total interest-bearing deposits............. 1,673,357 75,166 5.99 1,879,363 87,668 6.22
Securities sold under agreements to repurchase. 120,721 5,891 6.51 116,556 4,869 5.57
Obligations outstanding under lines of credit.. 264,607 12,219 6.16 559,214 28,510 6.80
Notes, debentures and other.................... 226,679 20,147 11.85 225,790 20,244 11.95
----------- ----------- ----------- ----------
Total interest-bearing liabilities.......... 2,285,364 113,423 6.62 2,780,923 141,291 6.77
----------- ----------
Non-interest bearing deposits.................. 39,550 14,546
Escrow deposits................................ 198,847 151,749
Other liabilities.............................. 71,235 128,916
----------- -----------
Total liabilities........................... 2,594,996 3,076,134
Capital securities............................. 125,000 125,000
Stockholders' equity........................... 433,563 427,810
----------- -----------
Total liabilities and stockholders' equity.. $ 3,153,559 $ 3,628,944
=========== ===========
Net interest income before provision for
loan losses................................. $ 71,677 $ 100,166
=========== ==========
Net interest rate spread....................... 4.41% 3.93%
Net interest margin............................ 4.27% 4.44%
Ratio of interest-earning assets to
Interest-bearing liabilities................ 98% 108%
</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.
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior rate), (ii) changes
in rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Three Months Nine Months
-------------------------------- --------------------------------
1999 vs. 1998 1999 vs. 1998
-------------------------------- --------------------------------
Increase (decrease) due to Increase (decrease) due to
-------------------------------- --------------------------------
For the periods ended September 30, Rate Volume Total Rate Volume Total
- ------------------------------------------------ -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and repurchase
agreements .................................. $ (122) $ (1,428) $ (1,550) $ (112) $ 1,580 $ 1,468
Securities available for sale ................. 5,470 898 6,368 21,968 577 22,545
Loans available for sale ...................... 1,104 (6,262) (5,158) 2,228 (23,037) (20,809)
Loan portfolio ................................ (5,130) (4,700) (9,830) (1,854) (10,849) (12,703)
Discount loan portfolio ....................... (9,237) (12,002) (21,239) (11,321) (33,440) (44,761)
Investment securities and other ............... 142 (1,256) (1,114) (36) (2,061) (2,097)
-------- -------- -------- -------- -------- --------
Total interest-earning assets ............. (7,773) (24,750) (32,523) 10,873 (67,230) (56,357)
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Interest-bearing demand deposits .............. 19 (285) (266) (141) 154 13
Savings deposits .............................. 1 -- 1 1 (2) (1)
Certificate of deposit ........................ (1,800) (4,302) (6,102) (2,722) (9,792) (12,514)
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits ........... (1,780) (4,587) (6,367) (2,862) (9,640) (12,502)
Securities sold under agreements to
repurchase .................................. (33) 985 952 843 179 1,022
Obligations outstanding under lines of credit . (1,420) (4,193) (5,613) (2,472) (13,819) (16,291)
Notes, debentures and other obligations ....... (197) 154 (43) (140) 43 (97)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities ........ (3,430) (7,641) (11,071) (4,631) (23,237) (27,868)
-------- -------- -------- -------- -------- --------
((Decrease) increase in net interest income ... $ (4,343) $(17,109) $(21,452) $ 15,504 $(43,993) $(28,489)
======== ======== ======== ======== ======== ========
</TABLE>
The Company's net interest income before provision for loan losses of
$19.2 million decreased $21.5 million or 53% during the three months ended
September 30, 1999 as compared to the same period in the prior year. The
decrease in net interest income reflects a $32.5 million decrease in interest
income, offset by an $11.1 million decrease in interest expense, and occurred
primarily as a result of decreases in the average balance of interest-earning
assets and interest-bearing liabilities. The net interest spread decreased 94
basis points during the three months ended September 30, 1999 as a result of a
137 basis point decrease in the weighted average yield on interest-earning
assets offset by a 43 basis point decrease in the weighted average rate on
interest-bearing liabilities. The impact of these rate changes resulted in a
$4.3 million decrease in net interest income. Average interest-earning assets
decreased by $846.5 million or 29% during the three months ended September 30,
1999 and reduced interest income by $24.8 million, while average
interest-bearing liabilities decreased $489.9 million or 18% and reduced
interest expense by $7.6 million. The net impact of these volume changes
resulted in a decrease of $17.1 million to net interest income.
26
<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 September 30, 1999 1998 $ 1999 1998 Basis Points
- ---------------------------------------- ----------- ----------- ----------- -------- ------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and
repurchase agreements ............ $ 74,761 $ 185,765 $ (111,004) 5.13% 5.40% (27)
Securities available for sale ...... 652,600 597,261 55,339 9.41 6.02 339
Loans available for sale(1)......... 231,216 467,449 (236,233) 10.78 9.75 103
Loan portfolio ..................... 141,759 255,113 (113,354) 11.12 21.59 (1,047)
Discount loan portfolio ............ 989,919 1,357,124 (367,205) 11.73 14.82 (309)
Investment securities and other..... 29,309 103,379 (74,070) 6.85 6.25 60
----------- ----------- -----------
$ 2,119,564 $ 2,966,091 $ (846,527) 10.57% 11.94% (137)
=========== =========== ===========
Average Balance Increase Average Yield Increase
------------------------- (Decrease) --------------------- (Decrease)
For the nine months ended September 30, 1999 1998 $ 1999 1998 Basis Points
- --------------------------------------- ----------- ----------- ----------- -------- ------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and
repurchase agreements............. $ 177,971 $ 130,421 $ 47,550 4.80% 5.05% (25)
Securities available for sale....... 584,458 571,862 12,596 11.00 5.98 502
Loans available for sale(2)......... 291,956 601,708 (309,752) 11.59 10.23 136
Loan portfolio...................... 174,953 273,979 (99,026) 14.47 15.42 (95)
Discount loan portfolio............. 972,976 1,347,753 (374,777) 11.59 12.80 (121)
Investment securities and other..... 35,192 82,370 (47,178) 5.82 5.88 (6)
----------- ----------- -----------
$ 2,237,506 $ 3,008,093 $ (770,587) 11.03% 10.70% 33
=========== =========== ===========
</TABLE>
(1) Includes an average balance of $168.1 million and $129.6 million with
an average yield earned of 11.15% and 6.90% for the three months ended
September 30, 1999 and 1998, respectively, related to Ocwen UK.
(2) Includes an average balance of $176.6 million and $188.6 million with
an average yield earned of 12.28% and 9.50% for the nine months ended
September 30, 1999 and 1998, respectively, related to Ocwen UK.
Interest income on securities available for sale increased by $6.4
million or 71% during the third quarter of 1999 as compared to the same period
in 1998 primarily as a result of a 339 basis point increase in the weighted
average yield earned. For the nine months ended September 30, 1999, interest
income on securities available for sale increased $22.5 million or 88%, as
compared to the same period 1998, primarily due to a 502 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 September 30, 1999 1998 1999 1998
- ---------------------------------------- ----------- ---------- -------- ------
<S> <C> <C> <C> <C>
CMOs (AAA-rated)...................... $ 429,247 $ 330,689 5.73% 4.79%
Subordinates and residuals(1)......... 223,331 187,787 16.04 8.34
IOs (AAA-rated agency)................ -- 52,184 -- 1.17
Other................................. 22 26,601 -- 14.40
----------- ----------
$ 652,600 $ 597,261 9.41% 6.02%
=========== ==========
</TABLE>
27
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Balance Annualized Yield
--------------------------- ----------------------
For the nine months ended September 30, 1999 1998 1999 1998
- --------------------------------------- ----------- ---------- -------- ------
<S> <C> <C> <C> <C>
CMOs (AAA-rated)................... $ 361,089 $ 251,058 5.63% 5.30%
Subordinates and residuals(2)...... 223,305 135,836 19.22 13.85
IOs (AAA-rated agency)............. -- 151,129 -- (0.87)
Other.............................. 64 33,839 -- 10.03
----------- -----------
$ 584,458 $ 571,862 11.00% 5.98%
=========== ===========
</TABLE>
(1) Includes an average balance of $95.1 million and $35.3 million
with an average yield earned of 11.15% and 6.90% for the three
months ended September 30, 1999 and 1998, respectively, related to
Ocwen UK.
(2) Includes an average balance of $81.2 million and $13.7 million
with an average yield earned of 12.28% and 9.50% for the nine
months ended September 30, 1999 and 1998, respectively, related to
Ocwen UK.
Interest income on loans available for sale decreased by $5.2 million
or 45% during the third quarter of 1999 as compared to the same period in 1998
as a result of a $236.2 million or 51% decrease in the average balance, offset
in part by a 103 basis point increase in the weighted average yield earned. For
the nine months ended September 30, 1999, interest income on loans available for
sale decreased $20.8 million or 45% due to a $309.8 million or 51% decline in
the average balance, offset in part by a 136 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 to the
closure of the domestic subprime business.
Interest income on the loan portfolio decreased by $9.8 million or 71%
for the three months ended September 30, 1999, as a result of a $113.4 million
or 44% decrease in the average balance, and a 1,047 basis point decline in the
weighted average yield earned. For the nine months ended September 30, 1999,
interest income on the loan portfolio decreased $12.7 million or 40% as a result
of a $99.0 million or 36% decline in the average balance, and a 95 basis point
decline in the average yield earned. The declining yields in 1999 are primarily
the result of a decline in additional interest received in connection with the
repayment of multifamily and nonresidential loans. Such additional interest
amounted to $0.5 million and $7.1 million during the third quarter of 1999 and
1998, respectively, and $6.1 million and $11.8 million during the nine months
ended September 30, 1999 and 1998, respectively. The declining average balances
on the loan portfolio reflect the continuing repayment of multifamily and
nonresidential loans.
Interest income on discount loans decreased by $21.2 million or 42% for
the three months ended September 30, 1999, as a result of a $367.2 million or
27% decrease in the average balance and a 309 basis point decrease in the
weighted average yield earned. For the nine months ended September 30, 1999,
interest income on discount loans decreased $44.8 million or 35% primarily as a
result of a $374.8 million or 28% decrease in the average balance and a 121
basis point decline in the average yield. Securitizations, through June 30,
1999, 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.
The 1998 average yields on the IOs and residuals were adversely
affected by declining interest rates and the resulting increase in prepayment
speeds. During the second quarter of 1998, OCN discontinued its IO investment
activity and sold its entire portfolio of IOs in July 1998.
28
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Balance Increase Average Yield Increase
For the three months ended ------------------------- (Decrease) ------------------------ (Decrease)
September 30, 1999 1998 $ 1999 1998 Basis Points
- ----------------------------------- ----------- ----------- ----------- ------------ ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits .......................... $ 1,637,445 $ 1,940,487 $ (303,042) 6.05% 6.42% (37)
Securities sold under
agreements to repurchase ....... 139,039 74,495 64,544 6.10 6.27 (17)
Obligations outstanding under
lines of credit (1).............. 205,136 461,735 (256,599) 6.17 7.60 (143)
Notes, debentures and other ....... 230,590 225,397 5,193 11.66 12.01 (35)
----------- ----------- -----------
$ 2,212,210 $ 2,702,114 $ (489,904) 6.65 7.08 (43)
=========== =========== ===========
Average Balance Increase Average Yield Increase
For the nine months ended ------------------------- (Decrease) ------------------------ (Decrease)
September 30, 1999 1998 $ 1999 1998 Basis Points
- ----------------------------------- ----------- ----------- ----------- ------------ ----------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits .......................... $ 1,673,357 $ 1,879,363 $ (206,006) 5.99% 6.22% (23)
Securities sold under
agreements to repurchase ........ 120,721 116,556 4,165 6.51 5.57 94
Obligations outstanding
under lines of credit (2)........ 264,607 559,214 (294,607) 6.16 6.80 (64)
Notes, debentures and other ....... 226,679 225,790 889 11.85 11.95 (10)
----------- ----------- -----------
$ 2,285,364 $ 2,780,923 $ (495,559) 6.62 6.77 (15)
=========== =========== ===========
</TABLE>
(1) Includes an average balance of $166.8 million and $116.1 million with
an average yield earned of 5.83% and 10.30% for the three months ended
September 30, 1999 and 1998, respectively, related to Ocwen UK.
(2) Includes an average balance of $174.4 million and $168.5 million with
an average yield earned of 6.16% and 7.40% for the nine months ended
September 30, 1999 and 1998, respectively, related to Ocwen UK.
Interest expense on deposits decreased $6.4 million or 20% during the
three months ended September 30, 1999 primarily due to a $277.6 million or 15%
decrease in the average balance of certificates of deposit. For the nine months
ended September 30, 1999, interest expense on deposits decreased $12.5 million
or 14%, also primarily due to a decline in the average balance of certificates
of deposit.
Interest expense on obligations outstanding under lines of credit
decreased $5.6 million or 64% during the third quarter of 1999 due to a $256.6
million or 56% decline in the average balance and a 143 basis point decline in
the average rate. For the nine months ended September 30, 1999, interest expense
on obligations outstanding under lines of credit decreased $16.3 million or 57%
due to a $294.6 million or 53% decline in the average balance and a 64 basis
point decline in the average rate. Lines of credit have been 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. The declines in the average rates are primarily due to
declines in the UK LIBOR. 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 both 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 Nine Months
------------------------------- -------------------------------
For the periods ended September 30, 1999 1998 1999 1998
- ------------------------------------ ------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Discount loans................. $ 1,209 $ 2,119 $ 4,618 $ 13,603
Loan portfolio................. (383) (313) 570 131
------------- ------------- ------------- -------------
Total........................ $ 826 $ 1,806 $ 5,188 $ 13,734
============= ============= ============= =============
</TABLE>
29
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
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 gross loan balances at the dates
indicated.
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------------------------------ ---------------------------------------
Loan Allowance as Loan Allowance
Allowance Balance a % Allowance Balance as a %
--------- ------- ------------ --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Discount loans.......... $ 20,322 $ 994,794 2.0% $ 21,095 $1,115,685 1.9%
Loan portfolio.......... 5,491 132,517 4.1 4,143 228,883 1.8
---------- ----------- ----------- ----------
$ 25,813 $ 1,127,311 2.3% $ 25,238 $1,344,568 1.9%
========== =========== =========== ==========
</TABLE>
For information relating to the Company's valuation allowance on real
estate owned, see "Changes in Financial Condition - Real Estate Owned."
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 Nine Months
------------------------------ -------------------------------
For the periods ended September 30, 1999 1998 1999 1998
-------------------------------------------- ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Servicing fees and other charges............ $ 19,584 $ 15,348 $ 56,764 $ 39,044
(Loss) gain on interest-earning assets, net. (21,075) 24,170 (6,800) 909
(Loss) gain on real estate owned, net....... (1,508) 1,216 1,798 12,763
Other income................................ 65,105 14,209 80,731 29,857
------------ ------------ ------------ ------------
Total.................................. $ 62,106 $ 54,943 $ 132,493 $ 82,573
============ ============ ============ ============
</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 $11.38 billion and $10.63 billion during the three
and nine months ended September 30, 1999, respectively, as compared to $9.13
billion and $7.47 billion during the three and nine months ended September 30,
1998. The increase in the average balance of loans serviced for others was
primarily related to servicing retained in connection with subprime
securitizations in prior quarters and acquisitions of servicing (primarily
during the third quarter of 1999), net of repayments. Acquisitions of servicing
during the third quarter of 1999 includes a contract with Southern Pacific
Funding Corporation entered into in August to service 17,660 subprime
residential mortgage loans with an unpaid principal balance of $1.3 billion.
The following table sets forth the Company's loans serviced for others
at September 30, 1999.
<TABLE>
<CAPTION>
Discount Loans Subprime Loans Other Loans Total
------------------------- ------------------------- ---------------------- ----------------------
No. of No. of No. of No. of
Amount Loans Amount Loans Amount Loans Amount Loans
----------- ------ ----------- ------ ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans securitized ...... $ 1,100,704 17,722 $ 1,226,478 11,917 $ -- -- $ 2,327,182 29,639
Loans serviced for third
parties .............. 1,339,517 18,095 6,450,738 82,028 995,285 710 8,785,540 100,833
----------- ------ ----------- ------ ----------- -------- ----------- -------
$ 2,440,221 35,817 $ 7,677,216 93,945 $ 995,285 710 $11,112,722 130,472
=========== ====== =========== ====== =========== ======== =========== =======
</TABLE>
Loss on interest-earning assets for the third quarter of 1999 of $21.1
million was primarily comprised of $19.2 million of impairment charges on
securities available for sale. Gain on interest-earning assets, net, for the
30
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
third quarter of 1998 of $24.2 million was primarily comprised of $32.5 million
of securitization gains, as presented in the table below, and $3.6 million of
gains on sales of large and small commercial discount loans, offset by $10.9
million of impairment losses on securities available for sale. See "Changes in
Financial Condition- Securities Available for Sale."
For the nine months ended September 30, 1999, losses on interest -
earning assets of $(6.8) million was primarily comprised of impairment losses on
securities available for sale of $48.1 million, offset by $36.8 million of
securitization gains, as presented in the table below, and $4.2 million of gains
on sales of commercial discount loans. For the nine months ended September 30,
1998, gains on interest - earnings assets of $0.9 million was primarily
comprised of $100.2 million of gains on sales of loans, including $88.2 million
of securitization gains, as presented in the table below, and $8.4 million of
gains on sales of commercial discount loans, and $3.6 million of gains on sales
of securities, offset by $101.2 million of impairment charges on 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
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 September 30,1999 (1): $ -- -- $ -- $ -- $ --
- -------------------------------------------------
Single family discount .......................... $ 172,904 2,706 $ 19,168 $ 12,056 $ 7,112
Single family subprime:
Domestic ..................................... 261,649 2,205 13,339 18,266 --
Foreign (Ocwen UK) ........................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
261,649 2,205 13,339 18,266 --
---------- ---------- ---------- ---------- ----------
$ 434,553 $ 4,911 $ 32,507 $ 30,322 $ 7,112
========== ========== ========== ========== ==========
For the nine months ended September 30,1999:
- -------------------------------------------------
Single family discount (2) ...................... 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 nine months ended September 30,1998:
- -------------------------------------------------
Single family discount .......................... $ 498,798 $ 7,638 $ 48,085 $ 32,261 $ 15,824
Single family subprime
Domestic ..................................... 805,765 8,166 30,946 55,390 --
Foreign (Ocwen UK) ........................... 363,801 14,179 9,133 33,988 --
---------- ---------- ---------- ---------- ----------
1,169,566 22,345 40,079 89,378 --
---------- ---------- ---------- ---------- ----------
$1,668,364 $ 29,983 $ 88,164 $ 121,639 $ 15,824
========== ========== ========== ========== ==========
</TABLE>
(1) There were no securitizations of loans executed by the Company during
the third quarter ended September 30, 1999. The Company has made a
strategic decision to structure future securitizations as financing
transactions which will preclude the use of gain on sale accounting.
(2) Includes 392 loans with an unpaid principal balance of $25.2 million
securitized from the loan portfolio.
31
<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 Nine Months
------------------------------ ------------------------------
For the periods ended September 30, 1999 1998 1999 1998
- ------------------------------------------------------- ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Gains on sales....................................... $ 8,184 $ 10,551 $ 29,591 $ 33,910
Provision for loss in fair value..................... (6,494) (6,682) (21,334) (12,561)
Rental income (carrying costs), net.................. (3,198) (2,653) (6,459) (8,586)
------------ ------------ ------------ ------------
(Loss) gain on real estate owned, net................ $ (1,508) $ 1,216 $ 1,798 $ 12,763
============ ============ ============ ============
</TABLE>
At September 30, 1999 the Company had established valuation allowances
on real estate owned of $18.4 million, or 9.3% of the balance, as compared to
$14.3 million or 7.8% of real estate owned at September 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 three months ended September 30, 1999 of $65.1 was
primarily comprised of a $50.4 million of gain on the sale of Ocwen UK, $5.0 of
brokerage commissions earned in connection with Ocwen UK loan originations, a
$5.5 million gain on the sale of low income housing tax credit interests and
$1.4 million of management fees earned from OAC. For the three months ended
September 30, 1998, other income of $14.2 was primarily comprised of $5.0
million of gains on sales of investments in real estate, $2.9 million of
brokerage commissions earned in connection with Ocwen UK loan originations, a
$2.3 million gain on the sale of low income housing tax credit interests and
$1.8 million of management fees earned from OAC.
Other income for the nine months ended September 30, 1999 of $80.7
million was primarily comprised of a $50.4 million gain on the sale of Ocwen UK,
$12.9 million of brokerage commissions earned in connection with Ocwen UK loan
originations, a $5.0 million gains on sale of low-income housing tax credit
interests, $4.5 million of management fees earned from OAC and $1.8 million of
gains on sales of investments in real estate. For the nine months ended
September 30, 1998, other income of $29.9 million was primarily comprised of
$8.0 million of gains on sales of investments in real estate, $6.9 million of
gains on the sales of low-income housing tax credit interests, $5.7 million of
brokerage commissions earned in connection with Ocwen UK loan originations and
$4.1 million of management fees earned from OAC.
NON-INTEREST EXPENSE. Non-interest expense decreased $13.5 million or
21% in the third quarter of 1999 as compared to the third quarter of 1998, and
decreased $3.9 million or 3% in the nine months ended September 30, 1999, as
compared to the same period in 1998. The following table sets forth the
principal components of the Company's non-interest expense during the periods
indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------ ------------------------------
For the periods ended September 30, 1999 1998 1999 1998
- ---------------------------------------------------- ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Compensation and employee benefits.................. $ 29,451 $ 32,474 $ 80,991 $ 83,721
Occupancy and equipment............................. 8,447 9,464 27,816 24,388
Loan expenses....................................... 3,992 9,131 10,773 18,826
Net operating loss on investments in real estate
and certain low-income housing tax credit
interests......................................... 958 2,695 4,179 4,988
Amortization of goodwill ........................... 284 2,670 771 3,604
Other operating expenses............................ 8,859 9,082 27,368 20,250
------------ ------------ ------------ ------------
Total............................................ $ 51,991 $ 65,516 $ 151,898 $ 155,777
============ ============ ============ ============
</TABLE>
32
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The decrease in compensation and employee benefits during 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 shutdown of the domestic
subprime business, and a decrease in recruiting related expenses as a result of
a Company wide 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.
The decrease in loan expenses during 1999 reflects significant declines
in the average balance of loans. The average balance of loans (loans available
for sale, loan portfolio and discount loans) declined 34% and 35% during the
three and nine months ended September 30, 1999, respectively, as compared to the
same periods in 1998.
The decline in goodwill amortization in 1999 is primarily the result of
the write-off of goodwill in 1998 in connection with the closing of retail and
wholesale branch networks at OFS.
Other operating expenses are primarily comprised of professional fees,
marketing, travel related costs, and regulatory and insurance. The increase in
other operating expenses during the nine months ended September 30, 1999 was due
primarily to a $1.7 million increase in advertising and a $1.2 million increase
in professional fees.
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
-----------------------------------------------------------
Three months Ended Nine Months Ended September
Ownership September 30, September 30,
----------------------------- ----------------------------- ---------------------------
Entity Shares/Units % 1999 1998 1999 1998
- -------------------- ------------ ------- ------------ ------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
OAC................ 1,540,000 8.12% $ (270) $ -- $ (1,809) $ --
OPLP............... 1,808,733 8.71% 150 -- (1,797) --
Kensington (1)..... 549,993 35.93% (4,639) 2,765 (6,070) 3,309
Other.............. various various (9) 150 193 150
------------ ------------- ----------- -----------
$ (4,768) $ 2,915 $ (9,483) $ 3,459
============ ============= =========== ===========
</TABLE>
(1) Equity in earnings of investment in Kensington includes goodwill
amortization of $0.6 million and $1.8 million for the three and nine
months ended September 30, 1999, as compared to $0.6 million and $1.5
million for the three and nine months ended September 30, 1998,
respectively.
See "Changes in Financial Condition - Investment in Unconsolidated
Entities".
INCOME TAXES. Income tax expense (benefit) amounted to $8.2 million and
$2.9 million during the third quarter of 1999 and 1998, respectively, and $9.6
million and $(2.9) million for the nine months ended September 30, 1999, and
1998, respectively. OCN's income tax provision for 1999 reflects an expected tax
rate of 35.01%. The increase in the expected income tax rate for 1999 primarily
reflects the loss of foreign income tax credits as a result of the sale of Ocwen
UK on September 30, 1999. Income taxes include tax credits resulting from the
Company's investment in certain low-income housing tax credit interests. Tax
credits amounted to $4.7 million and $4.6 million for the third quarter of 1999
and 1998, respectively, and $13.7 million and $13.6 million for the nine months
ended September 30, 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".
33
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
CHANGES IN FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE. At September 30, 1999, securities
available for sale amounted to $545.8 million or 19% 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 September 30, 1999 included an aggregate of $1.6 million of unrealized
gains as compared to $21.7 million of net unrealized gains ($22.0 million of
gross gains and $0.3 million of gross losses) at December 31, 1998.
The following table sets forth the fair value of the Company's
securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
Increase (Decrease)
September 30, December 31, ----------------------
1999 1998 Dollars Percent
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage-related securities:
Single-family residential:
CMOs (AAA-rated) ................................ $ 436,335 $ 344,199 $ 92,136 27%
Subordinates:
B-rated ....................................... 3,241 4,940 (1,699) (34)
BB-rated ...................................... 5,659 9,921 (4,262) (43)
BBB-rated ..................................... -- 17,593 (17,593) (100)
Unrated ....................................... 14,654 58,359 (43,705) (75)
Subprime residuals:
Unrated ....................................... 81,719 135,187 (53,468) (40)
AAA-rated non agency interest only .............. -- 6,981 (6,981) (100)
--------- --------- ---------
541,608 577,180 (35,572) (6)
--------- --------- ---------
Multi-family residential and commercial:
Unrated interest only ........................... 47 106 (59) (56)
AAA-rated interest only ......................... 18 -- 18 100
BB rated interest only ......................... 2 -- 2 100
Subordinates:
B-rated ....................................... 1,166 1,230 (64) (5)
Unrated ....................................... 2,957 14,831 (11,874) (80)
--------- --------- ---------
4,190 16,167 (11,977) (74)
--------- --------- ---------
Total ......................................... $ 545,798 $ 593,347 $ (47,549) (8)
========= ========= =========
</TABLE>
The Company's securities available for sale decreased by $47.5 million
or 8% during the nine months ended September 30, 1999, due primarily to $413.6
million of maturities and principal repayments, $110.7 million of subprime
residuals sold in connection with the sale of Ocwen UK on September 30, 1999,
$48.1 million of impairment and $9.2 million of net premium amortization, offset
by $431.0 million of purchases and the acquisition of $50.6 million of
subordinate and residual securities in connection with the Company's
securitization of loans.
At September 30, 1999, the fair value of the Company's investment in
subordinate and residual interests amounted to $109.4 million ($107.4 million of
amortized cost) or 20% of total securities available for sale and supported
senior classes of securities having an outstanding principal balance of $3.3
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.
34
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
The Company generally retains subordinate and residual securities,
which are certificated, related to its securitization of loans. Subordinate and
residual interests in mortgage-related securities provide credit support to the
more senior classes of the mortgage-related securities. Principal from the
underlying mortgage loans generally is allocated first to the senior classes,
with the most senior class having a priority right to the cash flow from the
mortgage loans until its payment requirements are satisfied. To the extent that
there are defaults and unrecoverable losses on the underlying mortgage loans,
resulting in reduced cash flows, the most subordinate security will be the first
to bear this loss. Because subordinate and residual interests generally have no
credit support, to the extent there are realized losses on the mortgage loans
comprising the mortgage collateral for such securities, the Company may not
recover the full amount or, indeed, any of its initial investment in such
subordinate and residual interests. The Company generally retains the most
subordinate classes of the securities from the securitization and therefore will
be the first to bear any credit losses.
The Company determines the present value of anticipated cash flows at
the time each securitization transaction closes, utilizing valuation assumptions
appropriate for each particular transaction. The significant valuation
assumptions include the anticipated prepayment speeds and the anticipated credit
losses related to the underlying mortgages. In order to determine the present
value of this estimated excess cash flow, the Company currently applies a
discount rate of 18% to the projected cash flows on the unrated classes of
securities. The annual prepayment rate of the securitized loans is a function of
full and partial prepayments and defaults. The Company makes assumptions as to
the prepayment rates of the underlying loans, which the Company believes are
reasonable, in estimating fair values of the subordinate securities and residual
securities retained. During 1999, the Company utilized proprietary prepayment
curves generated by the Company (reaching an approximate range of annualized
rates of 15.0%-35.0%). In its estimates of annual loss rates, the Company
utilizes assumptions that it believes are reasonable. The Company currently
estimates annual losses of between 1.0% and 6.5% 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
35
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
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.
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 nine months ended September 30, 1999,
subordinate securities with a fair value of $27.7 million were distributed by
the Bank to the Company in the form of a dividend. At September 30, 1999, the
Bank held no subordinate securities.
36
<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 September 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 9/30/99 PERCENTAGE 9/30/99 PURCHASE 9/30/99
------------------------- -------- ----- ------ -------- -------- -------- ---------- --------- -------- -------
<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 UR (a),(b) $70,773 $45,130 50.00% None 15.70% 10.96%
BCF 1997 R1(5).......... B4 Mar-97 UR (b),(c) 21,784 9,241 49.71 None 13.46 (38.07)
BCF 1997 R2 (5)......... B4 Jun-97 Ba2, BB (b),(c) 6,358 5,816 73.54 7.62% 9.58 1.00
B5 B2,B 6,264 5,730 73.54 4.06 10.74 (1.19)
B6 UR 13,883 6,545 73.54 None 15.98 (5.02)
BCF 1997 R3 (5)......... B4 Dec-97 UR (b),(d) 69,582 43,332 50.24 None 15.84 (37.66)
ORMBS 1998 R1 (6)....... B4 Mar-98 UR (b),(d) 101,774 81,720 50.34 None 20.50 (30.46)
ORMBS 1998 R2 (6)....... B4A Jun-98 Ba2 (b) 1,056 984 100.00 6.87 13.22 (30.26)
B4F Ba2 937 895 100.00 8.75 19.23 (22.46)
B5A B2 880 851 100.00 5.13 23.78 (28.02)
B5F B2 937 895 100.00 6.43 11.78 (23.38)
B6A UR 3,696 2,520 100.00 None 16.72 (5.24)
B6F UR 3,345 2,479 100.00 None 19.50 (14.43)
ORMBS 1998 R3 (6)....... B4 Sep-98 Ba2, BB (b),(d) 11,765 11,527 85.87 12.01 11.71 (27.65)
B5 B2, B 9,151 8,965 85.87 8.31 16.54 (23.24)
B6 UR 26,145 20,148 85.87 None 18.00 (15.31)
ORMBS 1999 RI (6)...... B5A Mar-99 B2, B (b),(d) 1,630 1,573 100.00 6.21 17.73 25.65
B5F B2, B 1,843 1,762 100.00 5.93 17.74 23.94
B6A UR 3,586 3,392 100.00 None 18.00 43.21
B6F UR 4,299 4,030 100.00 None 18.00 39.70
ORMBS 1999 R2 (6) ...... B4 Jun-99 BB (a),(c),(d) 10,530 10,421 100.00 4.09 13.45 18.54
B5 B 4,680 4,632 100.00 6.06 18.45 36.61
B6 UR 7,020 6,862 100.00 None 18.00 73.52
CSFB 1996-1R
(ITT 94-P1) (7)....... 4B2 Oct-96 UR (b),(c) 1,046 174 100.00 None N/A N/A
Subprime residuals:
SBMS 1996 3 (1)......... R Jun-96 UR (a),(b) 130,062 35,406 100.00 14.35 OC 15.52 2.79
MLM1 1996 1 (2)......... R Sep-96 UR (a),(b) 81,142 21,968 100.00 21.11 OC 15.16 4.38
MS 1997 1 (3)........... X1 Jun-97 UR (a),(b) 17,727 11,519 100.00 4.21 OC 21.47 15.23
X2 87,118 28,210 100.00 11.20 OC 20.38 5.68
1997 OFS 2 (4).......... X Sep-97 UR (a),(b) 102,201 48,550 100.00 7.38 OC 19.65 7.28
1997 OFS 3 (4).......... X Dec-97 UR (a),(b) 208,784 120,712 100.00 6.99 OC 19.59 14.54
1998 OFS 1 (4).......... X Mar-98 UR (b),(d) 161,400 103,524 100.00 2.96 OC 18.00 13.79
1998 OFS 2 (4).......... X Jun-98 UR (a),(b) 382,715 217,981 100.00 5.93 OC 19.46 6.29
1998 OFS 3 (4).......... X Sep-98 UR (a),(d) 261,649 209,004 100.00 3.88 OC 18.00 17.33
1998 OFS 4 (4).......... X Dec-98 UR (a),(b),(c) 349,000 321,414 100.00 3.06 OC 18.00 20.33
1999 OFS 1 (4) ......... X Jun-99 UR (a),(b) 148,628 145,120 100.00 3.21 OC 18.00 17.88
MULTI-FAMILY AND COMMERCIAL
Subordinates:
BCF 1997 C1 (2)......... F Dec-97 B (c) 3,210 3,210 100.00 16.40 10.35 11.47
G UR 12,197 12,207 100.00 None 15.00 21.35
Interest-only:
BCF 1997 C1 (2)......... X1 Dec-97 UR (c) 67,350 28,245 100.00 N/A 6.93 51.44
X2 UR 35,359 20,114 100.00 N/A 8.53 37.89
E UR 10,271 10,271 100.00 N/A 7.00 30.72
FNMA 1995 M2 (3) M Jun-95 UR (c) 100,875 10,854 100.00 N/A 0.00 (17.79)
BFBT Arm Strip.......... IO Jun-94 UR N/A 157,182 8,727 100.00 N/A 0.00 (25.81)
ISSUERS: (FN160253)
(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)
Certificates (9) Federal National Mortgage Association (c) Fitch
(5) BlackRock Capital Finance L.P. (10) Berkley Federal Bank & Trust (d) DCR
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
COUPON AT LTV/DSCR AT CPR AT LOSSES AT PRODUCT TYPE AT COLLATERAL BALANCE
SECURITIZATION (ISSUER) 9/30/99 AT 9/30/99 9/30/99 9/30/99 9/30/99 9/30/99 ISSUANCE 9/30/99
- ----------------------- --------- ---------- ----------- ----------- ----------- ----------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Single-Family Residential (Dollars in thousands)
Subordinates:
BCF 1996 R1 (5)......... 10.03% 97.33% 12.60% 13.81% $ 22,479 98% Fixed, 2% ARM 505,513 301,834
BCF 1997 R1 (5)......... 10.06 111.14 21.08 13.56 11,881 98% Fixed, 3% ARM 177,823 117,931
BCF 1997 R2 (5)......... 8.01 87.06 29.97 13.67 6,463 25% Fixed, 75%ARM 251,790 161,094
BCF 1997 R3 (5)......... 9.62 111.06 21.23 11.39 24,132 98% Fixed, 2% ARM 579,851 446,895
ORMBS 1998 R1 (6)....... 8.93 120.57 23.44 8.48 17,721 98% Fixed, 2% ARM 565,411 493,665
ORMBS 1998 R2 (6)....... 8.96 88.68 29.38 13.73 1,792 45% Fixed, 55%ARM 123,917 97,551
ORMBS 1998 R3 (6)....... 8.95 126.64 34.92 7.41 5,484 98% Fixed, 2% ARM 261,452 242,420
ORMBS 1999 R1 (6)....... 9.01 86.32 21.66 13.34 105 56% Fixed, 44%ARM 147,101 132,580
ORMBS 1999 R2 (6)...... 9.38 116.47 9.72 8.55 101 100%Fixed 117,004 113,315
CSFB 1996 1R
(ITT 94-P1) (7) ..... 7.19 N/A 1.64 N/A 156 100% 1-Year CMT 32,487 5,657
Subprime residuals:
SBMS 1996 3 (1)......... 10.97 69.35 20.98 32.59 2,917 52% Fixed, 43%ARM 130,062 35,406
MLM1 1996 1 (2)......... 11.23 75.22 17.41 34.92 1,775 34% Fixed, 66%ARM 81,142 21,968
MS 1997 1 (3)........... 10.54 74.99 18.14 34.64 1,251 29% Fixed, 71%ARM 17,727 11,519
11.15 74.59 18.14 34.64 1,251 29% Fixed, 71%ARM 87,118 28,210
1997 OFS 2 (4).......... 10.75 79.24 20.09 30.65 1,053 19% Fixed, 81%ARM 102,201 48,550
1997 OFS 3 (4).......... 10.10 79.12 16.99 26.43 2,036 17% Fixed, 83%ARM 208,784 120,712
1998 OFS 1 (4).......... 10.32 79.59 19.36 25.24 1,794 14% Fixed, 86%ARM 161,400 103,524
1998 OFS 2 (4).......... 10.84 75.57 14.93 35.77 2,367 39% Fixed, 61%ARM 382,715 217,981
1998 OFS 3 (4).......... 10.35 79.09 18.91 19.65 943 29% Fixed, 71%ARM 261,649 209,004
1998 OFS 4 (4).......... 10.49 76.70 21.60 8.95 52 41% Fixed, 59%ARM 349,000 321,414
1999 OFS 1 (4).......... 9.89 75.54 9.09 8.51 0 64% Fixed, 36%ARM 146,628 145,120
MULTI-FAMILY AND COMMERCIAL
Subordinates:
BCF 1997 C1 (2)......... 10.22 1.28 15.10 N/A 142 20% Multi-family, 128,387 74,411
19% Hotel, 16%
Industrial
Interest-only:
BCF 1997 C1 (2)......... 10.22 1.28 15.10 N/A 142 20% Multi-family, 128,387 74,411
19% Hotel, 16%
Industrial
FNMA 1995 M2 (3)........ 9.50 1.35 -- 9.55 -- 100% 216,797 138,251
Multi-family
BFBT Arm Strip.......... 8.35 N/A N/A N/A N/A 100% 157,182 8,727
Conventional
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 September 30, 1999.
<TABLE>
<CAPTION>
DESCRIPTION CALIFORNIA FLORIDA TEXAS NEW YORK MARYLAND OTHER (1) TOTAL
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Single family residential .... $ 669,741 $ 257,923 $ 248,955 $ 196,590 $ 157,851 $1,653,726 $3,184,786
Multi-family and commercial.. 42,869 16,699 1,872 27,160 8,947 85,976 183,523
Other ....................... 748 13 -- 116 59 1,448 2,384
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total ....................... $ 713,358 $ 274,635 $ 250,827 $ 223,866 $ 166,857 $1,741,150 $3,370,693
========== ========== ========== ========== ========== ========== ==========
Percentage (2) .............. 21% 8% 7% 7% 5% 52% 100%
========== ========== ========== ========== ========== ========== ==========
</TABLE>
(1) No other individual state makes up more than 9.0% 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 September 30, 1999.
<TABLE>
<CAPTION>
ANTICIPATED ANTICIPATED
ORIGINAL REMAINING WEIGHTED
ANTICIPATED YIELD TO AVERAGE
AMORTIZED PERCENT YIELD TO MATURITY AT REMAINING
RATING/DESCRIPTION COST FAIR VALUE OWNED MATURITY 9/30/99(1) COUPON LIFE (2)
- --------------------------------- --------- ---------- ------- ----------- ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
SINGLE-FAMILY RESIDENTIAL:
B-rated subordinates........ $ 2,935 $ 3,241 91.18% 16.84 4.59% 7.20% 2.56
BB-rated subordinates....... 5,185 5,659 87.85 13.07% (6.05) 6.90 2.71
Unrated subordinates........ 14,200 14,654 56.41 14.58 (7.75) 8.26 2.91
Unrated subprime residuals.. 81,224 81,719 100.00 18.47 13.22 N/A 7.01
MULTI-FAMILY AND COMMERCIAL:
Unrated interest-only....... -- 47 N/A N/A N/A N/A N/A
AAA-rated interest-only..... -- 18 N/A N/A N/A N/A N/A
BB-rated interest-only...... -- 2 N/A N/A N/A N/A N/A
B-rated subordinates........ 1,162 1,166 51.20 10.90 11.47 10.00 6.49
Unrated subordinates........ 2,729 2,957 51.20 26.40 21.35 10.00 7.32
</TABLE>
(1) Changes in the September 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 September 30, 1999 book
value.
The following table sets forth the property types of the Company's
commercial mortgage-backed securities at September, 1999, based upon the
principal amount.
PERCENTAGE
PROPERTY TYPE INVESTED
--------------------------------- ----------
Multi-family..................... 74.23%
Lodging.......................... 6.03
Warehouse........................ 5.84
Office........................... 2.37
Mixed Use........................ 4.53
Other............................ 7.00
---------
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>
Actual Life-to-Date CPR = 100 x [(1 - Final Aggregate Balance actual ) ( 12 ) ]
[ ------------------------------------- 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 SEPTEMBER 30, 1999 - Effective yield
from inception to maturity based on the purchase price, actual cash flows
received from inception until the respective date, and the then current estimate
of future cash flows under the assumptions at the respective date.
ANTICIPATED YIELD TO REMAINING MATURITY AT SEPTEMBER 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 ("UR") which,
if included in a securitization, will always receive interest last and
experience losses first.
40
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
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.
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
September 30, 1999, which are carried at the lower of cost or fair value,
decreased by $111.0 million or 62% from December 31, 1998, and consist primarily
of single family residential loans to subprime borrowers. The decline in loans
available for sale is primarily attributable to the Company's sale of Ocwen UK
on September 30, 1999 and its shutdown of operations at OFS. The Company
generally intends to sell or securitize its single family residential loans to
subprime borrowers and, as a result, all of such loans were classified as
available for sale at September 30, 1999 and December 31, 1998.
The following table sets forth the composition of the Company's loans
available for sale by type of loan at the dates indicated.
September 30, 1999 December 31,1998
------------------ ----------------
(Dollars in thousands)
Single family residential loans......... $ 66,680 $ 177,578
Consumer loans.......................... 149 269
------------ -------------
$ 66,829 $ 177,847
============ =============
41
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
The following table sets forth the activity in the Company's net loans available
for sale during the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
-------------------------- --------------------------
For the periods ended September 30, 1999 1998 1999 1998
- -------------------------------------------------------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ......................... $ 132,425 $ 338,359 $ 177,847 $ 177,041
Purchases:
Single family residential (1) (2) ................... 7,200 15,974 54,303 778,987
Originations:
Single family residential: (1)
Domestic .......................................... 17,458 174,404 206,171 527,519
Foreign (Ocwen UK) ................................ 216,784 88,039 509,791 134,145
----------- ----------- ----------- -----------
234,242 262,443 715,962 661,664
Sales (3) .............................................. (299,843) (258,195) (858,360) (1,201,471)
Decrease (increase) in lower of cost or market reserve.. 1,215 (835) 3,179 (3,266)
Principal repayments, net of capitalized interest ...... (5,310) (17,997) (15,901) (70,463)
Transfer to real estate owned .......................... (3,100) (2,413) (10,201) (5,156)
----------- ----------- ----------- -----------
Net increase (decrease) in loans .................... (65,596) (1,023) (111,018) 160,295
----------- ----------- ----------- -----------
Balance at end of period ............................... $ 66,829 $ 337,336 $ 66,829 $ 337,336
=========== =========== =========== ===========
</TABLE>
(1) During the nine months ended September 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 nine months
ended September 30, 1998 include $421.3 million purchased from the U.S.
operations of Cityscape Financial Corp.
(3) Sales for the three and nine months ended September 30,1999, includes
$297.5 million of subprime single family residential loans sold in
connection with the sale of Ocwen UK on September 30, 1999. Also
included in sales for the nine months ended September 30, 1999 is the
securitization of 1,381 domestic subprime single family loans with an
aggregate unpaid principal balance of $148.6 million and 8,983 foreign
subprime single family loans with an unpaid balance of $295.2 million.
No loans were securitized during the third quarter of 1999. Included in
sales for the nine months ended September 30, 1998 is the
securitization of 8,166 domestic subprime single family loans with an
aggregate unpaid principal balance of $805.8 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. The following
table sets forth the five states or countries in which the largest amount of
properties securing the Company's loans available for sale were located at
September 30, 1999:
Single-family
Residential Consumer Total
------------- ---------- ------------
(Dollars in thousands)
Florida............... $ 9,549 $ 67 $ 9,616
New Jersey............ 9,103 -- 9,103
Illinois.............. 5,653 -- 5,653
Michigan.............. 5,488 -- 5,488
New York.............. 5,275 -- 5,275
Other(1).............. 31,612 82 31,694
----------- ---------- ------------
Total................. $ 66,680 $ 149 $ 66,829
=========== ========== ============
(1) Consists of properties located in 42 other states, none of which
aggregated over $4.5 million in any one state.
42
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
The following table presents a summary of the Company's non-performing
loans (loans which were past due 90 days or more) in the loans available for
sale portfolio at the dates indicated:
September 30, December 31,
1999 1998
------------ ------------
(Dollars in thousands)
Non-performing loans:
Single family (1)....................... $ 20,030 $ 39,415
Consumer................................ 1 9
------------ ------------
$ 20,031 $ 39,424
============ ============
Non-performing loans as a percentage of:
Total net loans available for sale...... 29.97% 22.17%
Total assets............................ 0.72% 1.19%
(1) Includes $7.2 million ((pound)5.4 million) of non-performing loans
related to Ocwen UK at December 31, 1998.
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
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 September 30, 1999, the Company's net
discount loan portfolio amounted to $974.5 million or 35% 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.
September 30, December 31,
1999 1998
------------ ------------
(Dollars in thousands)
Single family residential loans.......... $ 495,382 $ 597,100
Multi-family residential loans........... 250,821 244,172
Commercial real estate loans (1)......... 465,931 449,010
Other loans (2).......................... 19,869 10,144
------------ ------------
Total discount loans.................. 1,232,003 1,300,426
Unaccreted discount (3).................. (237,209) (252,513)
------------ ------------
994,794 1,047,913
Allowance for loan losses................ (20,322) (21,402)
------------ ------------
Discount loans, net................... $ 974,472 $ 1,026,511
============ ============
(1) The balance at September 30, 1999 consisted of $141.0 million of loans
secured by office buildings, $99.9 million of loans secured by hotels,
$56.3 million of loans secured by retail properties or shopping centers
and $168.7 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) Other loans includes $15.6 million and $8.2 million at September 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.
43
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
(3) The balance at September 30, 1999 consisted of $126.7 million on single
family residential loans, $39.7 million on multi-family residential
loans, $69.6 million on commercial real estate loans and $1.2 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.
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 September 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............... $ 40,409 $ 17,548 $ 121,483 $ 179,440
New York................. 51,095 4,970 81,574 137,639
Michigan................. 8,291 64,724 23,308 96,323
Illinois................. 17,769 72,366 1,304 91,439
New Jersey............... 46,008 1,403 9,639 57,050
Other (1)................ 205,097 50,142 177,664 432,903
------------ ------------ ------------- -------------
Total................ $ 368,669 $ 211,153 $ 414,972 $ 994,794
============ ============ ============= =============
</TABLE>
(1) Consists of properties located in 44 other states, none of which
aggregated over $53.7 million in any one state.
The following tables set forth the activity in the Company's net
discount loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three months ended September 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..... $ 1,008,764 6,737 $ 1,421,506 10,315
Acquisitions(1)......................... 84,866 758 173,473 1,033
Resolutions and repayments (2).......... (52,182) (471) (255,905) (571)
Loans transferred to real estate owned.. (50,987) (617) (104,088) (1,012)
Sales(3)................................ (25,069) (45) (202,758) (2,725)
Decrease in discount.................... 8,997 -- 60,606 --
Decrease in allowance................... 83 -- 1,757 --
----------- ----------- ----------- ----------
Balance at end of period, net........... $ 974,472 6,362 $ 1,094,591 7,040
=========== =========== =========== ==========
</TABLE>
(1) During the three months ended September 30, 1999, acquisitions
consisted primarily of $61.7 million of single family residential
loans, $3.4 million of multi-family residential loans, $15.5 million of
commercial real estate loans and $4.2 million of other loans. For the
three months ended September 30, 1998, acquisitions consisted primarily
of $87.2 million of single family residential loans, $20.6 million of
multi-family residential loans, and $60.8 million of commercial real
estate loans and $4.9 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) There were no securitizations of loans executed by the Company during
the third quarter ended September 30, 1999. Included in sales for the
three months ended September 30, 1998 is the securitization of 2,706
discount single family residential mortgage loans with an aggregate
unpaid principal balance of $172.9 million.
44
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
<TABLE>
<CAPTION>
Nine months ended September 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)......................... 571,324 4,121 849,779 5,743
Resolutions and repayments (2).......... (176,497) (856) (461,697) (1,658)
Loans transferred to real estate owned.. (159,149) (1,787) (253,295) (2,335)
Sales(3)................................ (304,101) (3,216) (558,317) (7,690)
Decrease in discount.................... 15,304 -- 81,547 --
Decrease in allowance................... 1,080 -- 2,398 --
----------- ----------- ----------- ----------
Balance at end of period, net........... $ 974,472 6,362 $ 1,094,591 7,040
=========== =========== =========== ==========
</TABLE>
45
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
(1) During the nine months ended September 30, 1999, acquisitions consisted
primarily of $335.8 million of single family residential loans, $75.3
million of multi-family residential loans, $147.3 million of commercial
real estate loans and $12.9 million of other loans. For the nine months
ended September 30, 1998, acquisitions consisted primarily of $422.4
million of single family residential loans, $169.1 million of
multi-family residential loans and $258.2 million of commercial real
estate 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 nine months ended September 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 nine months ended September 30, 1998 is the
securitization of 7,638 discount single family residential mortgage
loans with an aggregate unpaid principal balance of $498.8 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>
September 30, 1999 December 31, 1998
----------------------- ----------------------
Principal % of Principal % of
Amount Loans Amount Loans
----------- --------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans without Forbearance Agreements:
Current....................................... $ 642,615 52.16% $ 578,269 44.47%
Past due 31 to 89 days........................ 16,787 1.36 35,555 2.73
Past due 90 days or more...................... 442,623 35.93 509,838 39.21
Acquired and servicing not yet transferred.... 32,448 2.63 57,048 4.39
----------- --------- ---------- -------
Subtotal.................................... 1,134,473 92.08 1,180,710 90.80
----------- --------- ---------- -------
Loans with Forbearance Agreements:
Current....................................... 4,415 0.36 1,180 0.09
Past due 31 to 89 days........................ 2,420 0.20 4,046 0.31
Past due 90 days or more (1).................. 90,695 7.36 114,490 8.80
----------- --------- ---------- -------
Subtotal.................................... 97,530 7.92 119,716 9.20
----------- --------- ---------- -------
Total............................................ $ 1,232,003 100.00% $1,300,426 100.00%
=========== ========= ========== =======
</TABLE>
(1) Includes $90.1 million of loans which were less than 90 days past due under
the terms of the forbearance agreements at September 30, 1999, of which
$83.3 million were current and $6.8 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.
46
<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.
September 30, December 31,
1999 1998
------------ ------------
(Dollars in thousands)
Single family residential loans.............. $ 1,863 $ 30,361
Multi-family residential loans:
Permanent................................. 28,121 53,311
Construction.............................. 12,716 22,288
------------ ------------
40,837 75,599
------------ ------------
Commercial real estate and land loans:
Hotel:
Permanent............................... 20,524 29,735
Construction............................ -- 6,896
Office buildings.......................... 70,661 93,068
Land...................................... 1,788 2,266
Other..................................... -- 6,762
------------ ------------
Total................................... 92,973 138,727
------------ ------------
Consumer..................................... 85 132
------------ ------------
Total loans............................. 135,758 244,819
Undisbursed loan funds....................... (2,140) (7,100)
Unaccreted discount.......................... (1,101) (2,480)
Allowance for loan losses.................... (5,491) (4,927)
------------ ------------
Loans, net.............................. $ 127,026 $ 230,312
============ ============
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 September 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 $ 4,237 $ 22,368 $ 33 $ 26,796
Florida................... -- -- 14,206 -- 14,206
California................ 21 9,030 5,090 -- 14,141
Massachusetts............. 66 -- 12,865 -- 12,931
Virginia.................. -- -- 9,718 -- 9,718
Other (1)................. 1,618 27,570 28,726 52 57,966
---------- ------------ ----------- ---------- ----------
Total..................... $ 1,863 $ 40,837 $ 92,973 $ 85 $ 135,758
========== ============ =========== ========== ==========
</TABLE>
(1) Consists of properties located in 19 other states, none of which
aggregated over $7.9 million in any one state.
47
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
The following table sets forth the activity in the Company's gross loan
portfolio during the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------- ----------------------
For the periods ended September 30, 1999 1998 1999 1998
- ----------------------------------------------------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period....................... $ 146,255 $ 296,361 $ 244,819 $ 294,925
Originations:
Multi-family residential loans.................... -- 7,950 4,225 30,221
Commercial real estate loans...................... -- 43,336 11,500 103,266
--------- --------- --------- ---------
Total loans originated.......................... -- 51,286 15,725 133,487
--------- --------- --------- ---------
Sales (1)............................................ (1,063) -- (26,549) --
Principal repayments, net of capitalized interest.... (9,434) (107,993) (95,665) (188,758)
Loans and transfer to real estate owned.............. -- -- (2,572) --
--------- --------- --------- ---------
Net increase (decrease) in loans................ (10,497) (56,707) (109,061) (55,271)
--------- --------- --------- ---------
Balance at end of period (2)......................... $ 135,758 $ 239,654 $ 135,758 $ 239,654
========= ========= ========= =========
</TABLE>
(1) Included in sales for the nine months ended September 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 September 30,
1999, as compared to September 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 (see Note (1) above). As of June 30, 1999, the
Company ceased origination of multi-family 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:
September 30, December 31,
1999 1998
----------- -----------
(Dollars in thousands)
Nonperforming loans (1):
Single family residential loans.............. $ 288 $ 1,169
Multi-family residential loans............... 9,488 7,392
Commercial real estate and other............. 22,597 488
----------- -----------
$ 32,373 $ 9,049
=========== ===========
Nonperforming loans as a percentage of:
Total loans (2).............................. 24.43% 3.85%
Total assets................................. 1.16% 0.27%
Allowance for loan losses as a percentage of:
Total loans (2).............................. 4.14% 2.09%
Nonperforming loans.......................... 16.96% 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
48
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
losses. While management uses all information available to it to estimate losses
on loans, future changes to the allowance may become necessary based on changes
in economic and market conditions. The OTS, as part of its examination process,
periodically reviews the adequacy of the Company's allowance for loan losses.
Such agency may require the company to recognize changes to the allowance based
on its judgment about information available to it at the time of examination.
The following table sets forth the allocation of the Company's
allowance for loan losses at the dates indicated by loan category and the
percentage of loans in each category to total loans in the respective portfolios
at the dates indicated:
<TABLE>
<CAPTION>
September 30, 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................ $ 25 0.4% $ 1,863 1.3% $ 215 4.3% $ 30,361 12.4%
Multi-family................. 2,023 36.9 40,837 30.1 2,714 55.1 75,599 30.9
Commercial real estate....... 3,443 62.7 92,973 68.5 1,999 40.6 138,727 56.7
Consumer..................... -- -- 85 0.1 -- -- 132 --
--------- --------- ---------- ---------- -------- --------- ----------- --------
$ 5,491 100.0% $ 135,758 100.0% $ 4,928 100.0% $ 244,819 100.0%
========= ========= ========== ========== ======== ========= =========== ========
Discount loan portfolio:
Single family................ $ 10,794 53.1% $ 495,382 40.2% $ 10,307 48.2% $ 597,100 45.9%
Multi-family................. 2,747 13.5 250,821 20.4 2,457 11.5 244,172 18.8
Commercial real estate....... 5,957 29.3 465,931 37.8 8,607 40.2 449,010 34.5
Other........................ 824 4.1 19,869 1.6 31 0.1 10,144 0.8
--------- --------- ---------- ---------- -------- --------- ----------- --------
$ 20,322 100.0% $1,232,003 100.0% $ 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 nine months ended September 30, 1999.
<TABLE>
<CAPTION>
Balance Balance
December 31, September 30,
1998 Provision Charge-offs Recoveries 1999
------------ ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Loan portfolio:
Single family................... $ 215 $ (183) $ (7) $ -- $ 25
Multi-family.................... 2,714 (691) -- -- 2,023
Commercial real estate.......... 1,999 1,444 -- -- 3,443
Consumer........................ -- -- -- -- 0
---------- ----------- ---------- ---------- ----------
$ 4,928 $ 570 $ (7) $ -- $ 5,491
========== =========== ========== ========== ==========
Discount loans:
Single family................... $ 10,307 $ 3,264 $ (3,103) $ 326 $ 10,794
Multi-family.................... 2,457 791 (501) -- 2,747
Commercial...................... 8,607 (262) (2,388) -- 5,957
Other........................... 31 825 (32) -- 824
---------- ----------- ---------- ---------- ----------
$ 21,402 $ 4,618 $ (6,024) $ 326 $ 20,322
========== =========== ========== ========== ==========
</TABLE>
49
<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>
September 30, December 31,
1999 1998
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Investments solely as a limited partner made prior to May 18, 1995.............. $ 17,929 $ 19,607
Investments solely as a limited partner made on or after May 18, 1995........... 72,642 56,299
Investments both as a limited and, through subsidiaries, as a general partner... 71,205 68,258
----------- -----------
$ 161,776 $ 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. During the third quarter of 1999, the Company completed the
sale of its investment in eight low-income housing tax credit projects which had
a carrying value of $25.7 million for a gain of $5.5 million.
INVESTMENT IN UNCONSOLIDATED ENTITIES. The Company's investments in
unconsolidated entities was comprised of the following at the dates indicated.
Ownership Carrying Value
-------------------- ------------------------------------
Entity Shares/Units % September 30, 1999 December 31, 1998
- ------------------ ------------ ------ ------------------ -----------------
(Dollars in thousands)
OAC............... 1,540,000 8.12% $ 14,459 $ 16,268
OPLP.............. 1,808,733 8.71% 21,389 22,820
Kensington........ 549,993 35.93% 39,923 46,586
Other............. various various 636 1,219
----------- ----------
$ 76,407 $ 86,893
=========== ==========
Other consists primarily of the Company's joint venture investment,
which represents 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 nine months ended September 30, 1999, the Company recorded
equity in the losses of its investments in OAC and OPLP of $1.8 million and $1.8
million, respectively. At September 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 $32.7 million
((pound)19.8 million) at September 30, 1999, as compared to $34.5 million
((pound)20.9 million) at December 31, 1998. For the nine months ended September
30, 1999, the Company recorded equity in the losses of its investment in
Kensington of $6.1 million.
See Note 3 to the Interim Consolidated Financial Statements included in Item 1
hereof.
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
50
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
estimated costs to dispose. Rental income related to properties is reported as
earned. Holding and maintenance costs related to properties are recorded as
period costs as incurred. Decreases in market value of foreclosed real estate
subsequent to foreclosure are recognized as a valuation allowance on a property
specific basis. Subsequent increases in the market value of the foreclosed real
estate are reflected as reductions in the valuation allowance, but not below
zero. Such changes in the valuation allowance are charged or credited to income.
The following table sets forth certain information relating to the
Company's real estate owned at the dates indicated:
September 30, December 31,
1999 1998
------------- ------------
(Dollars in thousands)
Discount loan portfolio:
Single family residential........... $ 75,037 $ 94,641
Multi-family residential............ 2,463 20,130
Commercial real estate............. 93,876 82,591
------------- ------------
Total............................. 171,376 197,362
Loan portfolio......................... 2,666 227
Loans available for sale portfolio..... 4,307 3,962
------------- ------------
$ 178,349 $ 201,551
============= ============
The following table sets forth the activity in the valuation allowance
on real estate owned for the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
--------------------------- -------------------------
For the periods ended September 30, 1999 1998 1999 1998
- -------------------------------------------- ------------ ------------ ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period (1).......... $ 17,260 $ 11,204 $ 15,325 $ 12,346
Provision for loss in fair value............ 6,494 6,682 21,334 12,561
Charge-offs and sales....................... (5,374) (3,620) (18,279) (10,641)
------------ ------------ ----------- -----------
Balance at end of period (1)................ $ 18,380 $ 14,266 $ 18,380 $ 14,266
============ ============ =========== ===========
</TABLE>
(1) The valuation allowance as a percentage of total real estate owned was
9.34% at September 30, 1999 as compared to 7.07% at December 31, 1998,
and 7.75% at September 30, 1998.
The following tables set forth the activity in real estate owned during
the periods indicated.
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------------------
1999 1998
----------------------- -----------------------
No. of No. of
Amount Properties Amount Properties
--------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period ....... $ 183,162 1,866 $ 151,607 1,647
Properties acquired through
foreclosure or deed-in-lieu thereof:
Discount loans .................. 50,987 617 104,088 1,012
Loans available for sale ........ 3,100 38 2,413 30
Less discount transferred ....... (17,027) -- (29,955) --
--------- --------- --------- ---------
37,060 655 76,546 1,042
--------- --------- --------- ---------
Acquired in connection with
acquisitions of discount loans .... 6,358 93 3,798 52
Sales ................................ (47,111) (920) (59,169) (729)
Increase in allowance ................ (1,120) -- (3,062) --
--------- --------- --------- ---------
Balance at end of period ............. $ 178,349 1,694 $ 169,720 2,012
========= ========= ========= =========
</TABLE>
51
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
<TABLE>
<CAPTION>
Nine months ended September 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 .................. 159,149 1,787 253,295 2,335
Loans available for sale ........ 10,201 129 5,156 50
Loan portfolio .................. 2,572 4 --
Less discount transferred ....... (51,330) -- (75,877)
--------- --------- --------- ---------
120,592 1,920 182,574 2,385
--------- --------- --------- ---------
Acquired in connection with
acquisitions of discount loans .... 37,848 668 14,850 240
Sales ................................ (178,587) (2,893) (193,049) (2,118)
Increase in allowance ................ (3,055) -- (1,920) --
--------- --------- --------- ---------
Balance at end of period ............. $ 178,349 1,694 $ 169,720 2,012
========= ========= ========= =========
</TABLE>
The following table sets forth the amount of time that the Company had
held its real estate owned at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------ -----------------------
Amount % Amount %
------------ --------- ------------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One to two months................. $ 30,306 17.0% $ 38,444 19.1%
Three to four months.............. 16,887 9.4 79,264 39.3
Five to six months................ 10,086 5.7 27,115 13.4
Seven to twelve months............ 82,419 46.2 26,122 13.0
Over twelve months................ 38,651 21.7 30,606 15.2
------------ --------- ------------ -------
$ 178,349 100.0% $ 201,551 100.0%
============ ========= ============ =========
</TABLE>
The following table sets forth certain geographical information by type
of property at September 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.................. $ 4,987 94 $ 49,836 11 $ 54,823 105
California............... 14,811 263 6,728 6 21,539 269
Connecticut.............. 4,785 82 12,908 2 17,693 84
Georgia.................. 2,263 30 14,571 2 16,834 32
Pennsylvania............. 4,760 141 3,366 5 8,126 146
Other (1)................ 48,536 1,032 10,798 26 59,334 1,058
---------- ---------- ----------- ---------- ----------- ----------
Total................. $ 80,142 1,642 $ 98,207 52 $ 178,349 1,694
========== ========== =========== ========== =========== ==========
</TABLE>
(1) Consists of properties located in 45 other states, none of which
aggregated over $6.6 million in any one state.
DEPOSITS. Deposits decreased $398.4 million or 18% from December 31,
1998. The decrease in deposits during the nine months ended September 30, 1999
was primarily the result of a $252.6 million decrease in brokered deposits
obtained through national investment banking firms which solicit deposits from
their customers, a $103.4 million decrease in deposits obtained through direct
52
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
solicitation and marketing efforts to regional and local investment banking
firms, institutional investors and high net worth individuals and a $40.7
million decrease in escrow deposits. Brokered deposits obtained through national
investment banking firms amounted to $1.23 billion at September 30, 1999, as
compared to $1.48 billion at December 31,1998. Deposits obtained through direct
solicitation and marketing amounted to $274.0 million at September 30, 1999, as
compared to $377.4 million at December 31, 1998. At September 30, 1999, the
Company had $156.9 million of certificates of deposit in amounts of $100,000 or
more, including $77.5 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.
September 30, December 31,
1999 1998
------------- ------------
2003:
11.875% Notes due October 1........................... $ 125,000 $ 125,000
2004:
Loan payable due May 24 (LIBOR plus 150 basis points). 6,396 --
2005:
12% Subordinated Debentures due June 15............... 90,560 100,000
----------- -----------
$ 221,956 $ 225,000
=========== ===========
(1) On February 9, 1999, the Company repurchased $2.0 million of its 12%
Subordinated Debentures at par. On September 29, 1999, the Company
repurchased $7.4 million of its 12% Subordinated Debentures at below
par, resulting in an extraordinary gain of $0.4 million ($0.3 million
net of taxes).
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit amounted to $49.8 million at September 30, 1999, a
decrease of $129.4 million from December 31, 1998. The decrease is primarily the
result of the sale of Ocwen UK and shutdown of operations at OFS. Lines of
credit have been utilized primarily to finance subprime lending.
The Company's lines of credit obtained through its subsidiaries are
summarized as follows:
<TABLE>
<CAPTION>
Balance
Outstanding at Amount of Committed Maturity
Entity 9/30/99 Facility Amount Date Interest Rate
- --------------- -------------- ------------- ----------- --------- -----------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
OFS (1)........ $ 5,470 $ 200,000 $ 100,000 July 2001 LIBOR + 75 basis points
11,303 115,000 100,000 May 2000 LIBOR + 95 - 150 basis points
21,287 50,000 50,000 May 2000 LIBOR + 137.5 basis points
9,186 25,000 -- May 2000 LIBOR + 175 basis points
IMI (2) ....... 2,603 Lesser of $15,000 N/A N/A LIBOR + 150 basis points
--------- or 60% of market
value of
collateral
Total ......... $ 49,849
=========
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
Balance
Outstanding at Amount of Committed Maturity
Entity 12/31/98 Facility Amount Date Interest Rate
- --------------- -------------- ------------- ------------- -------------- -------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
OFS (1)........ $ 8,321 $ 200,000 $ 100,000 July 2001 LIBOR + 75 basis points
-- 100,000 -- March 1999 LIBOR + 75 basis points
9,757 185,000 100,000 April 1999 LIBOR + 60 basis points
30,666 50,000 50,000 May 1999 LIBOR + 112 basis points
2,276 20,000 -- month to month LIBOR + 250 basis points
8,472 15,000 -- April 1999 LIBOR + 150 basis points
IMI (2) ....... 2,477 Lesser of N/A N/A LIBOR + 150 basis points
$15,000 or 60%
of market value
of collateral
Ocwen UK (1)... 92,753 160,818 68,065 April 1999 LIBOR + 87.5 basis points
24,563 124,478 99,914 November 1999 LIBOR + 80 basis points
----------
Total ......... $ 179,285
==========
</TABLE>
(1) These lines are used to fund subprime 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.
For additional information regarding lines of credit, see "Liquidity,
Commitments and Off-Balance Sheet Risks."
COMPANY-OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY. In August
1997, Ocwen Capital Trust I issued $125.0 million of 10 7/8% Capital 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 nine months ended September 30, 1998 and 1999, the
Company recorded $3.4 million and $10.2 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 increased $1.0 million
during the nine months ended September 30, 1999. The increase in stockholders'
equity during this period was primarily attributable to $18.6 million of net
income and a $0.8 million decline in unrealized foreign currency translation
loss, offset by a $13.1 million decrease in unrealized gains on securities
available for sale and $5.3 million of repurchases of common stock. Through
September 30, 1999, the Company had repurchased 690,800 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
54
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
================================================================================
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.
Sources of liquidity include certificates of deposit obtained primarily
from wholesale sources. At September 30, 1999, the Company had $1.57 billion of
certificates of deposit, including $1.23 billion of brokered certificates
deposit obtained through national investment banking firms, all of which are
non-cancelable. At the same date scheduled maturities of certificates of deposit
during the 12 months ending September 30, 2000 and 2001 and thereafter, amounted
to $737.3 million, $377.0 million and $457.2 million, respectively. Brokered and
other wholesale deposits generally are more responsive to changes in interest
rates than core deposits and, thus, are more likely to be withdrawn from the
Company upon maturity as changes in interest rates and other factors are
perceived by investors to make other investments more attractive. Management of
the Company believes that it can adjust the rates paid on certificates of
deposit to retain deposits in changing interest rate environments, and that
brokered and other wholesale deposits can be both a relatively cost-effective
and stable source of funds. There can be no assurance that this will continue to
be the case in the future, however.
Sources of borrowings include FHLB advances, which are required to be
secured by single family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. At September 30, 1999,
the Company was eligible to borrow up to an aggregate of $565.4 million from the
FHLB of New York (subject to the availability of acceptable collateral) and had
$10.7 million of residential loans and $54.5 million of short duration CMO's
(all of which were held by the Bank) pledged as security for any such advances.
At September 30, 1999 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 September 30, 1999, the Company had
unrestricted cash and equivalents of $218.8 million (including $72.8 million
held at the Bank), $381.8 million of short duration CMOs (all of which were held
by the Bank), and $55.9 million of subordinate and residual mortgage- backed
securities that could be used to secure additional borrowings.
The Company believes that its existing sources of liquidity, including
internally generated funds, will be adequate to fund planned activities for the
foreseeable future, although there can be no assurances in this regard.
Moreover, the Company continues to evaluate other sources of liquidity, such as
lines of credit from unaffiliated parties, which will enhance the management of
its liquidity and the costs thereof.
The Company's operating activities used cash flows of $188.5 million
and provided cash flows of $272.1 million during the nine months ended September
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 Company's investing activities provided cash flows totaling $178.8
million and used cash flows totaling $423.6 million during the nine months ended
September 30, 1999 and 1998, respectively. During the foregoing periods, cash
flows from investing activities were provided primarily from the sale of Ocwen
UK (for $122.1 million cash) on September 30, 1999, 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 Company's financing activities used cash flows of $179.0 million
and provided cash flows totaling $257.1 million during the nine months ended
September 30, 1999 and 1998, respectively. During the foregoing periods cash
flows attributed to financing activities related primarily to the issuance of
obligations under lines of credit, as well as changes in deposits and securities
sold under agreements to repurchase.
55
<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 9.86% at September
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, the Bank may be limited in its
ability to pay cash dividends to the Company. The Bank held no subordinate or
residual mortgage-related securities at September 30, 1999. 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 12% Debentures. See Note 6 to the
Interim Consolidated Financial Statements included in Item 1 hereof. Future cash
dividends also depend on future operating results of the Bank.
At September 30, 1999, the Company had $4.9 million of commitments to
fund loans secured by multi-family residential buildings. 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.
56
<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 September 30, 1999, the Company had expended approximately 113%
of budgeted man-hours and incurred costs of approximately $2.1 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 assist the Company in
testing its software for compliance with 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.
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 brought in 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 its year 2000 posture was sound and conformed to FFIEC
requirements. The Company plans to conduct simulations of its business
continuity plan in November 1999. 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.
57
<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 nine months ended
September 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 $31,000 and $100,000 during the three and nine
months ended September 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 nine months ended September 30, 1999. Futures contracts had the effect of
decreasing the Company's net interest income by $49,000 during the nine months
ended September 30, 1998. See Note 5 to the Interim Consolidated Financial
Statements included in Item 1 hereof.
During the nine months ended September 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.
58
<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
September 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
$181.6 million at September 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>
September 30, 1999
---------------------------------------------------------------------
Within Four to More than Three
Three Twelve One Year to Years
Months Months Three Years and Over Total
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Interest-earning deposits ...................... $ 161,991 $ -- $ -- $ -- $ 161,991
Securities available for sale .................. 230,836 186,415 73,213 55,334 545,798
Loans available for sale (1) ................... 15,247 23,193 11,278 17,111 66,829
Investment securities, net ..................... -- -- -- 10,825 10,825
Loan portfolio, net (1) ........................ 31,071 47,524 32,694 15,737 127,026
Discount loan portfolio, net ................... 97,559 371,680 287,912 217,321 974,472
----------- ----------- ----------- ----------- -----------
Total rate-sensitive assets .................. 536,704 628,812 405,097 316,328 1,886,941
----------- ----------- ----------- ----------- -----------
Rate-Sensitive Liabilities:
NOW and money market checking deposits ......... 6,481 2,405 4,783 8,825 22,494
Savings deposits ............................... 75 200 396 781 1,452
Certificates of deposit ........................ 263,136 475,994 678,277 153,699 1,571,106
----------- ----------- ----------- ----------- -----------
Total interest-bearing deposits .............. 269,692 478,599 683,456 163,305 1,595,052
Securities sold under agreements to repurchase.. 109,383 -- -- -- 109,383
Obligations outstanding under lines of credit .. 49,849 -- -- -- 49,849
Notes and debentures ........................... 6,396 -- -- 215,560 221,956
----------- ----------- ----------- ----------- -----------
Total rate-sensitive liabilities ............. 435,320 478,599 683,456 378,865 1,976,240
Interest rate sensitivity gap before off-balance
sheet financial instruments .................. 101,384 150,213 (278,359) (62,537) (89,299)
Financial Instruments:
Swaptions and put option contracts ............. 144 403 -- -- 547
----------- ----------- ----------- ----------- -----------
Interest rate sensitivity gap ..................... $ 101,528 $ 150,616 $ (278,359) $ (62,537) $ (88,752)
=========== =========== =========== =========== ===========
Cumulative interest rate sensitivity gap .......... $ 101,528 $ 252,144 $ (26,215) $ (88,752)
=========== =========== =========== ===========
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets....... 5.38% 13.36% (1.39)% (4.70)%
=========== =========== =========== ===========
</TABLE>
(1) Balances have not been reduced for non-performing loans.
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
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,
59
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
================================================================================
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 September 30, 1999.
Rate Shock Board Limits Current
(in basis points) (minimum NPV Ratios) NPV Ratios
----------------- -------------------- ----------
+300 5.00% 20.30%
+200 6.00 20.41
+100 7.00 20.46
0 8.00 20.42
-100 7.00 20.35
-200 6.00 20.28
-300 5.00 20.23
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 September 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 16.96% (4.33)%
+200 11.31 (2.53)
+100 5.65 (0.99)
0 -- --
-100 (5.65) 0.87
-200 (11.31) 1.70
-300 (16.96) 2.59
60
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
================================================================================
Management of the Company believes that the assumptions used by it to evaluate
the vulnerability of the Company's operations to changes in interest rates
approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities and the
estimated effects of changes in interest rates on the Company's net interest
income and 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.
The Company entered into a foreign currency swap with a AAA-rated
counterparty and sold short foreign currency futures contracts to hedge its
equity investment in Kensington. See Note 5 to the Interim Consolidated
Financial Statements included in Item 1 hereof.
Prior to the sale of Ocwen UK, the Company sold 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. 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 (currency futures and swaps) and
related foreign currency equity investments and net exposures as of September
30, 1999 and December 31, 1998 were as follows.
Equity Investment Net Hedges Net Exposure
----------------- ----------- ------------
(Dollars in thousands)
SEPTEMBER 30, 1999:
Ocwen UK (1)............... $ -- $ 111,642 $ 111,642
Kensington................. $ 39,923 $ 48,208 $ 8,285
DECEMBER 31, 1998:
Ocwen UK (1)............... $ 53,436 $ 43,828 $ (9,608)
Kensington................. $ 46,586 $ 45,093 $ (1,493)
(1) Equity investment in Ocwen UK excludes unrealized gains on securities
available for sale. The Company sold its investment in Ocwen UK on
September 30, 1999. These currency futures were closed in October 1999.
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.
61
<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, 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.
62
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
================================================================================
(a) Exhibits.
3.1 Amended and Restated Articles of Incorporation (1)
3.2 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 (8)
10.7 Agreement of Merger dated as of July 25, 1999 among Ocwen
Financial Corporation, Ocwen Asset Investment Corp. and Ocwen
Acquisition Company (9)
27.1 Financial Data Schedule-For the three months ended September
30, 1999 (filed herewith)
99.1 Risk factors (8)
- ----------------------
(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.
(8) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
(9) 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.
63
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
================================================================================
(b) Reports on Form 8-K, filed during the quarter ended September 30, 1999.
(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.
(3) A Form 8-K was filed by the Company on August 19, 1999 which
contained a news release announcing the setting of the record
and meeting dates of shareholders relating to the proposed
acquisition of OAC by the Company.
64
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Ocwen Financial Corporation
By: /s/ MARK S. ZEIDMAN
---------------------------------------
Mark S. Zeidman,
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as its principal financial officer)
Date: November 15, 1999
65
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 94,517
<INT-BEARING-DEPOSITS> 161,991
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 545,798
<INVESTMENTS-CARRYING> 10,825
<INVESTMENTS-MARKET> 10,825
<LOANS> 1,168,327<F1>
<ALLOWANCE> 25,813<F2>
<TOTAL-ASSETS> 2,801,441
<DEPOSITS> 1,776,646
<SHORT-TERM> 159,232<F3>
<LIABILITIES-OTHER> 81,127
<LONG-TERM> 221,956
0
0
<COMMON> 608
<OTHER-SE> 436,786
<TOTAL-LIABILITIES-AND-EQUITY> 2,801,441
<INTEREST-LOAN> 128,952<F4>
<INTEREST-INVEST> 49,736
<INTEREST-OTHER> 6,412
<INTEREST-TOTAL> 185,100
<INTEREST-DEPOSIT> 75,166
<INTEREST-EXPENSE> 113,423
<INTEREST-INCOME-NET> 71,677
<LOAN-LOSSES> 5,188
<SECURITIES-GAINS> 4,486
<EXPENSE-OTHER> 171,577<F5>
<INCOME-PRETAX> 27,405
<INCOME-PRE-EXTRAORDINARY> 18,307
<EXTRAORDINARY> 253
<CHANGES> 0
<NET-INCOME> 18,560
<EPS-BASIC> 0.31
<EPS-DILUTED> 0.31
<YIELD-ACTUAL> 11.03
<LOANS-NON> 585,722
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,330
<CHARGE-OFFS> 6,031
<RECOVERIES> 326
<ALLOWANCE-CLOSE> 25,813
<ALLOWANCE-DOMESTIC> 25,813
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> Includes Loans Available for Sale of $66,829, Loan Portfolio of
$127,026, and Discount Loan Portfolio of $974,472.
<F2> Includes Allowance for Loan Losses on Loan Portfolio of $5,491 and on
the Discount Loan Portfolio of $20,322.
<F3> Includes Securities sold under agreements to repurchase of $109,383 and
Obligations outstanding under lines of credit of $49,849.
<F4> Includes Interest Income on Loans Available for Sale of $25,376, Loan
Portfolio of $18,985, and Discount Loans of $84,591.
<F5> Includes Non-interest expense of $151,898 and Distributions on Company
obligated, Mandatorily Redeemable Securities of Subsidiary Trust
Holding Solely Junior Subordinated Debentures of the Company of
$10,196, and Equity in Losses of Investment in Unconsolidated Entities
of $9,483.
</FN>
</TABLE>
