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, 2000
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,
2000: 67,152,363 shares
<PAGE>
OCWEN FINANCIAL CORPORATION
FORM 10-Q
<TABLE>
<CAPTION>
I N D E X
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PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Interim Consolidated Financial Statements (Unaudited)................................. 3
Consolidated Statements of Financial Condition
at September 30, 2000 and December 31, 1999........................................... 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 2000 and 1999.............................................. 4
Consolidated Statements of Comprehensive Income (Loss) for the three and nine
months ended September 30, 2000 and 1999.............................................. 5
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended September 30, 2000.......................................... 6
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999.............................................. 7
Notes to Consolidated Financial Statements............................................ 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 66
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 71
Item 4. Submission of Matters to a Vote of Security Holders................................... 71
Item 6. Exhibits and Reports on Form 8-K...................................................... 71
Signature...................................................................................... 73
</TABLE>
2
<PAGE>
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)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS:
Cash and amounts due from depository institutions............................... $ 31,055 $ 153,459
Interest earning deposits....................................................... 16,422 116,399
Federal funds sold.............................................................. 179,000 112,000
Securities available for sale, at fair value:
Collateralized mortgage obligations (AAA-rated)............................ -- 392,387
Subordinates, residuals and other securities............................... -- 195,131
Trading securities, at fair value:
Collateralized mortgage obligations (AAA-rated)............................ 372,541 --
Subordinates, residuals and other securities............................... 123,754 --
Loans available for sale, at lower of cost or market............................ 12,323 45,213
Real estate held for sale....................................................... 160,589 --
Low-income housing tax credit interests held for sale........................... 75,478 --
Investment securities........................................................... 13,257 10,965
Loan portfolio, net............................................................. 115,103 157,408
Discount loan portfolio, net.................................................... 701,941 913,229
Match funded loans and securities, net.......................................... 123,900 157,794
Investments in low-income housing tax credit interests.......................... 68,271 150,989
Investments in unconsolidated entities.......................................... 29,803 37,118
Real estate owned, net.......................................................... 169,200 167,506
Investment in real estate....................................................... 151,242 268,241
Premises and equipment, net..................................................... 44,922 49,038
Income taxes receivable......................................................... 22,827 --
Deferred tax asset, net......................................................... 131,306 136,920
Excess of purchase price over net assets acquired............................... 10,861 13,207
Principal, interest and dividends receivable.................................... 9,528 10,024
Escrow advances on loans and loans serviced for others.......................... 211,253 162,548
Other assets.................................................................... 68,607 59,737
--------------- ---------------
$ 2,843,183 $ 3,309,313
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits...................................................................... $ 1,604,640 $ 1,842,286
Securities sold under agreements to repurchase................................ 5,692 47,365
Bonds-match funded agreements................................................. 114,687 141,515
Obligations outstanding under lines of credit................................. 135,644 187,866
Notes, debentures and other interest bearing obligations...................... 273,562 317,573
Accrued interest payable...................................................... 37,692 32,569
Excess of net assets acquired over purchase price............................. 47,923 56,841
Income taxes payable.......................................................... -- 6,369
Accrued expenses, payables and other liabilities.............................. 30,193 57,487
--------------- ---------------
Total liabilities.......................................................... 2,250,033 2,689,871
--------------- ---------------
Company obligated, mandatorily redeemable securities of subsidiary trust holding
solely junior subordinated debentures of the Company......................... 99,390 110,000
COMMITMENTS AND CONTINGENCIES (NOTE 10)
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; 67,152,363 and
68,571,575 shares issued and outstanding at September 30, 2000, and
December 31, 1999, respectively............................................ 672 686
Additional paid-in capital................................................... 223,148 232,340
Retained earnings............................................................ 269,825 277,002
Accumulated other comprehensive income, net of taxes:
Net unrealized gain on securities available for sale....................... -- 163
Net unrealized foreign currency translation gain (loss) ................... 115 (749)
--------------- ---------------
Total stockholders' equity................................................... 493,760 509,442
--------------- ---------------
$ 2,843,183 $ 3,309,313
=============== ===============
</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, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------ ------------------------------
For the periods ended September 30, 2000 1999 2000 1999
-------------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Federal funds sold and repurchase agreements................ $ 2,544 $ 958 $ 5,118 $ 6,412
Securities available for sale............................... 12,831 15,350 42,508 48,199
Loans available for sale.................................... 450 6,233 2,174 25,376
Investment securities and other............................. 352 502 1,181 1,537
Loan portfolio.............................................. 4,651 3,941 13,956 18,985
Match funded loans and securities........................... 2,611 -- 8,874 --
Discount loan portfolio..................................... 21,848 29,035 70,021 84,591
------------ ------------ ------------ ------------
45,287 56,019 143,832 185,100
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits.................................................... 25,852 24,779 75,330 75,166
Securities sold under agreements to repurchase.............. 2,761 2,120 10,685 5,891
Bonds-match funded agreements............................... 2,948 -- 9,095 --
Obligations outstanding under lines of credit............... 4,371 3,101 11,783 12,219
Notes, debentures and other interest bearing obligations.... 8,501 6,787 26,598 20,147
------------ ------------ ------------ ------------
44,433 36,787 133,491 113,423
------------ ------------ ------------ ------------
Net interest income before provision for loan losses........ 854 19,232 10,341 71,677
Provision for loan losses................................... 6,861 826 12,604 5,188
------------ ------------ ------------ ------------
Net interest (loss) income after provision for loan losses.. (6,007) 18,406 (2,263) 66,489
------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Servicing fees and other charges............................ 22,517 19,584 63,647 56,764
Gain on interest earning assets, net........................ 1,453 442 17,717 43,585
Unrealized loss on trading securities....................... (2,406) -- (2,406) --
Impairment charges on securities available for sale......... -- (19,211) (11,597) (48,080)
(Loss) gain on real estate owned, net....................... (4,621) (1,508) (14,634) 1,798
Net operating gains (losses) on investments in real estate.. 9,153 (2,169) 22,769 (1,927)
Amortization of excess of net assets acquired over purchase
price..................................................... 2,995 -- 8,788 --
Other income................................................ 20,445 65,105 33,431 80,731
------------ ------------ ------------ ------------
49,536 62,243 117,715 132,871
------------ ------------ ------------ ------------
NON-INTEREST EXPENSE:
Compensation and employee benefits.......................... 22,134 29,451 61,114 80,991
Occupancy and equipment..................................... 3,141 4,331 9,356 15,053
Technology and communication costs.......................... 6,003 4,275 16,698 14,818
Loan expenses............................................... 3,583 3,992 10,500 10,773
Net operating losses on investments in certain low-income
housing tax credit interests.............................. 3,691 1,094 6,030 4,558
Amortization of excess of purchase price over net assets
acquired.................................................. 778 284 2,346 771
Other operating expenses.................................... 5,370 8,701 18,574 25,312
------------ ------------ ------------ ------------
44,700 52,128 124,618 152,276
------------ ------------ ------------ ------------
Distributions on Company-obligated, mandatory redeemable
securities of subsidiary trust holding solely junior
subordinated debentures................................... 2,730 3,400 8,842 10,196
Equity in losses of investments in unconsolidated entities.... 893 4,768 4,965 9,483
------------ ------------ ------------ ------------
(Loss) income before income taxes and extraordinary gain...... (4,794) 20,353 (22,973) 27,405
Income tax benefit (expense).................................. 1,486 (8,199) 7,122 (9,595)
Minority interest in net loss of consolidated subsidiary...... -- 369 -- 497
------------ ------------ ------------ ------------
(Loss) income before extraordinary gain....................... (3,308) 12,523 (15,851) 18,307
Extraordinary gain on repurchase of debt, net of taxes........ 2,628 253 8,674 253
------------ ------------ ------------ ------------
Net (loss) income............................................. $ (680) $ 12,776 $ (7,177) $ 18,560
============ ============ ============ ============
(LOSS) EARNINGS PER SHARE:
Basic:
Net (loss) income before extraordinary gain............... $ (0.05) $ 0.21 $ (0.24) $ 0.30
Extraordinary gain........................................ 0.04 -- 0.13 0.01
------------ ----------- ------------ ------------
Net (loss) income......................................... $ (0.01) $ 0.21 $ (0.11) $ 0.31
============ ============ ============ ============
Diluted:
Net (loss) income before extraordinary gain............... $ (0.05) $ 0.21 $ (0.24) $ 0.30
Extraordinary gain........................................ 0.04 -- 0.13 0.01
------------ ----------- ------------ ------------
Net (loss) income......................................... $ (0.01) $ 0.21 $ (0.11) $ 0.31
============ ============ ============ ============
Weighted average common shares outstanding:
Basic....................................................... 67,152,363 60,427,623 67,519,428 60,652,865
============ ============ ============ ============
Diluted..................................................... 67,152,363 60,460,314 67,519,428 60,691,416
============ ============ ============ ============
</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 (LOSS)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Nine Months
----------------------------- ----------------------------
For the periods ended September 30, 2000 1999 2000 1999
----------------------------------------------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net (loss) income.................................... $ (680) $ 12,776 $ (7,177) $ 18,560
------------ ----------- ----------- -----------
Other comprehensive (loss) income, net of taxes:
Change in unrealized (loss) gain on securities
available for sale arising during the period (1). -- (7,308) -- (8,805)
Less: Reclassification adjustment.................. 1,295 (1,673) (163) (4,286)
----------- ----------- ----------- -----------
Net change in unrealized loss on securities
available for sale (2)........................... 1,295 (8,981) (163) (13,091)
------------ ----------- ----------- -----------
Change in unrealized foreign currency translation
adjustment arising during the period (3)......... 491 (117) 864 (375)
----------- ----------- ----------- -----------
Less: Reclassification adjustment for losses on
foreign currency translation included in net
income........................................... -- 1,184 -- 1,184
----------- ----------- ----------- -----------
Net change in unrealized foreign currency
translation loss................................. 491 1,067 864 809
----------- ----------- ----------- -----------
Other comprehensive (loss) income.................. 1,786 (7,914) 701 (12,282)
------------ ----------- ----------- -----------
Comprehensive (loss) income.......................... $ 1,106 $ 4,862 $ (6,476) $ (6,278)
============ =========== =========== ===========
Disclosure of reclassification adjustment:
Unrealized holding losses (gains) arising during
the period on securities sold or impaired........ $ 2,955 $ (32,871) $ 9,499 $ 32,621
Add: Adjustment for realized gains (losses) and
impairment charges on securities available for
sale included in net income (loss)............... (1,660) 31,198 (9,662) 28,335
----------- ----------- ----------- -----------
Net reclassification adjustment for gains (losses)
recognized in other comprehensive income (loss)
in prior years (4)(5)............................ $ 1,295 $ (1,673) $ (163) $ (4,286)
=========== =========== =========== ===========
</TABLE>
(1) Net of tax benefit (expense) of $3,464 and $4,893 for the three and
nine months ended September 30, 1999, respectively.
(2) Net of a tax (expense) benefit of $(950) and $4,404 for the three
months ended September 30, 2000 and 1999, respectively, and $123 and
$7,300 for the nine months ended September 30, 2000 and 1999,
respectively.
(3) Net of tax (expense) benefit of $(274) and $63 for the three months
ended September 30, 2000 and 1999, respectively, and $(475) and $202
for the nine months ended September 30, 2000 and 1999, respectively.
(4) Net of tax (expense) benefit of $(950) and $(940) for the three months
ended September 30, 2000 and 1999, respectively, and $123 and $(2,407)
for the nine months ended September 30, 2000 and 1999, respectively.
(5) Includes the adjustment related to the reclassification of securities
available for sale to trading securities.
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Additional Comprehensive
-------------------------- Paid-in Retained Income (Loss),
Shares Amount Capital Earnings Net of Taxes Total
------------- ------- ----------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999............. 68,571,575 $ 686 $ 232,340 $ 277,002 $ (586) $ 509,442
Net loss.................................. -- -- -- (7,177) -- (7,177)
Repurchase and retirement of
common stock............................. (1,427,747) (14) (9,233) -- -- (9,247)
Change in directors' stock plan........... 8,535 -- 41 -- -- 41
Other comprehensive income, net of taxes:
Change in unrealized gain (loss) on
securities available for sale....... -- -- -- -- (163) (163)
Change in unrealized foreign currency
translation loss.................... -- -- -- -- 864 864
------------- ------- ----------- --------- ---------- ----------
Balances at September 30, 2000............ 67,152,363 $ 672 $ 223,148 $ 269,825 $ 115 $ 493,760
============= ======= =========== ========= ========== ==========
</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, 2000 1999
----------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.............................................................................. $ (7,177) $ 18,560
Adjustments to reconcile net (loss) income to net cash used by operating activities:
Net cash provided by trading activities...................................................... -- 39,264
Proceeds from sales of loans available for sale.............................................. 22,219 557,865
Purchases of loans available for sale........................................................ -- (54,303)
Origination of loans available for sale...................................................... -- (715,962)
Principal payments received on loans available for sale...................................... 4,304 24,142
Premium amortization on securities, net...................................................... 12,108 18,462
Depreciation and amortization................................................................ 3,885 6,264
Provision for loan losses.................................................................... 12,604 5,188
Provision for real estate owned.............................................................. 24,556 21,334
Gain on sale of Ocwen UK..................................................................... -- (50,431)
Gain on interest-earning assets, net......................................................... (17,717) (43,585)
Unrealized loss on trading securities........................................................ 2,406 --
Impairment charges on securities available for sale.......................................... 11,597 48,080
Extraordinary gain on repurchase of long-term debt........................................... (12,572) (389)
Gain on sale of low-income housing tax credit interests...................................... (261) (5,542)
Loss on low-income housing tax credits held for sale......................................... 3,062 --
Gain on real estate owned, net............................................................... (16,793) (29,591)
Gain on sale of investment in real estate held for sale...................................... (20,925) (1,465)
Gain on sale of real estate held for investment.............................................. (643) (297)
Equity in losses of unconsolidated entities.................................................. 4,965 9,483
Decrease in principal, interest and dividends receivable..................................... 496 5,389
(Increase) decrease in income taxes receivable............................................... (22,827) 19,849
Decrease in income taxes payable............................................................. (6,369) --
(Decrease) increase in deferred tax asset.................................................... 5,491 (31,573)
Increase in escrow advances.................................................................. (48,705) (38,948)
Decrease in other assets, net................................................................ (19,191) (8,702)
(Decrease) increase in accrued expenses, interest payable and other liabilities.............. (25,971) 18,814
----------- -----------
Net cash used by operating activities.......................................................... (91,458) (187,822)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale......................................... 550,121 633
Purchase of securities available for sale.................................................... (891,269) (549,175)
Maturities of and principal payments received on securities available for sale............... 416,004 413,568
Proceeds from the sale of Ocwen UK........................................................... -- 122,101
Acquisition of Federal Home Loan Bank stock.................................................. (2,432) --
Principal payments received on match funded loans............................................ 21,204 --
Increase in low-income housing tax credit investments........................................ (24,702) (13,720)
Proceeds from sales of low-income housing tax credit interests............................... 22,587 --
Proceeds from sales of discount loans, net................................................... 153,123 259,371
Proceeds from sale of real estate held for sale.............................................. 80,758 --
Proceeds from sale of real estate held for investment........................................ 3,623 --
Proceeds from sales of loans held for investment............................................. 8,894 26,218
Proceeds from sale of premises and equipment................................................. 46 --
Purchase and originations of loans held for investment, net of undisbursed loan funds........ (41,030) (19,665)
Purchase of discount loans, net.............................................................. (162,599) (437,106)
Decrease in investment in unconsolidated entities............................................ 490 --
Increase in real estate held for investment.................................................. (98,903) 21,306
Principal payments received on loans held for investment..................................... 73,388 94,589
Increase in real estate held for sale........................................................ (3,905) --
Principal payments received on discount loans, net........................................... 117,987 130,401
Proceeds from sale of real estate owned...................................................... 130,670 192,821
Purchase of real estate owned in connection with discount loan purchases..................... (8,580) (37,848)
Acquisition of subsidiaries.................................................................. -- (5,196)
Additions to premises and equipment.......................................................... (2,789) (20,561)
----------- -----------
Net cash provided by investing activities...................................................... 342,686 177,737
----------- -----------
</TABLE>
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, 2000 1999
----------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in deposits......................................................................... $ (237,646) $ (393,851)
(Decrease) increase in securities sold under agreements to repurchase........................ (41,673) 70,554
Repayment of obligations under lines of credit, net.......................................... (52,222) 152,668
Payments on bonds-match funded agreements.................................................... (24,556) --
Repurchase of Capital Securities............................................................. (4,979) --
Repurchases of notes and subordinate debentures............................................. (36,537) (2,655)
Repurchase of common stock................................................................... (8,996) (5,302)
----------- -----------
Net cash used by financing activities.......................................................... (406,609) (178,586)
----------- -----------
Net decrease in cash and cash equivalents...................................................... (155,381) (188,671)
Cash and cash equivalents at beginning of period............................................... 381,858 445,179
----------- -----------
Cash and cash equivalents at end of period..................................................... $ 226,477 $ 256,508
=========== ===========
RECONCILIATION OF CASH AND CASH EQUIVALENTS AT END OF PERIOD:
Cash and amounts due from depository institutions............................................ $ 31,055 $ 94,517
Interest-earning deposits.................................................................... 16,422 161,991
Federal funds sold and repurchase agreements................................................. 179,000 --
----------- -----------
$ 226,477 $ 256,508
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................................................... $ 128,369 $ 83,024
=========== ===========
Income taxes................................................................................. $ 18,837 $ 575
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Real estate owned acquired through foreclosure............................................... $ 120,329 $ 120,591
=========== ===========
Exchange of discount loans and loans available for sale for securities....................... $ -- $ 758,032
=========== ===========
Reclassification of properties from investment in real estate to real estate held for sale... $ 218,514 $ --
=========== ===========
Exchange of note receivable for real estate held for sale.................................... $ 19,000 $ --
=========== ===========
Reclassification of securities available for sale to trading securities...................... $ 496,295 $ --
=========== ===========
Reclassification of investments in low-income housing tax credit interests to low-income
housing tax credits held for sale........................................................... $ 75,478 $ --
=========== ===========
Acquisition of businesses:
Fair value of assets acquired................................................................ $ -- $ 5,304
Liabilities assumed.......................................................................... -- (101)
----------- -----------
Cash paid.................................................................................... -- 5,203
Less cash acquired........................................................................... -- (7)
----------- -----------
Net cash paid for assets acquired............................................................ $ -- $ 5,196
=========== ===========
Sale of subsidiary:
Fair values of assets sold................................................................... $ -- $ 413,121
Liabilities.................................................................................. -- (345,327)
Cash sold.................................................................................... -- 3,936
Gain on sale................................................................................. -- 50,371
----------- -----------
$ -- $ 122,101
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
8
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(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
Company's consolidated financial statements include the accounts of Ocwen
Financial Corporation ("OCN" or the "Company") and its subsidiaries. The Company
owns directly and indirectly all of the outstanding common and preferred stock
of its primary subsidiaries, Ocwen Federal Bank FSB (the "Bank"), Investors
Mortgage Insurance Holding Company ("IMI"), Ocwen Technology Xchange, Inc.
("OTX") and Ocwen Asset Investment Corp. ("OAC"). The Company acquired OAC on
October 7, 1999. The Company's consolidated financial statements include OAC and
its subsidiaries as of that date. The Company also owns 99.58% of Ocwen
Financial Services, Inc. ("OFS"), with the remaining 0.42% owned by the
shareholders of Admiral Home Loan. The Company sold its investment in its
foreign subsidiary, Ocwen UK plc ("Ocwen UK"), on September 30, 1999. Ocwen UK's
results of operations for 1999 have been included in the consolidated statements
of operations through that date. 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, 2000
and December 31, 1999, the results of its operations for the three and nine
months ended September 30, 2000 and 1999, its comprehensive income (loss) for
the three and nine months ended September 30, 2000 and 1999, its changes in
stockholders' equity for the nine months ended September 30, 2000 and its cash
flows for the nine months ended September 30, 2000 and 1999. The results of
operations and other data for the three and nine-month period ended September
30, 2000 are not necessarily indicative of the results that may be expected for
any other interim periods or the entire year ending December 31, 2000. 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, 1999. Certain reclassifications have been made to the prior
period's consolidated financial statements to conform to the September 30, 2000
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: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS IN REAL ESTATE
In conjunction with its commercial loan acquisition and resolution
activities, the Company acquired certain acquisition, development and
construction loans in which the Company participated in the residual profits of
the underlying real estate and the borrower had not contributed substantial
equity to the project. As such, the Company accounted for these loans under the
equity method of accounting as though it had made an investment in a real estate
limited partnership.
INVESTMENTS IN REAL ESTATE PARTNERSHIPS
The Company's investments in real estate partnerships are accounted for
under the equity method of accounting. Under the equity method of accounting, an
investment in the shares of other interests of an investee is recorded at cost
of the shares or interests acquired and thereafter is periodically increased
(decreased) by the investors proportionate share of earnings (losses) of the
investee and decreased by the dividends or distributions received by the
investor from the investee.
9
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
REAL ESTATE HELD FOR SALE
Real estate held for sale is reported at the lower of the carrying
amount or fair value less cost to sell. Real estate is classified as held for
sale when the Company has committed to a plan to sell the assets, and
depreciation is discontinued. Gains and losses on the sale of real estate held
for sale are included as a component of income.
SECURITIES
Securities are reported on the Statement of Financial Condition at fair
value. Fair value is determined within a range based on third party dealer
quotations, where available, and internal values, subject to an internal review
process.
On September 30, 2000 the Company changed its accounting policy for
securities available for sale and match funded securities to account for these
securities as trading. For these securities, changes in fair value are reported
in income in the period of change. Previously, the Company accounted for its
securities as available for sale, for which the unrealized gains and losses for
these securities were reported as a separate component of accumulated other
comprehensive income in stockholder's equity.
LOW-INCOME HOUSING TAX CREDIT INTERESTS HELD FOR SALE
Low-income housing tax credit interests held for sale are reported at
the lower of cost or fair value less costs to sell. Investments in low-income
housing tax credit interests are classified as held for sale when the Company
has committed to a plan to sell the interests. Gains and losses on the sale of
investments in low-income housing tax credit interests are included in other
income.
NOTE 3: CURRENT ACCOUNTING PRONOUNCEMENTS
RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138
(collectively, "SFAS No. 133"). SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000; accordingly, the
Company is required to adopt SFAS No. 133 on January 1, 2001.
SFAS No. 133 requires that all derivative instruments be recorded on
the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction.
o For fair-value hedging transactions in which the Company is
hedging changes in fair value of an asset, liability or firm
commitment, changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the
hedged item's fair value.
o For cash-flow hedging transactions in which the Company is hedging
the variability of cash flows related to a variable-rate asset,
liability, or a forecasted transaction, changes in the fair value
of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative
instrument that are reported in other comprehensive income will be
reclassified to earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item.
o For hedge transactions of net investments in foreign operations,
changes in fair value of the derivative instrument will be
recorded in the cumulative translation adjustment account within
equity.
The ineffective portion of all hedges will be recognized in current
period earnings.
For other derivative instruments used by the Company for risk
management purposes which do not meet the hedge accounting criteria and,
therefore, do not qualify for hedge accounting, these derivative instruments
will be accounted for at fair
10
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
value with changes in fair value recorded in the income statement.
Had the Company adopted SFAS No. 133 on October 1, 2000, the Company
estimates that it would have recorded, net of tax, a cumulative effect
adjustment of $468 gain in accumulated other comprehensive income to recognize
at fair value all derivative instruments that will be designated as cash-flow
hedging instruments. The Company further estimates that it also would have
recorded, net of tax, a cumulative effect adjustment of $235 gain in earnings to
recognize at fair value all derivative instruments that will be designated as
hedges of net investments in foreign operations. At September 30, 2000, the
Company did not have any derivative instruments that would be designated as fair
value hedges.
During September 2000, the FASB issued SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
a replacement of SFAS No. 125. It revises the standards of accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, however, it carries over most of SFAS 125's
provisions without reconsideration. The Company does not expect that SFAS No.
140 will have a material impact on the Company's financial position or results
of operations.
SFAS 140 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001. This
Statement is effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Disclosures about securitization
and collateral accepted need not be reported for periods ending on or before
December 15, 2000, for which financial statements are presented for comparative
purposes.
NOTE 4: COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY
In August 1997, the Ocwen Capital Trust ("OCT") issued $125,000 of
10.875% Capital Securities (the "Capital Securities"). Proceeds from the
issuance of the Capital Securities were invested in 10.875% Junior Subordinated
Debentures issued by OCN. The Junior Subordinated Debentures, which represent
the sole assets of OCT, will mature on August 1, 2027. During 1999, OCT
repurchased $15,000 of its Capital Securities in the open market, resulting in
extraordinary gains of $5,548 ($4,570 net of taxes). During the nine months
ended September 30, 2000, OCT repurchased $10,610 of its Capital Securities in
the open market, resulting in extraordinary gains of $4,499 ($3,104 net of
taxes).
Holders of the Capital Securities are entitled to receive cumulative
cash distributions accruing from the date of original issuance and payable
semiannually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998, at an annual rate of 10.875% 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 therefore. Accumulated
distributions payable on the Capital Securities amounted to $1,801 and $4,815 at
September 30, 2000 and December 31, 1999, respectively, and are included in
accrued interest payable.
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 semiannual periods with respect to each deferral
period, provided that no extension period may extend beyond the stated maturity
of the Junior Subordinated Debentures. Upon the termination of any such
extension period and the payment of all amounts then due on any interest payment
date, the Company may elect to begin a new extension period. Accordingly, there
could be multiple extension periods of varying lengths throughout the term of
the Junior Subordinated Debentures. If interest payments on the Junior
Subordinated Debentures are deferred, distributions on the Capital Securities
will also be deferred and the Company may not, and may not permit any subsidiary
of the Company to, (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, the
Company's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities that rank
pari passu with or junior to the Junior Subordinated Debentures. During an
extension period, interest on the Junior Subordinated Debentures will continue
to accrue at the rate of 10-7/8% per annum, compounded semiannually.
11
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
The Junior Subordinated Debentures are redeemable prior to maturity at
the option of the Company, subject to the receipt of any necessary prior
regulatory approval, (i) in whole or in part on or after August 1, 2007, at a
redemption price equal to 105.438% of the principal amount thereof on August 1,
2007, declining ratably on each August 1 thereafter to 100% on or after August
1, 2017, plus accrued interest thereon, or (ii) at any time, in whole (but not
in part), upon the occurrence and continuation of a special event (defined as a
tax event, regulatory capital event or 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 semiannual basis
at the adjusted Treasury rate plus accrued interest thereon to the date of
prepayment. The Capital Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at maturity or
their earlier redemption, in an amount equal to the amount of the related Junior
Subordinated Debentures maturing or being redeemed and at a redemption price
equal to the redemption price of the Junior Subordinated Debentures, plus
accumulated and unpaid distributions thereon to the date of redemption.
For financial reporting purposes, OCT is treated as a subsidiary of the
Company and, accordingly, the accounts of OCT are included in the consolidated
financial statements of the Company. Intercompany transactions between OCT and
the Company, including the Junior Subordinated Debentures, are eliminated in the
consolidated financial statements of the Company. The Capital Securities are
presented as a separate caption between liabilities and stockholders' equity in
the consolidated statement of financial condition of the Company as
"Company-obligated, mandatorily redeemable securities of subsidiary trust
holding solely Junior Subordinated Debentures of the company." Distributions on
the Capital Securities are recorded as a separate caption immediately following
non-interest expense in the consolidated statements of operations of the
Company. The Company intends to continue this method of accounting going
forward.
In connection with the issuance of the Capital Securities, the Company
incurred certain costs which have been capitalized and are being amortized over
the term of the Capital Securities. The unamortized balance of these issuance
costs amounted to $3,551 and $4,041 at September, 2000 and December 31, 1999,
respectively, and is included in other assets.
NOTE 5: TRADING SECURITIES
As discussed in Note 2 above, the Company changed its policy for
securities available for sale and match funded securities to account for them as
trading securities. The Company believes that this treatment more appropriately
reflects the impact on its results of operations arising from changes in the
value of these securities. In connection with this change, securities available
for sale are now classified as trading securities. As a result, net unrealized
losses as of September 30, 2000 of $2,406 have been included in earnings.
NOTE 6: LOW-INCOME HOUSING TAX CREDIT INTERESTS HELD FOR SALE
On September 1, 2000 the Company entered into a transaction to sell
twenty-one of its low-income housing tax credit properties, together with the
related tax credits. Although this transaction resulted in the transfer of tax
credits and operating results for these properties to the purchaser, it did not
qualify as a sale for accounting purposes under the criteria established in SFAS
no. 66 "Accounting for Sales of Real Estate," primarily due to the amount of
cash received at signing, as well as to certain contingencies with respect to
potential repurchase requirements. As a result, the Company has reclassified
these properties as "held for sale" and has valued them at the lower of cost or
fair value less disposal costs. The Company recorded a charge to earnings of
$3,026 reflecting the expected net loss to be incurred upon completion of this
transaction, currently projected to occur on April 1, 2001, when the cash
receipts will meet sale treatment criteria and expiration of repurchase
contingencies is projected to occur.
NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments for the purpose of
managing 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.
When entering into these derivative financial instruments, it is the
Company's intent to account for them under current hedge accounting guidelines.
None of these instruments are entered into for trading purposes.
In certain instances, although the instruments are economic hedges of
the underlying risks, they do not meet the hedge accounting criteria. In these
instances, the gain or loss on the derivative financial instrument is included
in earnings.
12
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
INTEREST RATE MANAGEMENT
In managing its interest rate risk, the Company enters into interest
rate swaps ("interest swaps"). The terms of the outstanding interest swaps at
September 30, 2000 and December 31, 1999, respectively, are as follows:
<TABLE>
<CAPTION>
Notional LIBOR
Maturity Amount Index Fixed Rate Floating Rate Fair Value
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 2000:
April 2001........... $ 59,000 1-Month 6.00% 6.62% $ 251
============ ============
DECEMBER 31, 1999:
April 2001........... $ 75,000 1-Month 6.00% 6.48% $ 482
April 2001........... 17,000 1-Month 6.00 6.48 108
April 2002........... 8,780 1-Month 6.04 6.46 129
January 2003......... 100,000 1-Month 5.75 6.46 2,983
------------ ------------
$ 200,780 $ 3,702
============ ============
</TABLE>
During the nine months ended September 30, 2000, the Company terminated
certain interest rate swaps for which the underlying borrowing had been
repaid. The unrealized gain on the date of termination was $144 and is
included in the Statement of Operations.
The Company has purchased amortizing Caps and Floors to hedge its
interest rate exposure relating to its match funded loans and securities. The
terms of the outstanding Caps and Floors at September 30, 2000 and December 31,
1999 are as follows:
<TABLE>
<CAPTION>
Notional
Amount Maturity Index Strike Rate Fair Value
-------------------- ------------------ ------------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 2000:
Caps................. $ 145,883 October 2003 LIBOR 1-Month 7.00% $ 821
Floors............... $ 38,772 October 2003 CMT 2-Year 4.35 54
------------
$ 875
============
DECEMBER 31, 1999:
Caps................. $ 159,211 October 2003 LIBOR 1-Month 7.00% $ 2,289
Floors............... $ 41,899 October 2003 CMT 2-Year 4.35 47
------------
$ 2,336
============
</TABLE>
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
The Company also manages its interest rate risk by purchasing European
swaptions and put options and U.S. Treasury and U.S. Agency futures contracts to
hedge anticipated future fundings related to low-income housing tax credit
projects. During the fourth quarter of 1999, these financial instruments ceased
to qualify for hedge accounting and subsequent gains or losses are included in
earnings. The following table sets forth the terms and values of these financial
instruments at September 30, 2000 and December 31, 1999, respectively:
<TABLE>
<CAPTION>
Notional Strike
Amount Maturity Rate/Price Fair Value
----------- --------------- ---------- -----------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 2000:
European 10-year swaptions....................................... $ 6,000 March 2001 6.78% $ 136
4,000 November 2000 7.45 3
2,300 October 2000 7.40 --
2,200 November 2000 7.85 --
----------- -----------
$ 14,500 $ 139
=========== ===========
U.S. 10-year Agency futures...................................... $ 5,800 December 2000 $ 93.91 $ (33)
=========== ===========
DECEMBER 31, 1999:
European 10-year swaptions....................................... $ 7,500 March 2000 6.78% $ 282
5,800 May 2000 6.72 264
2,800 February 2000 7.20 34
2,300 June 2000 7.11 63
----------- -----------
$ 18,400 $ 643
=========== ===========
European 10-year put options, U.S. Treasury 4.75% due 11/05/08... $ 2,500 March 2000 $ 91.45 $ 83
=========== ===========
U.S. 2-year Treasury futures..................................... $ 12,000 March 2000 $ 99.82 $ 62
U.S. 10-year Treasury futures.................................... 7,000 March 2000 $ 97.52 $ 116
----------- -----------
$ 19,000 $ 178
=========== ===========
</TABLE>
FOREIGN CURRENCY MANAGEMENT
The Company enters into foreign currency derivatives to hedge its
equity investment in Kensington Group plc ("Kensington"), its investments in
foreign subsidiaries which own residual interests backed by residential loans
originated in the UK ("UK residuals") and in the shopping center located in
Halifax, Nova Scotia (the "Nova Scotia Shopping Center"). 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 investments
in these assets. The following table sets forth the terms and values of these
foreign currency financial instruments at September 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
Notional Amount
--------------------------------- Contract Unamortized
Maturity Pay Receive Rate Discount Fair Value
---------------- -------------- ------------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 2000:
Currency forward................ February 2003 (pound) 27,500 $ 43,546 1.5835 $ 855 $ 2,469
============== ============= ========== =========
DECEMBER 31, 1999:
Currency forward................ February 2003 (pound) 27,500 $ 43,546 1.5835 $ 1,119 $ (976)
============== ============= ========== =========
</TABLE>
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notional Strike
Position Maturity Amount Rate Fair Value
-------- -------------- --------------- ------- ----------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 2000:
Canadian Dollar currency futures........... Short December 2000 C$ 32,500 .6744 $ 271
British Pound currency futures............. Short December 2000 (pound) 11,000 1.4380 (429)
Long December 2000 (pound) 7,313 1.4197 419
----------
$ 261
==========
DECEMBER 31, 1999:
Canadian Dollar currency futures........... Short March 2000 C$ 22,100 .6786 $ (300)
Short March 2000 C$ 1,600 .6800 (20)
British Pound currency futures............. Long March 2000 (pound) 3,750 1.6018 65
Short March 2000 (pound) 15,875 1.6225 56
----------
$ (199)
==========
</TABLE>
NOTE 8: REGULATORY REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
and the regulations promulgated thereunder established certain minimum levels of
regulatory capital for savings institutions subject to 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,
2000, 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 gains or losses on debt securities available for sale. Effective
April 1, 1999, the OTS minimum core capital ratio provides that only those
institutions with a Uniform Financial Institution Rating System rating of
"1" are subject to a 3% minimum core capital ratio. All other institutions
are subject to a 4% minimum core capital ratio.
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, 2000, the Bank was "well capitalized" under the prompt
corrective action regulations adopted by the OTS pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991. To be categorized as "well
capitalized," the Bank must maintain minimum core capital, Tier 1 risk-based
capital and 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. There are no
conditions or events since September 30, 2000 that management believes have
changed the institution's category.
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 and with the regulatory
capital requirements of general applicability (as indicated below). 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.
As a result of its most recent examination, the Bank was required to
submit a written plan to the OTS by October 16, 2000 to address issues raised
by the agency under Part 570 of the rules and regulations. Under the plan, the
Bank will take certain actions regarding its operations with respect to asset
reviews and the management of interest rate risk exposure and will
15
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
have periodic reporting obligations to the OTS. In addition, as part of the
plan, the Bank submitted a business plan and budget outlining the Bank's
operations through 2003. The business plan submitted reflects proposed changes
in the Bank's deposit gathering strategies and potential future sources of
revenue as the Bank continues its shift away from capital-intensive businesses
into fee-based sources of income. On November 9, 2000 the OTS requested the Bank
to supply additional information regarding the plan.
The following table summarizes the Bank's actual and required
regulatory capital at September 30, 2000.
<TABLE>
<CAPTION>
To Be Well
Capitalized Committed
Minimum For Capital For 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 12.58% $ 267,106
Non-includable subsidiary...................... (7,388)
Acquired real estate........................... (1,075)
Disallowed deferred tax assets................. (21,720)
Disallowed servicing assets.................... (1,869)
-----------
Tangible capital, and ratio to adjusted total
assets...................................... 11.23% $ 235,054 1.50% $ 31,397
=========== =========
Tier 1 (core) capital, and ratio to adjusted
total assets................................ 11.23% $ 235,054 4.00% $ 83,726 5.00% $ 104,658 9.00%
=========== ========= =========
Tier 1 capital, and ratio to risk-weighted
assets...................................... 14.61% $ 235,054 6.00% $ 96,520
=========== =========
Allowance for loan and lease losses............ 20,134
Qualifying subordinated debentures............. 53,600
-----------
Tier 2 capital................................. 73,734
-----------
Land loans in excess of 80% of loan to value
ratio....................................... (768)
-----------
Total risk-based capital, and ratio to risk-
weighted assets............................. 19.15% $ 308,020 8.00% $ 128,693 10.00% $ 160,866 13.00%
=========== ========= =========
Total regulatory assets........................ $2,123,977
==========
Adjusted total assets.......................... $2,093,161
==========
Risk-weighted assets........................... $1,608,664
==========
</TABLE>
The OTS amended its capital distribution regulation effective April 1,
1999. Under the revised regulation, the Bank is required to file a notice with
the OTS at least 30 days prior to making a capital distribution unless (a) it is
not eligible for expedited treatment under the OTS application processing
regulations, (b) the total amount of the Bank's capital distributions (including
the proposed distribution) for the calendar year exceeds the Bank's net income
for the year to date plus retained net income for the previous two years, (c)
the Bank would not be "adequately capitalized" following the proposed
distribution or (d) the proposed distribution would violate any applicable
statute, regulation, or agreement between the Bank and the OTS, or a condition
imposed upon the Bank by an OTS-approved application or notice. If one of these
four criteria is present, the Bank is required to file an application with the
OTS at least 30 days prior to making the proposed capital distribution. The OTS
may deny the Bank's application or disapprove its notice if the OTS determines
that (a) the Bank will be "under capitalized," "significantly under capitalized"
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 or agreement between the Bank
and the OTS or a condition imposed on the Bank in an application or notice
approved by the OTS. The new rule also amends the definition of "capital
distribution" to include any payment to repurchase, redeem, retire, or otherwise
acquire debt instruments included in total risk-based capital.
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
16
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
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.
NOTE 9: BUSINESS SEGMENT REPORTING
SFAS No. 131 requires public enterprises to report financial and
descriptive information about their reportable operating segments. An operating
segment is defined as a component of an enterprise (a) that engages 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. The Company conducts a variety of business activities within the
following segments:
<TABLE>
<CAPTION>
Net Interest Non-Interest Non-Interest Net (Loss) Total
Income Income Expense Income Assets
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
AT OR FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000:
----------------------------------------------------
Single family residential discount loans............... $ 6,681 $ 3,215 $ 3,128 $ 4,157 $ 474,199
Commercial loans....................................... 269 2,870 4,567 (3,887) 741,292
Domestic residential mortgage loan servicing........... (2,253) 20,218 14,725 2,008 173,546
Investment in low-income housing tax credits........... (2,828) 376 4,840 (2,500) 183,012
OTX.................................................... (162) 574 9,695 (5,756) 19,568
Commercial real estate................................. (5,130) 21,213 779 9,489 204,192
UK operations.......................................... (247) -- 149 (798) 25,923
Domestic subprime single family residential lending.... (307) (6,866) 621 (4,832) 142,883
Unsecured collections.................................. (9) 608 2,340 (2,235) 11,708
Ocwen Realty Advisors (1).............................. -- 2,485 2,955 (291) 1,327
Corporate items and other.............................. 4,840 4,843 901 3,965 865,533
--------- --------- --------- --------- ----------
$ 854 $ 49,536 $ 44,700 $ (680) $2,843,183
========= ========= ========= ========= ==========
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000:
---------------------------------------------------
Single family residential discount loans............... $ 20,284 $ 7,558 $ 9,153 $ 11,624 $ 474,199
Commercial loans....................................... 6,053 10,450 12,178 (2,437) 741,292
Domestic residential mortgage loan servicing........... (2,908) 59,401 43,162 8,242 173,546
Investment in low-income housing tax credits........... (8,406) 1,674 9,379 (1,308) 183,012
OTX.................................................... (539) 1,462 25,926 (15,502) 19,568
Commercial real estate................................. (15,290) 36,995 2,030 12,199 204,192
UK operations.......................................... (801) -- 213 (3,730) 25,923
Domestic subprime single family residential lending.... 689 (19,942) 1,295 (12,740) 142,883
Unsecured collections.................................. (92) 693 6,615 (6,598) 11,708
Ocwen Realty Advisors (1).............................. -- 10,185 10,188 (2) 1,327
Corporate items and other.............................. 11,351 9,239 4,479 3,075 865,533
--------- --------- --------- --------- ----------
$ 10,341 $ 117,715 $ 124,618 $ (7,177) $2,843,183
========= ========= ========= ========= ==========
</TABLE>
(1) Non-interest income for the three and nine months ended September 30, 2000
included $1,589 and $3,695, respectively, of intercompany revenues which
have been eliminated in consolidation.
17
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Interest Non-Interest Non-Interest Net (Loss) Total
Income Income Expense Income Assets
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
AT OR FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999:
----------------------------------------------------
Single family residential discount loans............... $ 6,664 $ (5,061) $ 7,444 $ (4,154) $ 499,681
Commercial loans....................................... 8,923 (86) 11,648 (2,185) 840,564
Domestic residential mortgage loan servicing........... 1,219 14,848 12,841 2,000 131,052
Investment in low-income housing tax credits........... (2,600) 5,061 4,125 4,163 219,718
OTX.................................................... -- 821 4,910 (2,535) 7,728
Commercial real estate................................. -- 766 702 39 (17)
UK operations.......................................... 8,869 60,532 16,294 30,049 42,024
Domestic subprime single family residential lending.... 1,751 (16,647) 2,186 (10,217) 146,985
Unsecured collections.................................. 180 -- 1,617 (1,027) 15,330
Ocwen Realty Advisors ................................. -- -- -- -- --
Corporate items and other.............................. (5,774) 2,009 (9,639) (3,357) 912,359
--------- --------- --------- --------- -----------
$ 19,232 $ 62,243 $ 52,128 $ 12,776 $ 2,815,424
========= ========= ========= ========= ===========
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
---------------------------------------------------
Single family residential discount loans............... $ 18,915 $ (9,193) $ 17,621 $ (9,472) $ 499,681
Commercial loans....................................... 29,917 15,575 27,616 8,043 840,564
Domestic residential mortgage loan servicing........... 3,755 42,361 33,066 8,091 131,052
Investment in low-income housing tax credits........... (8,033) 7,909 11,511 6,612 219,718
OTX.................................................... -- 1,527 11,977 (6,479) 7,728
Commercial real estate................................. -- 2,352 2,014 209 (17)
UK operations.......................................... 29,982 85,157 46,157 39,005 42,024
Domestic subprime single family residential lending.... 12,167 (19,536) 11,907 (11,454) 146,985
Unsecured collections.................................. 342 -- 4,366 (2,492) 15,330
Ocwen Realty Advisors ................................. -- -- -- -- --
Corporate items and other.............................. (15,368) 6,719 (13,959) (13,503) 912,359
--------- --------- --------- --------- ----------
$ 71,677 $ 132,871 $ 152,276 $ 18,560 $2,815,424
========= ========= ========= ========= ==========
</TABLE>
NOTE 10: COMMITMENTS AND CONTINGENCIES
At September 30, 2000, the Company had commitments of $13,866 to fund
construction loans (including loans accounted for as investments in real estate)
secured by multi-family and commercial properties. In addition, the Company,
through the Bank, had commitments under outstanding letters of credit in the
amount of $17,946. The Company, through its investment in subordinated
securities and subprime residuals, which had a carrying value of $123,754 at
September 30, 2000, supports senior classes of securities. At September 30, 2000
the Company had $7,463 outstanding in guarantees to third parties related to
debt obligations and lease commitments of its subsidiaries.
18
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
On April 20, 1999, a complaint was filed on behalf of a putative class
of public shareholders of the Company 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 a 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 consummation of the acquisition of OAC by
OCN. The cases were consolidated, and on September 13, 1999 a consolidated
amended complaint was filed. The injunction was denied, and on October 14, 1999
OCN was dismissed as a party. Plaintiffs' remaining claims are for damages for
alleged breaches of common law fiduciary duties. Discovery is ongoing.
On June 3, 1999, Walton Street Capital, L.L.C. ("Walton") filed suit
against OAC and Ocwen Partnership, L.P. ("OPLP") in the Circuit Court of Cook
County, Illinois. Walton has alleged that OAC committed an anticipatory breach
of contract with respect to the proposed sale by OAC of all of its interest in
its commercial mortgage-backed securities portfolio to Walton. Walton has
claimed damages in an amount in excess of $20,000. As of October 20, 2000, both
Walton and OAC have filed motions for Summary Judgement. OAC believes this suit
is without merit and continues to vigorously defend against the same. Discovery
has been suspended pending the adjudication of the motions.
The Company is subject to various other pending legal proceedings. In
management's opinion, the resolution of these other claims will not have a
material effect on the consolidated financial statements.
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
GENERAL
The Company's primary businesses are the servicing and resolution of
subperforming and nonperforming residential and commercial mortgage loans, as
well as the related development of loan servicing technology, software and
business-to-business e-commerce solutions for the mortgage and real estate
industries.
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 (the
"FDIC") as a result of its membership in the Savings Association Insurance Fund
administered by the FDIC, which insures the Banks' deposits up to the maximum
extent permitted by law. The Bank is also subject to regulation by the Board of
Governors of the Federal Reserve System and is currently a member of the Federal
Home Loan Bank ("FHLB") of New York, one the 12 regional banks which comprise
the FHLB System.
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 herein (which is incorporated herein by reference).
RECENT DEVELOPMENTS
On November 1, 2000, the Company sold its remaining San Francisco
office building (225 Bush Street) for $143,500 realizing net proceeds of
approximately $60,300 and a gain of $100. See "Changes in Financial Condition -
Real Estate Help for Sale."
The Company intends to sell its entire minority interest in Kensington
Group plc during the fourth quarter of 2000. This sale is subject to a number of
uncertainties, but it is the Company's expectation that it will realize a gain
upon its completion.
On November 14, 2000 OAC announced a tender offer and consent
solicitation with respect to all its outstanding 11.5% notes, at a price of $840
per $1,000 principal amount, plus accrued and unpaid interest. The offer and
solicitation will expire on December 12, 2000 unless otherwise extended. The
primary purpose of the tender offer is to acquire all of the outstanding 11.5%
notes and eliminate the interest expense associated with the notes. The primary
purpose of the consent solicitation is to eliminate substantially all of the
covenants and events of default, other than those related to payment of the
notes, thereby affording the Company additional financial and operational
flexibility. If consummated, the Company projects that it will recognize
extraordinary gains on the retirement of debt during the fourth quarter of 2000
although the amount is dependent upon the quantity of notes purchased by the
Company.
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION September 30, December 31, Increase
2000 1999 (Decrease)
-------------- ------------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA
Total assets..................................................... $ 2,843,183 $ 3,309,313 (14)%
Securities available for sale, at fair value:
Collateralized mortgage obligations (AAA-rated)................ -- 392,387 (100)
Subordinates, residuals and other securities................... -- 195,131 (100)
Trading securities, at fair value:
Collateralized mortgage obligations (AAA-rated)................ 372,541 -- --
Subordinates, residuals and other securities................... 123,754 -- --
Loans available for sale, at lower of cost or market............. 12,323 45,213 (73)
Real estate held for sale........................................ 160,589 -- --
Low-income housing tax credits held for sale..................... 75,478 -- --
Loan portfolio, net.............................................. 115,103 157,408 (27)
Discount loan portfolio, net..................................... 701,941 913,229 (23)
Match funded loans and securities, net........................... 123,900 157,794 (21)
Investment in low-income housing tax credit interests............ 68,271 150,989 (55)
Investment in unconsolidated entities............................ 29,803 37,118 (20)
Real estate owned, net........................................... 169,200 167,506 1
Total liabilities................................................ 2,250,033 2,689,871 (16)
Deposits......................................................... 1,604,460 1,842,286 (13)
Securities sold under agreements to repurchase................... 5,692 47,365 (88)
Bonds-match funded agreements.................................... 114,687 141,515 (19)
Obligations outstanding under lines of credit.................... 135,644 187,866 (28)
Notes, debentures and other interest bearing obligations......... 273,562 317,573 (14)
Capital Securities............................................... 99,390 110,000 (10)
Stockholders' equity............................................. 493,760 509,442 (3)
</TABLE>
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the Three Months Ended September 30,
----------------------------------------------------------
Increase
2000 1999 (Decrease)
------------------- ----------------- ------------------
<S> <C> <C> <C>
OPERATIONS DATA
Net interest income.............................................. $ 854 $ 19,232 (96)%
Provision for loan losses........................................ 6,861 826 731
Non-interest income.............................................. 49,536 62,243 (20)
Non-interest expense............................................. 44,700 52,128 (14)
Distributions on Capital Securities.............................. 2,730 3,400 (20)
Equity in losses of investment in unconsolidated entities........ 893 4,768 (81)
Income tax benefit (expense)..................................... 1,486 (8,199) (118)
Extraordinary gain on repurchase of debt, net of taxes........... 2,628 253 939
Net (loss) income................................................ (680) 12,776 (105)
PER COMMON SHARE
Net (loss) income:
Basic......................................................... $ (0.01) $ 0.21 (105)%
Diluted....................................................... (0.01) 0.21 (105)
Stock price:
High.......................................................... $ 6.88 $ 8.25 (17)%
Low........................................................... 5.44 6.00 (9)
Close......................................................... 5.88 6.19 (5)
Repurchase of common stock (1)................................ -- 7.68 (100)
KEY RATIOS
Annualized return on average assets ............................ (0.09)% 1.67% (105)%
Annualized return on average equity ............................ (0.55) 11.93 (105)
Efficiency ratio (2) .......................................... 90.31 67.96 33
Core (leverage) capital ratio.................................... 11.23 10.00 12
Risk-based capital ratio......................................... 19.15 18.37 4
</TABLE>
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the Nine Months Ended September 30,
----------------------------------------------------------
Increase
2000 1999 (Decrease)
------------------- ----------------- ------------------
<S> <C> <C> <C>
OPERATIONS DATA
Net interest income.............................................. $ 10,341 $ 71,677 (86)%
Provision for loan losses........................................ 12,604 5,188 143
Non-interest income.............................................. 117,715 132,871 (11)
Non-interest expense............................................. 124,618 152,276 (18)
Distributions on Capital Securities.............................. 8,842 10,196 (13)
Equity in losses of investment in unconsolidated entities........ 4,965 9,483 (48)
Income tax benefit (expense)..................................... 7,122 (9,595) (174)
Extraordinary gain on repurchase of debt, net of taxes........... 8,674 253 3,328
Net (loss) income................................................ (7,177) 18,560 (139)
PER COMMON SHARE
Net loss:
Basic......................................................... $ (0.11) $ 0.31 (135)%
Diluted....................................................... (0.11) 0.31 (135)
Stock price:
High.......................................................... $ 9.25 $ 12.31 (25)%
Low........................................................... 5.25 6.00 (13)
Close......................................................... 5.88 6.19 (5)
Average repurchase of common stock (1)........................ 6.48 7.68 (16)
KEY RATIOS
Annualized return on average assets ............................ (0.29)% 0.79% (137)%
Annualized return on average equity ............................ (1.94) 5.71 (134)
Efficiency ratio (2) .......................................... 101.24 78.06 30
Core (leverage) capital ratio.................................... 11.23 10.00 12
Risk-based capital ratio......................................... 19.15 18.37 4
</TABLE>
(1) The Company repurchased 1,388,300 shares of its common stock during the
first quarter of 2000.
(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 of investment in unconsolidated entities.
RESULTS OF OPERATIONS: THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
GENERAL. The Company recorded a net loss of $(680), or $(0.01) per
share, for the third quarter of 2000, as compared to net income of $12,776, or
$0.21 per share, for the third quarter of 1999. There were a number of key
factors and transactions that contributed to the results for the third quarter
of 2000 as compared to the third quarter of 1999, including: the sale of Ocwen
UK in September 1999 for a gain of $50,431; the acquisition of OAC in October
1999; gains of $16,776 from the sales of two office buildings in San Francisco
during the third quarter of 2000; a decline in impairment charges from $19,211
during the third quarter of 1999 to $0 for the third quarter of 2000; unrealized
trading losses of $2,406 during the third quarter of 2000 as a result of the
Company's decision to change its accounting policy for securities available for
sale and match funded securities to account for them as trading securities
effective September 30, 2000; an increase in net losses incurred by OTX from
$(2,535) in the third quarter of 1999 to $(5,756) in the third quarter of 2000,
reflecting the Company's ongoing commitment to the development of this business;
and an increase in extraordinary gains on repurchases of debt, net of tax, from
$253 during the third quarter of 1999 to $2,628 during the third quarter of
2000.
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
SEGMENT PROFITABILITY. The following table presents the after tax
contribution by business segment to the Company's net (loss) income for the
years indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------------------------------- -----------------------------------------
Favorable Favorable
For the periods ended September 30, 2000 1999 (Unfavorable) 2000 1999 (Unfavorable)
----------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Single family residential discount
loans........................... $ 4,157 $ (4,154) $ 8,311 $ 11,624 $ (9,472) $ 21,096
Commercial loans.................. (3,887) (2,185) (1,702) (2,437) 8,043 (10,480)
Domestic residential mortgage loan
servicing....................... 2,008 2,000 8 8,242 8,091 151
Investment in low-income housing
tax credits..................... (2,500) 4,163 (6,663) (1,308) 6,612 (7,920)
OTX............................... (5,756) (2,535) (3,221) (15,502) (6,479) (9,023)
Commercial real estate............ 9,489 39 9,450 12,199 209 11,990
UK operations..................... (798) 30,049 (30,847) (3,730) 39,005 (42,735)
Domestic subprime single family
residential lending............. (4,832) (10,217) 5,385 (12,740) (11,454) (1,286)
Unsecured collections............. (2,235) (1,027) (1,208) (6,598) (2,492) (4,106)
Ocwen Realty Advisors............. (291) -- (291) (2) -- (2)
Corporate items and other......... 3,965 (3,357) 7,322 3,075 (13,503) 16,578
----------- ----------- ----------- ----------- ----------- -----------
$ (680) $ 12,776 $ (13,456) $ (7,177) $ 18,560 $ (25,737)
=========== =========== =========== =========== =========== ===========
</TABLE>
The following is a discussion of the contribution by business segment
to the Company's net income (loss) for the periods indicated.
o Single Family Residential Discount Loans. Results for three and nine months
ended September 30, 2000 included gains of $2,303 and $14,567,
respectively, from the sale of loans. This compares to securitization gains
of $22,763 for the nine months ended September 30, 1999 (none during the
third quarter). Impairment charges on residential subordinate securities
amounted to $26,977 for the nine months ended September 30, 1999, including
$4,078 for the third quarter. Net unrealized trading gains on residential
subordinate securities amounted to $4,143 for the third quarter of 2000.
Losses from the sale and operation of real estate owned amounted to $2,824
and $19,359 for the three and nine months ended September 30, 2000,
respectively, as compared to $1,027 and $5,548 for the three and nine
months ended September 30, 1999, respectively. The results for the three
and nine months ended September 30, 2000 also reflect declines of $796 and
$7,437, respectively, in the provision for loan losses, as compared to the
same periods in the prior year. See "Results of Operations - Non-Interest
Income."
o Commercial Loans. The results for the three and nine months ended September
30, 2000 reflect declines of $1,833 and $7,698, respectively, in gains from
the sale and operation of real estate owned as compared to the same periods
of 1999. Additional interest received in connection with the repayment of
loans held in the loan portfolio amounted to $6,084 during the nine months
ended September 30, 1999. Equity in earnings related to certain loans which
are accounted for as investments in real estate amounted to $4,723 and
$9,267 during the three and nine months ended September 30, 2000,
respectively. The results for the three and nine months ended September 30,
2000 also reflect increases in the provision for loan losses of $4,139 and
$3,235, respectively, primarily related to discount loans.
o Domestic Residential Mortgage Loan Servicing. Domestic residential
servicing fees and other charges amounted to $20,286 and $59,439 for the
three and nine months ended September 30, 2000, respectively, as compared
to $14,731 and $42,229 for the three and nine months ended September 30,
1999, respectively. The increase in servicing fees reflects an increase in
the average balance of loans serviced for others. See "Results of
Operations - Non-Interest Income."
o Investment in Low-Income Housing Tax Credits. See "Changes in Financial
Condition - Investment in Low-Income Housing Tax Credit Interests."
o UK Operations. The Company sold its investment in Ocwen UK on September 30,
1999 for a gain of $50,431. Losses for 2000 relate to the Company's 38.7%
equity investment in Kensington. See "Results of Operations - Equity in
Losses of Investments in Unconsolidated Entities."
o OTX. The increase in net losses incurred by OTX reflects the Company's
ongoing commitment to the development of its technology business.
24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
o Commercial Real Estate. Results for the three and nine months ended
September 30, 2000 included gains of $16,776 and $20,891, respectively,
from the sale of real estate properties held for sale. Results for the
three and nine months ended September 30, 2000 also included $4,178 and
$13,243, respectively, of net operating gains on investments in real
estate. These real estate properties were acquired in connection with the
acquisition of OAC in October 1999. See "Results of Operations -
Non-Interest Income."
o Domestic Subprime Single Family Residential Lending. Results for the three
and nine months ended September 30, 1999 included $15,133 and $20,883,
respectively, of impairment charges on subprime residual securities, as
compared to $0 and $10,930 for the three and nine months ended September
30, 2000, respectively. The results for 2000 also included $6,657 of net
unrealized trading losses on subprime residual securities during the third
quarter. The Company closed its domestic subprime origination business,
which had been conducted primarily through OFS, in 1999.
o Unsecured Collections. Unsecured collections is primarily comprised of
activities related to the Company's 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.
Results for the three and nine months ended September 30, 2000 included
provisions for loan losses of $1,863 and $4,630, respectively, as compared
to $219 and $(5) for the three and nine months ended September 30, 1999.
o Ocwen Realty Advisors. Ocwen Realty Advisors ("ORA"), a new activity in
2000, provides collateral valuation services for residential and commercial
properties.
See Note 9 to the Consolidated Financial Statements, included in Item 1
herein (which is incorporated herein by reference), for additional information
related to the Company's operating segments.
NET INTEREST INCOME: Net interest income is the difference between
interest income earned from interest-earning assets and interest expense
incurred on its interest-bearing liabilities. Net interest income is determined
by 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.
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
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 spread and net
interest margin. Information is based on average daily balances during the
indicated periods.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------------------------------
2000 1999
------------------------------------- -------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Federal funds sold and repurchase agreements....... $ 140,534 $ 2,544 7.24% $ 74,761 $ 958 5.13%
Securities available for sale (1).................. 629,088 12,831 8.16 652,527 15,350 9.41
Loans available for sale (2)....................... 28,564 450 6.30 235,136 6,233 10.60
Investment securities and other.................... 27,476 352 5.12 29,407 502 6.83
Loan portfolio (2)................................. 145,546 4,651 12.78 138,360 3,941 11.39
Match funded loans and securities.................. 138,619 2,611 7.53 -- -- --
Discount loan portfolio............................ 790,051 21,848 11.06 1,000,273 29,035 11.61
---------- --------- ---------- ---------
Total interest earning assets................... 1,899,878 45,287 9.53 2,130,464 56,019 10.52
--------- ---------
Non-interest earning cash.......................... 35,100 120,069
Allowance for loan losses.......................... (27,756) (26,466)
Low-income housing tax credit interests............ 143,930 184,855
Investment in unconsolidated entities.............. 30,279 78,280
Real estate owned, net............................. 179,666 179,585
Investment in real estate.......................... 160,029 17,579
Real estate held for sale.......................... 195,545 --
Escrow advances on loans and loans serviced for
others........................................... 200,578 145,552
Other assets....................................... 277,224 237,316
---------- ----------
Total assets.................................... $3,094,473 $3,067,234
========== ==========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits................... $ 13,349 $ 157 4.70% $ 25,441 $ 286 4.50%
Savings deposits................................... 1,404 8 2.28 1,593 10 2.51
Certificates of deposit............................ 1,573,785 25,687 6.53 1,610,378 24,483 6.08
---------- --------- ---------- ---------
Total interest-bearing deposits................. 1,588,538 25,852 6.51 1,637,412 24,779 6.05
Securities sold under agreements to repurchase..... 159,335 2,761 6.93 139,039 2,120 6.10
Bonds-match funded agreements...................... 118,437 2,948 9.96 -- -- --
Obligations outstanding under lines of credit...... 178,121 4,371 9.82 200,942 3,101 6.17
Notes, debentures and other........................ 280,231 8,501 12.13 226,952 6,787 11.96
---------- --------- ---------- ---------
Total interest-bearing liabilities.............. 2,324,662 44,433 7.65 2,204,345 36,787 6.68
--------- ---------
Non-interest bearing deposits...................... 7,281 18,251
Escrow deposits.................................... 62,079 222,865
Excess of net assets acquired over purchase price.. 49,900 --
Other liabilities.................................. 59,667 68,363
---------- ----------
Total liabilities............................... 2,503,589 2,513,824
Capital Securities................................. 100,422 125,000
Stockholders' equity............................... 490,462 428,410
---------- ----------
Total liabilities and stockholders' equity...... $3,094,473 $3,067,234
========== ==========
Net interest income................................ $ 854 $ 19,232
========= =========
Net interest spread................................ 1.88% 3.84%
Net interest margin................................ 0.18% 3.61%
Ratio of interest-earning assets to
interest-bearing liabilities..................... 82% 97%
</TABLE>
(1) Excludes effect of unrealized gains or losses on securities available
for sale.
(2) The average balances of loans available for sale and the loan portfolio
include non-performing loans, interest on which is recognized on a cash
basis.
26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------------------------------------
2000 1999
------------------------------------- -------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Federal funds sold and repurchase agreements....... $ 104,976 $ 5,118 6.50% $ 177,971 $ 6,412 4.80%
Securities available for sale (1).................. 715,121 42,508 7.93 584,488 48,199 11.00
Loans available for sale (2)....................... 37,112 2,174 7.81 297,093 25,376 11.39
Investment securities and other.................... 25,817 1,181 6.10 33,893 1,537 6.05
Loan portfolio (2)................................. 156,882 13,956 11.86 176,147 18,985 14.37
Match funded loans and securities.................. 147,479 8,874 8.02 -- -- --
Discount loan portfolio............................ 871,808 70,021 10.71 973,941 84,591 11.58
---------- --------- ---------- ---------
Total interest earning assets................... 2,059,195 143,832 9.31 2,243,533 185,100 11.00
--------- ---------
Non-interest earning cash.......................... 47,707 77,684
Allowance for loan losses.......................... (27,511) (26,589)
Low-income housing tax credit interests............ 147,111 167,605
Investment in unconsolidated entities.............. 32,666 82,820
Real estate owned, net............................. 181,699 196,840
Investment in real estate.......................... 224,354 33,267
Real estate held for sale.......................... 130,722 --
Escrow advances on loans and loans serviced for
others........................................... 187,222 126,133
Other assets....................................... 282,590 249,978
---------- ----------
Total assets.................................... $3,265,755 $3,151,271
========== ==========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits................... $ 9,677 $ 410 5.65% $ 43,586 $ 1,178 3.60%
Savings deposits................................... 1,520 28 2.46 1,565 28 2.39
Certificates of deposit............................ 1,569,044 74,892 6.36 1,626,920 73,960 6.06
---------- --------- ---------- ---------
Total interest-bearing deposits................. 1,580,241 75,330 6.36 1,672,071 75,166 5.99
Securities sold under agreements to repurchase..... 220,843 10,685 6.45 120,721 5,891 6.51
Bonds-match funded agreements...................... 127,771 9,095 9.49 -- -- --
Obligations outstanding under lines of credit...... 181,001 11,783 8.68 262,051 12,219 6.22
Notes, debentures and other........................ 292,556 26,598 12.12 224,528 20,147 11.96
---------- --------- ---------- ---------
Total interest-bearing liabilities.............. 2,402,412 133,491 7.41 2,279,371 113,423 6.63
--------- ---------
Non-interest bearing deposits...................... 7,318 17,849
Escrow deposits.................................... 131,672 211,000
Excess of net assets acquired over purchase price.. 52,837 --
Other liabilities.................................. 71,297 84,488
---------- ----------
Total liabilities............................... 2,665,536 2,592,708
Capital Securities................................. 106,329 125,000
Stockholders' equity............................... 493,890 433,563
---------- ----------
Total liabilities and stockholders' equity...... $3,265,755 $3,151,271
========== ==========
Net interest income................................ $ 10,341 $ 71,677
========= =========
Net interest spread................................ 1.90% 4.37%
Net interest margin................................ 0.67% 4.28%
Ratio of interest-earning assets to
interest-bearing liabilities..................... 86% 98%
</TABLE>
(1) Excludes effect of unrealized gains or losses on securities available
for sale.
(2) The average balances of loans available for sale and the loan portfolio
include non-performing loans, interest on which is recognized on a cash
basis.
27
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
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
-------------------------------------- --------------------------------------
2000 vs. 1999 2000 vs. 1999
-------------------------------------- --------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
-------------------------------------- --------------------------------------
For the periods ended September 30, Rate Volume Total Rate Volume Total
----------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold and repurchase
agreements.................................. $ 506 $ 1,080 $ 1,586 $ 1,835 $ (3,129) $ (1,294)
Securities available for sale.................. (1,983) (536) (2,519) (8,688) 2,997 (5,691)
Loans available for sale....................... (1,827) (3,956) (5,783) (2,753) (20,449) (23,202)
Investment securities and other................ (119) (31) (150) 5 (361) (356)
Loan portfolio................................. 498 212 710 (1,883) (3,146) (5,029)
Match funded loans and securities.............. -- 2,611 2,611 -- 8,874 8,874
Discount loan portfolio........................ (1,320) (5,867) (7,187) (3,090) (11,480) (14,570)
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets............... (4,245) (6,487) (10,732) (14,574) (26,694) (41,268)
---------- ---------- ---------- ---------- ---------- ----------
Interest-Bearing Liabilities:
Interest-bearing demand deposits............... 13 (142) (129) 229 (997) (768)
Savings deposits............................... (1) (1) (2) -- -- --
Certificates of deposit........................ 1,770 (566) 1,204 2,137 (1,205) 932
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits............. 1,782 (709) 1,073 2,366 (2,202) 164
Securities sold under agreements to
repurchase.................................. 310 331 641 (19) 4,813 4,794
Bonds-match funded agreements.................. -- 2,948 2,948 -- 9,095 9,095
Obligations outstanding under lines of credit.. 1,600 (393) 1,207 2,311 (2,747) (436)
Notes, debentures and other interest-bearing
obligations................................. 164 1,613 1,777 103 6,348 6,451
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities........ 3,856 3,790 7,646 4,761 15,307 20,068
---------- ---------- ---------- ---------- ---------- ----------
$ (8,101) $ (10,277) $ (18,378) $ (19,335) $ (42,001) $ (61,336)
========== ========== ========== ========== ========== ==========
</TABLE>
The Company's net interest income before provision for loan losses of
$854 for the three months ended September 30, 2000 decreased $18,378 or 96% as
compared to the same period in the prior year. The decrease was due to a
decrease in average interest-earning assets, an increase in average
interest-bearing liabilities and a decrease in the net interest spread. Average
interest-earning assets decreased by $230,586 or 12% during the three months
ended September 30, 2000 and reduced interest income by $6,487. Average
interest-bearing liabilities increased by $120,317 or 5% during the three months
ended September 30, 2000 and increased interest expense by $3,790. The impact of
these volume changes resulted in a $10,277 decrease in net interest income. The
net interest spread decreased 196 basis points as a result of a 99 basis-point
decrease in the weighted average rate on interest-earning assets and a 97
basis-point increase in the weighted average rate on interest-bearing
liabilities. The impact of these rate changes resulted in a $8,101 decrease in
net interest income. The sale of Ocwen UK, which had a net interest spread for
the three months ended September 30, 1999 of 8.28%, contributed to the overall
decline in the net interest spread. Additionally, the average balance of
non-interest earning assets that are largely funded by interest bearing
liabilities has increased during 2000, primarily due to an increase in real
estate assets resulting from the acquisition of OAC and increase in escrow
advances resulting from the growth of the domestic loan servicing business.
The Company's net interest income before provision for loan losses of
$10,341 for the nine months ended September 30, 2000 decreased $61,336 or 86% as
compared to the same period in the prior year. The decrease was due to a
decrease in average interest-earning assets, an increase in average
interest-bearing liabilities, and a decrease in the net interest spread. Average
interest-earning assets decreased by $184,338 or 8% during the nine months ended
September 30, 2000 and reduced interest income by $26,694. Average
interest-bearing liabilities increased by $123,041 or 5% during the nine months
ended September 30, 2000 and increased interest expense by $15,307. The impact
of these volume changes resulted in a $42,001 decrease in net interest income.
The net interest spread decreased 247 basis points during the nine months ended
September 30, 2000 as a result of a 169 basis-point decrease in the weighted
average rate on interest-earning assets and a 78 basis-point increase in the
weighted average rate on interest-bearing liabilities. The impact of these rate
changes resulted in a
28
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
$19,335 decrease in net interest income. The sale of Ocwen UK, which had a net
interest spread for the nine months ended September 30, 1999 of 9.70%,
contributed to the overall decline in net interest spread.
<TABLE>
<CAPTION>
Average Balance Increase Average Yield Increase
----------------------------- (Decrease) --------------------- (Decrease)
For the three months ended September 30, 2000 1999 $ 2000 1999 Basis Points
---------------------------------------- ------------- ------------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and repurchase
agreements............................ $ 140,534 $ 74,761 $ 65,773 7.24% 5.13% 211
Securities available for sale........... 629,088 652,527 (23,439) 8.16 9.41 (125)
Loans available for sale (1)............ 28,564 235,136 (206,572) 6.30 10.60 (430)
Investment securities and other......... 27,476 29,407 (1,931) 5.12 6.83 (171)
Loan portfolio.......................... 145,546 138,360 7,186 12.78 11.39 139
Match funded loans and securities....... 138,619 -- 138,619 7.53 -- 753
Discount loan portfolio................. 790,051 1,000,273 (210,222) 11.06 11.61 (55)
----------- ----------- -----------
$ 1,899,878 $ 2,130,464 $ (230,586) 9.53 10.52 (99)
=========== =========== ===========
<CAPTION>
Average Balance Increase Average Yield Increase
----------------------------- (Decrease) --------------------- (Decrease)
For the nine months ended September 30, 2000 1999 $ 2000 1999 Basis Points
---------------------------------------- ------------- ------------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and repurchase
agreements............................ $ 104,976 $ 177,971 $ (72,995) 6.50% 4.80% 170
Securities available for sale........... 715,121 584,488 130,633 7.93 11.00 (307)
Loans available for sale (2)............ 37,112 297,093 (259,981) 7.81 11.39 (358)
Investment securities and other......... 25,817 33,893 (8,076) 6.10 6.05 5
Loan portfolio.......................... 156,882 176,147 (19,265) 11.86 14.37 (251)
Match funded loans and securities....... 147,479 -- 147,479 8.02 -- 802
Discount loan portfolio................. 871,808 973,941 (102,133) 10.71 11.58 (87)
----------- ----------- -----------
$ 2,059,195 $ 2,243,533 $ (184,338) 9.31 11.00 (169)
=========== =========== ===========
</TABLE>
(1) Includes an average balance of $168,110 with an average yield earned of
11.15% for the three months ended September 30, 1999 related to Ocwen
UK.
(2) Includes an average balance of $176,572 with an average yield earned of
12.28% for the nine months ended September 30, 1999 related to Ocwen
UK.
Interest income on federal funds sold and repurchase agreements
increased $1,586 or 166% during the three months ended September 30, 2000 as
compared to the same period in 1999 due to a $65,773 or 88% increase in the
average balance, and a 211 basis-point increase in the average yield. For the
nine months ended September 30, 2000 interest income on federal funds sold and
repurchase agreements declined $1,294 or 20% as compared to the same period in
1999 primarily due to a $72,995 or 41% decline in the average balance, offset by
a 170 basis-point increase in the average yield.
Interest income on securities available for sale decreased $2,519 or
16% during the three months ended September 30, 2000 as compared to the same
period in 1999 as a result of a $23,439 or 4% decrease in the average balance
and a 125 basis-point decrease in the weighted average yield earned. For the
nine months ended September 30, 2000, interest income on securities available
for sale decreased $5,691 or 12% as compared to the same period in 1999 as a
result of a 307 basis-point decrease in the weighted average yield earned,
offset by a $130,633 or 22% increase in the average balance. As indicated in the
tables below, the decrease in the weighted average yield during the three and
nine months ended September 30, 2000, as compared to the same periods in 1999,
is due primarily to the sale of Ocwen UK and other changes in the composition of
the securities available for sale portfolio.
<TABLE>
<CAPTION>
Average Balance Average Yield
--------------------------------------------------- --------------------
For the three months ended September 30, 2000 1999 2000 1999
-------------------------------------------------- ------------------------ ------------------------- --------- ---------
Amount Percent Amount Percent
------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
CMOs (AAA-rated) (1).............................. $ 502,869 80% $ 429,246 66% 6.70% 5.73%
Subordinates, residuals and other securities (2).. 126,219 20 223,281 34 13.98 16.48
------------ ----- ------------ -----
629,088 100% $ 652,527 100% 8.16 9.41
============ ===== ============ =====
</TABLE>
29
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Balance Average Yield
--------------------------------------------------- --------------------
For the nine months ended September 30, 2000 1999 2000 1999
-------------------------------------------------- ------------------------ ------------------------- --------- ---------
Amount Percent Amount Percent
------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
CMOs (AAA-rated) (1).............................. $ 571,486 80% $ 361,089 62% 5.63% 6.46%
Subordinates, residuals and other securities (3).. 143,635 20 223,399 38 19.66 13.75
------------ ----- ------------ -----
$ 715,121 100% $ 584,488 100% 7.93 11.00
============ ===== ============ =====
</TABLE>
(1) Because collateralized mortgage obligations ("CMOs") have less cash
flow variability, their average lives and yields to maturity are more
stable, and therefore, CMOs are priced to yield less than a less stable
class of mortgage-related securities. See "Changes in Financial
Condition - Securities Available for Sale."
(2) Includes an average balance of $95,080 with an average yield earned of
19.22% for the three months ended September 30, 1999 related to Ocwen
UK.
(3) Includes an average balance of $81,204 with an average yield earned of
24.45% for the nine months ended September 30, 1999 related to Ocwen
UK.
Interest income on loans available for sale decreased $5,783 or 93%
during the three months ended September 30, 2000 as compared to the same period
in 1999 as a result of a $206,572 or 88% decrease in the average balance and a
430 basis-point decline in the average yield. For the nine months ended
September 30, 2000, interest income on loans available for sale decreased
$23,202 or 91% as compared to the same period in 1999 as a result of a $259,981
or 88% decrease in the average balance and a 358 basis-point decline in the
average yield. The decrease in the average balances and yields reflects the
closure of the domestic subprime origination business and the sale of Ocwen UK.
See "Changes in Financial Condition - Loans Available for Sale."
Interest income on the loan portfolio increased by $710 or 18% during
the three months ended September 30, 2000 versus the same period in 1999 due to
a 139 basis-point increase in the average yield and a $7,186 or 5% increase in
the average balance. For the nine months ended September 30, 2000, interest
income on the loan portfolio decreased $5,029 or 26% versus the same period in
1999 as a result of a $19,265 or 11% decrease in the average balance and a 251
basis-point decrease in the average yield. The decrease in the average yield is
due in part to a decline in the amount of additional interest received in
connection with the repayment of loans. Such additional interest amounted to $8
and $97 during the three and nine months ended September 30, 2000, respectively,
as compared to $476 and $6,084 for the three and nine months ended September 30,
1999, respectively. During 1999, the Company ceased origination of multi-family
and commercial loans. See "Changes in Financial Condition - Loan Portfolio."
Interest income on match funded loans and securities is comprised of
income earned on loans acquired in connection with the acquisition of OAC. These
loans were previously securitized by OAC under a securitization accounted for as
a financing transaction and on four unrated residual securities transferred by
the Company in December 1999 to Ocwen NIM Corp. in exchange for non-recourse
notes. See "Changes in Financial Condition - Match Funded Loans and Securities."
Interest income on discount loans decreased by $7,187 or 25% during the
three months ended September 30, 2000 as compared to the same period in 1999
primarily as a result of a $210,222 or 21% decline in the average balance and a
55 basis-point decrease in the average yield. For the nine months ended
September 30, 2000, interest income on discount loans decreased by $14,570 or
17% as compared to the same period in 1999 as a result of a $102,133 or 10%
decline in the average balance and an 87 basis-point decline in the average
yield. See "Changes in Financial Condition - Discount Loans, Net." 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 non-performing loans.
30
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Balance Increase Average Rate Increase
------------------------- (Decrease) ----------------------- (Decrease)
For the three months ended September 30, 2000 1999 $ 2000 1999 Basis Points
-------------------------------------------------- ----------- ----------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits......................... $ 1,588,538 $ 1,637,412 $ (48,874) 6.51% 6.05% 46
Securities sold under agreements to repurchase (1) 159,335 139,039 20,296 6.93 6.10 83
Bonds-match funded agreements..................... 118,437 -- 118,437 9.96 -- 996
Obligations outstanding under lines of credit (2) 178,121 200,942 (22,821) 9.82 6.17 365
Notes, debentures and other....................... 280,231 226,952 53,279 12.13 11.96 17
----------- ----------- ----------
$ 2,324,662 $ 2,204,345 $ 120,317 7.65 6.68 97
=========== =========== ==========
<CAPTION>
Average Balance Increase Average Rate Increase
------------------------- (Decrease) ----------------------- (Decrease)
For the nine months ended September 30, 2000 1999 $ 2000 1999 Basis Points
-------------------------------------------------- ----------- ----------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits......................... 1,580,241 1,672,071 (91,830) 6.36% 5.99% 37
Securities sold under agreements to repurchase (3) 220,843 120,721 100,122 6.45 6.51 (6)
Bonds-match funded agreements..................... 127,771 -- 127,771 9.49 -- 949
Obligations outstanding under lines of credit (4) 181,001 262,051 (81,050) 8.68 6.22 246
Notes, debentures and other....................... 292,556 224,528 68,028 12.12 11.96 16
----------- ----------- ----------
$ 2,402,412 $ 2,279,371 $ 123,041 7.41 6.63 78
=========== =========== ==========
</TABLE>
(1) Includes an average balance of $35,445 with an average yield of 7.17%
for the three months ended September 30, 1999 related to Ocwen UK.
(2) Includes an average balance of $166,816 with an average yield of
5.83%for the three months ended September 30, 1999 related to Ocwen UK.
(3) Includes an average balance of $30,627 with an average yield of
7.64%for the nine months ended September 30, 1999 related to Ocwen UK.
(4) Includes an average balance of $174,393 with an average yield of 6.16%
for the nine months ended September 30, 1999 related to Ocwen UK.
Interest expense on interest-bearing deposits increased $1,073 or 4%
during the three months ended September 30, 2000 due to a 46 basis-point
increase in the average rate offset in part by a $48,874 or 3% decrease in the
average balance. For the nine months ended September 30, 2000, interest expense
on interest-bearing deposits increased $164 as compared to the same period in
1999 primarily as a result of a 37 basis-point increase in the average rate,
offset by a $91,830 or 5% decrease in the average balance. The increase in the
average rates for the above periods was primarily related to certificates of
deposit.
Interest expense on securities sold under agreements to repurchase
increased $641 or 30% primarily due to an $20,296 or 15% increase in the average
balance. For the nine months ended September 30, 2000, interest expense on
securities sold under agreements to repurchase increased $4,794 or 81% as
compared to the same period in 1999 primarily as a result of a $100,122 or 83%
increase in the average balance. See "Changes in Financial Condition -
Securities Sold Under Agreements to Repurchase."
Interest expense on bonds-match funded agreements is comprised of
interest incurred on bonds-match funded agreements acquired as a result of the
OAC acquisition and on non-recourse notes which resulted from the Company's
transfer of four unrated residual securities in December 1999 to Ocwen NIM Corp
in exchange for non-recourse notes. See "Changes in Financial Condition - Bonds
- Match Funded Agreements."
Interest expense on obligations outstanding under lines of credit
increased $1,270 or 41% during the three months ended September 30, 2000 as
compared to the same period in 1999 due to a 365 basis-point increase in the
weighted average interest rate offset in part by a $22,821 or 11% decrease in
the average balance. For the nine months ended September 30, 2000, interest
expense on obligations outstanding under lines of credit decreased $436 or 4% as
compared to the same period in 1999 as a result of a $81,050 or 31% decrease in
the average balance, offset by a 246 basis-point increase in the average rate.
During the nine months ended September 30, 1999, lines of credit were used
primarily to fund the acquisition and origination of subprime single family
loans at OFS and Ocwen UK. The net decreases in the average balances reflects
the
31
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
closure of the domestic subprime origination business and the sale of Ocwen UK,
offset by the assumption of lines as a result of the acquisition of OAC. The OAC
lines are primarily collateralized by investments in real estate. See "Changes
in Financial Condition - Obligations Outstanding Under Lines of Credit."
Interest expense on notes, debentures and other increased $1,777 or 26%
during the three months ended September 30, 2000 primarily due to a $53,279 or
23% increase in the average balance. For the nine months ended September 30,
2000, interest expense on notes, debentures and other increased $6,451 or 32% as
compared to the same period in 1999 primarily as a result of a $68,028 or 30%
increase in the average balance. The increases in the average balances is
primarily due to the assumption of $140,487 of 11.5% Redeemable Notes as a
result of the OAC acquisition, offset by the Company's repurchases of debt
during 1999 and 2000. See "Changes in Financial Condition - Notes, Debentures
and Other."
PROVISIONS FOR LOAN LOSSES. Provisions for losses on loans are charged
to operations to maintain an allowance for losses on the loan portfolio, the
discount loan portfolio and match funded loans at a level which management
considers adequate based upon an evaluation of known and inherent risks in such
portfolios. Management's periodic evaluation is based on an analysis of the
discount loan portfolio, the loan portfolio and match funded loans, historical
loss experience, current economic conditions and trends, collateral values and
other relevant factors.
The following table presents the provisions for loan losses by the
discount loan, loan portfolio and match funded loans for the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------------- ---------------------------
For the periods ended September 30, 2000 1999 2000 1999
----------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Discount loan portfolio................ $ 5,989 $ 1,209 $ 13,209 $ 4,618
Loan portfolio......................... 938 (383) (477) 570
Match funded loans..................... (66) -- (128) --
---------- ---------- ---------- ----------
$ 6,861 $ 826 $ 12,604 $ 5,188
========== ========== ========== ==========
</TABLE>
The increase in the provision for loan losses is primarily attributed
to detailed asset reviews of commercial loans and an increase in the allowance
for losses on unsecured credit card receivables.
The following table sets forth the allowance for loan losses as a
percentage of the respective loan balances at the dates indicated.
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
--------------------------------------- --------------------------------------
Loan Allowance Loan Allowance
Allowance Balance as a % Allowance Balance as a %
----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Discount loan portfolio......... $ 23,047 $ 724,988 3.18% $ 20,322 $ 994,794 2.04%
Loan portfolio.................. 4,871 119,974 4.06 5,491 132,517 4.14
Match funded loans.............. 367 87,721 0.42 -- -- --
----------- ----------- ----------- -----------
$ 28,285 $ 932,683 3.03 $ 25,813 $ 1,127,311 2.29%
=========== =========== =========== ===========
</TABLE>
At December 31, 1999, the allowance as a percentage of the loan balance
for discount loans, loan portfolio and match funded loans was 2.06%, 4.41% and
0.47%, respectively. For additional information regarding the Company's
allowance for loan losses on the above portfolios, see "Changes in Financial
Condition - Allowance for Loan Losses." For information relating to the
Company's valuation allowance on real estate owned, see "Changes in Financial
Condition - Real Estate Owned."
32
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
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, 2000 1999 2000 1999
-------------------------------------------------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Servicing fees and other charges........................ $ 22,517 $ 19,584 $ 63,647 $ 56,764
Gain on interest-earning assets, net.................... 1,453 442 17,717 43,585
Unrealized loss on trading securities................... (2,406) -- (2,406) --
Impairment charges on securities available for sale..... -- (19,211) (11,597) (48,080)
(Loss) gain on real estate owned, net................... (4,621) (1,508) (14,634) 1,798
Net operating gains (loss) on investments in real estate 9,153 (2,169) 22,769 (1,927)
Amortization of excess of net assets acquired over
purchase price....................................... 2,995 -- 8,788 --
Other income............................................ 20,445 65,105 33,431 80,731
----------- ----------- ----------- ----------
Total................................................... $ 49,536 $ 62,243 $ 117,715 $ 132,871
=========== =========== =========== ==========
</TABLE>
Servicing fees and other charges are primarily comprised of fees from
investors for servicing mortgage loans. Excluding Ocwen UK, servicing fees and
other charges for the three and nine months ended September 30, 1999 increased
$6,529 and $16,574, respectively. Excluding Ocwen UK, the average unpaid
principal balance of loans serviced for others amounted to $10,627,495 and
$10,750,711 during the three and nine months ended September 30, 2000,
respectively, as compared to $10,477,469 and $9,763,100 for the three and nine
months ended September 30, 1999, respectively. Also contributing to the increase
in servicing fees and other charges during 2000 was an increase in interest
earned on custodial accounts during the holding period between collection of
borrower payments and remittance to investors, an increase in late charges on
residential loans and an increase in other miscellaneous servicing related fees.
Servicing fees for the three and nine months ended September 30, 2000 included
$2,663 and $8,657 respectively, of special servicing fees as compared to $3,466
and $8,663 for the three and nine months ended September 30, 1999, respectively.
The Company began entering into special servicing arrangements in 1998 wherein
the Company acts as a special servicer for third parties, typically as part of a
securitization. Under these arrangements, the Company services loans that become
greater than 90 days past due and receives incentive fees to the extent certain
loss mitigation parameters are achieved.
The following table sets forth the Company's loans serviced for others
at September 30, 2000.
<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............... $ 905,100 14,848 $ 800,544 8,177 $ -- -- $ 1,705,644 23,025
Loans serviced for third parties 813,171 14,362 7,164,323 89,144 972,969 497 8,950,463 104,003
----------- --------- ----------- --------- ---------- --------- ------------ ---------
$ 1,718,271 29,210 $ 7,964,867 97,321 $ 972,969 497 $ 10,656,107 127,028
=========== ========= =========== ========= ========== ========= ============ =========
</TABLE>
For the nine months ended September 30, 2000, net gains on
interest-earning assets of $17,717 were primarily comprised of $14,567 of gains
from the sale of 1,912 single family residential discount loans with an
aggregate unpaid principal balance of $155,079, and a $2,768 gain on the sale of
a commercial subordinate security. For the nine months ended September 30, 1999,
net gains on interest-earning assets of $43,585 were primarily comprised of
$36,804 of gains recognized in connection with the securitization of single
family loans, as presented in the table below, $4,395 of gains on sales of
commercial subordinate securities and $4,212 of gains on sales of commercial
discount loans.
The unrealized loss on trading securities securities of $2,406 for the
three and nine months ended September 30, 2000 resulted from the Company's
change, on September 30, 2000, in its policy for securities available for sale
and match-funded securities to account for them as trading securities. See Notes
2 and 5 to the Interim Consolidated Financial Statements included in Item 1
herein.
33
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
During the third quarter of 1999, the Company made a strategic decision
to structure future securitizations as financing transactions, thereby
precluding the use of gain-on-sale accounting. There were no securitizations of
loans executed by the Company during the nine months ended September 30, 2000.
The following table sets forth the Company's net gains recognized in connection
with the securitization of loans during the nine months ended September 30,
1999. There were no securitizations of loans executed by the Company during the
three months ended September 30, 1999.
<TABLE>
<CAPTION>
Book Value
Loans Securitized Of Securities
------------------------------------------------------------------------------- Retained
No. of (Non-cash Cash
Type of Loans Principal Loans Net Gain Gain) Gain
------------------------------------------------- ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
For the nine months ended September 30, 1999:
---------------------------------------------
Single family discount (1) ...................... $ 227,303 3,137 $ 22,763 4,040 $ 18,723
Single family subprime:
Domestic...................................... 235,572 2,192 3,834 12,091 --
Foreign (Ocwen UK) ........................... 295,157 8,983 10,207 34,452 --
------------ ------------ ------------ ------------ ------------
530,729 11,175 14,041 46,543 --
------------ ------------ ------------ ------------ ------------
$ 758,032 14,312 $ 36,804 50,583 $ 18,273
============ ============ ============ ============ ============
</TABLE>
(1) Includes 384 loans with an unpaid principal balance of $24,880
securitized from the loan portfolio.
Impairment charges on securities available for sale represent declines
in fair value that were deemed to be other than temporary. See "Changes in
Financial Condition - Securities Available for Sale."
The following table sets forth the results of the Company's real estate
owned (which does not include investments in real estate, as discussed below)
during the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
-------------------------- --------------------------
For the periods ended September 30, 2000 1999 2000 1999
--------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gains on sales........................... $ 5,110 $ 8,184 $ 16,793 $ 29,591
Provision for losses in fair value (1)... (7,593) (6,494) (24,556) (21,334)
Carrying costs, net...................... (2,138) (3,198) (6,871) (6,459)
---------- ---------- ---------- ----------
(Loss) income on real estate owned, net.. $ (4,621) $ (1,508) $ (14,634) $ 1,798
========== ========== ========== ==========
</TABLE>
(1) The valuation allowance as a percentage of real estate owned was 11.38%
and 9.34% at September 30, 2000 and 1999, respectively. This increase
reflects an increase in the amount of real estate owned which the
Company has held in excess of one year, which is primarily due to the
anticipated migration of a large retail property which is currently
being repositioned for sale.
See "Changes in Financial Condition - Real Estate Owned" for additional
information regarding real estate owned.
Net operating gains on investments in real estate during the three and
nine months ended September 30, 2000 included $4,366 and $13,394, respectively
of operating income from investments in real estate acquired as a result of the
OAC acquisition in October 1999. The three and nine months ended September 30,
2000 also included $4,723 and $9,267 of equity in earnings related to certain
loans acquired during the first quarter of 2000 which are accounted for as
investments in real estate. See "Changes in Financial Condition - Investments in
Real Estate."
The amortization of excess of net assets acquired over purchase price
resulted from the Company's acquisition of OAC on October 7, 1999. The
acquisition resulted in an excess of net assets acquired over the purchase price
of $60,042, which is being amortized on a straight-line basis over a period of
five years. The unamortized balance of the excess of net assets acquired over
purchase price at September 30, 2000 was $47,923, as compared to $56,841 at
December 31, 1999.
Other income for the three months ended September 30, 2000 was
primarily comprised of $16,354 of gains on sales of investments in real estate
and $2,801 of property valuation service fees earned by ORA. See "Changes in
Financial Condition - Real Estate Held for Sale." Other income for the three
months ended September 30, 1999 was primarily comprised of a $50,431 gain on the
sale of Ocwen UK, a gain of $5,003 from the sale of low-income housing tax
credit interests, $4,976 of brokerage commissions earned in connection with
Ocwen UK loan originations and $1,415 of management fees earned from OAC.
34
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
Other income for the nine months ended September 30, 2000 was primarily
comprised of $21,568 of gains on sales of investments in real estate and $8,395
of property valuation service fees earned by ORA. Other income for the nine
months ended September 30, 1999 was primarily comprised of the $50,431 gain on
sale of Ocwen UK, $12,896 of brokerage commissions earned in connection with
Ocwen UK loan originations, a gain of $5,003 from the sale of low-income housing
tax credit interests, $4,467 of management fees earned from OAC and $1,762 of
gains on sales of investments in real estate.
NON-INTEREST EXPENSE. As compared to the same periods in 1999,
non-interest expense decreased $7,428 or 14% during the three months ended
September 30, 2000 and $27,658 or 18% during the nine months ended September 30,
2000. The decrease was due in large part to the sale of Ocwen UK in September
1999 and the Company's closing of its domestic subprime lending operations at
OFS, offset by an increase in non-interest expenses related to OTX and the
acquisition of OAC in October 1999.
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, 2000 1999 2000 1999
---------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Compensation and employee benefits............ $ 22,134 $ 29,451 $ 61,114 $ 80,991
Occupancy and equipment....................... 3,141 4,331 9,356 15,053
Technology and communication costs............ 6,003 4,275 16,698 14,818
Loan expenses................................. 3,583 3,992 10,500 10,773
Net operating losses on investments in certain
low-income housing tax credit interests.... 3,691 1,094 6,030 4,558
Amortization of excess of purchase price over
net assets acquired........................ 778 284 2,346 771
Other operating expenses...................... 5,370 8,701 18,574 25,312
---------- ---------- ---------- ----------
Total...................................... $ 44,700 $ 52,128 $ 124,618 $ 152,276
========== ========== ========== ==========
</TABLE>
The decline in compensation and employee benefits for the three and
nine months ended September 30, 2000 as compared to the same periods in 1999 was
due in large part to the sale of Ocwen UK and the closing of the domestic
subprime lending operations at OFS. In addition to Ocwen UK and OFS, the
reversal of accrued profit sharing expense in the amount of $6,012 during the
first quarter of 2000 as a result of the Company's decision to suspend its
long-term incentive plan also contributed to the decline in compensation and
employee benefits during the nine months ended September 30, 2000. Excluding
Ocwen UK, OFS and the $6,012 accrual reversal, compensation and employee
benefits increased $568 and $8,608 during the three and nine months ended
September 30, 2000, respectively. This increase reflects an increase in the
average number of full-time equivalent employees (excluding Ocwen UK and OFS)
from 1,189 and 1,119 during the three and nine months ended September 30, 1999,
respectively, to 1,299 and 1,322 for the three and nine months ended September
30, 2000, respectively. Further contributing to the increase in compensation and
employee benefits during 2000 was a reversal of $2,248 of profit sharing expense
in the second quarter of 1999 resulting from the Company's decision at that time
to grant stock 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.
For 2000, it is anticipated that options will be granted at exercise prices
below fair market value.
The decrease in occupancy and equipment costs during the three and nine
months ended September 30, 2000, as compared to the same periods in 1999, was
primarily due to the sale of Ocwen UK. Excluding Ocwen UK, occupancy and
equipment expense increased $283 and decreased $1,234 during the three and nine
months ended September 30, 2000, respectively, as compared to the same periods
in 1999.
Technology and communication costs consists primarily of depreciation
expense on computer hardware and software, technology-related consulting fees
(primarily OTX) and telephone expense.
Excluding Ocwen UK and OFS, loan expenses decreased $1,527 for the
three months ended September 30, 2000, as compared to the same period in 1999.
For the nine months ended September 30, 2000, loan expenses excluding Ocwen UK
and OFS increased $5,090 as compared to the same period in 1999. The increase in
loan expenses was due in large part to an increase in appraisal fees in
connection with property valuation services provided by ORA.
35
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
Other operating expenses are primarily comprised of professional fees,
marketing costs and travel costs. The decrease in other operating expenses
during the three and nine months ended September 30, 2000, as compared to the
same periods in 1999, is primarily due to the sale of Ocwen UK. Excluding Ocwen
UK, other operating expenses for the three and nine months ended September 30,
2000 decreased $1,702 and $1,832, respectively, as compared to the same periods
in the prior year.
DISTRIBUTIONS ON COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE
COMPANY. Cash distributions on the Capital Securities are payable semi-annually
in arrears on February 1 and August 1 of each year at an annual rate of 10.875%.
The Company recorded $2,730 and $8,842 of distributions to holders of the
Capital Securities during the three and nine months ended September 30, 2000,
respectively, as compared to $3,400 and $10,196 during the three and nine months
ended September 30, 1999, respectively. The decline in distributions is the
result of repurchases during the fourth quarter of 1999 and the second and third
quarters of 2000. See Note 4 to the Consolidated Financial Statements included
in Item 1 (which is incorporated herein by reference) and "Changes in Financial
Condition - Company-Obligated, Mandatorily Redeemable Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures of the Company."
EQUITY IN LOSSES OF INVESTMENTS IN UNCONSOLIDATED ENTITIES. During the
three and nine months ended September 30, 2000, the Company recorded equity in
the losses of investments in unconsolidated entities of $893 and $4,965,
respectively. This compares to losses of $4,768 and $9,483 for the three and
nine months ended September 30, 1999, respectively.
During the three and nine months ended September 30, 2000, the Company
recorded equity in losses of Kensington Group plc of $891 and $5,002
respectively, including goodwill amortization. For the three and nine months
ended September 30, 1999, the Company's share of Kensington's losses amounted to
$4,640 and $6,070, respectively. At September 30, 2000, the Company owned 38.7%
of the total outstanding common stock of Kensington, an originator of
non-conforming residential mortgages in the U.K. See "Recent Developments."
Equity in the losses of investments in unconsolidated entities for the
three and nine months ended September 30, 1999 included the Company's equity in
the losses of its investments in OAC and OPLP of $120 and $3,605, respectively.
Prior to its acquisition of OAC in October 1999, the Company accounted for its
investments in OAC and OPLP using the equity method.
See "Changes in Financial Condition - Investment in Unconsolidated
Entities."
INCOME TAX BENEFIT (EXPENSE). Income tax benefit (expense) amounted to
$1,486 and $(8,199) during the three months ended September 30, 2000 and 1999,
respectively, and $7,122 and $(9,595) for the nine months ended September 30,
2000 and 1999, respectively. The Company's income taxes for 2000 and 1999
reflect expected effective tax rates of 31.0% and 35.01%, respectively. The
Company's effective tax rates reflect tax credits resulting from the Company's
investment in low-income housing tax credit interests of $2,079 and $4,651
during the third quarter of 2000 and 1999, respectively, and $8,496 and $13,714
for the nine months ended September 30, 2000 and 1999, respectively. See
"Changes in Financial Condition - Investments in Low-Income Housing Tax Credit
Interests."
EXTRAORDINARY GAIN ON REPURCHASE OF DEBT, NET OF TAXES. Extraordinary
gains on repurchases of debt, net of taxes, for the three and nine months ended
September 30, 2000 of $2,628 and $8,674, respectively, is comprised of $3,104 of
gains recognized in connection with the repurchase of Capital Securities ($572
during the third quarter of 2000) and $5,570 of gains ($2,056 during the third
quarter of 2000) recognized in connection with repurchases of the 11.5%
Redeemable Notes. Extraordinary gains on repurchases of debt for the three and
nine months ended September 30, 1999 amounted to $253 and resulted from the
Company's repurchase of $7,440 of its 12% Subordinated Debentures. See "Changes
in Financial Condition - Notes, Debentures and Other Interest-Bearing
Obligations" and "Company Obligated, Mandatorily Redeemable Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company."
CHANGES IN FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE. On September 30, 2000, the Company
changed its policy for securities available for sale, to account for them as
trading securities. On that date, the Company transferred its portfolio of
securities available for sale which had a fair value of $496,295, to trading.
Securities available for sale were carried at fair value with unrealized gains
or losses reported as a separate component of accumulated other comprehensive
income in stockholders' equity, net of
36
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
taxes. Unrealized losses on securities available for sale that reflected a
decline in value which was other than temporary were charged to earnings. At
December 31, 1999, securities available for sale included an aggregate of $1,036
of unrealized gains ($6,967 of gross gains and $5,931 of gross losses). See
"Changes in Financial Condition - Trading Securities."
The following table sets forth the fair value of the Company's securities
available for sale at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Mortgage-related securities:
Collateralized mortgage obligations
(AAA-rated)....................................... $ -- $ 392,387
------------ ------------
Subordinates, residuals and other securities:
Single family residential:
BB-rated subordinates.......................... -- 5,908
B-rated subordinates........................... -- 6,098
Unrated subordinates........................... -- 17,287
Unrated subprime residuals..................... -- 124,087
------------ ------------
-- 153,380
------------ ------------
Multi-family residential and commercial:
BB-rated subordinates.......................... -- 38,234
Unrated subordinates........................... -- 3,503
Unrated interest only.......................... -- 14
------------ ------------
-- 41,751
------------ ------------
-- 195,131
------------ ------------
Total securities available for sale................. $ -- $ 587,518
============ ============
</TABLE>
During the nine months ended September 30, 2000, and prior to the
transfer of securities available for sale to trading, securities available for
sale declined $91,233 primarily due to $416,004 of maturities and principal
repayments, $550,120 of sales, $59,509 of principal shortfalls, $11,597 of
impairment charges and $6,888 of net amortization, offset by $891,269 of
purchases and $52,621 of premium amortization.
37
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
TRADING SECURITIES. On September 30, 2000, the Company reclassified its
collateralized mortgage obligations with a fair value of $372,541 (amortized
cost of $372,432) and its subordinates, residuals and other securities with a
fair value of $123,754 (amortized cost of $115,778) from securities available
for sale to trading.
The following table sets forth the fair value of the Company's trading
securities at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Mortgage-related securities:
Collateralized mortgage obligations
(AAA-rated)....................................... $ 372,541 $ --
------------ ------------
Subordinates, residuals and other securities:
Single family residential:
BB-rated subordinates.......................... 4,989 --
B-rated subordinates........................... 3,857 --
Unrated subordinates........................... 12,417 --
Unrated subprime residuals..................... 99,855 --
------------ ------------
121,118 --
------------ ------------
Multi-family residential and commercial:
Unrated subordinates........................... 2,636 --
------------ ------------
2,636 --
------------ ------------
123,754 --
------------ ------------
Trading securities..................................... $ 496,295 $ --
============ ============
</TABLE>
Historically, the Company has determined 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 have included 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 25% 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 2000, the
Company utilized proprietary prepayment curves (reaching an approximate range of
annualized rates of 11% - 41%). During 2000, the Company estimated annual losses
of between 0.90% and 6.20% of the unpaid principal balance 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 Company periodically assesses the carrying value of its subordinate
securities and residual securities retained as well as the servicing assets for
impairment. There can be no assurance that the Company's estimates used to
determine the gain on securitized loan sales, subordinate securities and
residual securities retained and servicing asset valuations will remain
appropriate for the life of each securitization. If actual loan prepayments or
defaults exceed the Company's estimates, the carrying value of the Company's
subordinate securities and residual securities retained and/or servicing assets
may be decreased during the period management recognized the disparity. Other
factors may also result in a write-down of the
38
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
Company's subordinate securities and residual securities in subsequent months.
During the nine months ended September 30, 2000, the Company recorded $11,597 of
impairment charges on its portfolio of subordinate and residual securities as a
result of declines in value that were deemed to be "other than temporary."
39
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
The following tables detail the Company's trading securities portfolio
at September 30, 2000, and its estimates of expected yields on such securities,
taking into consideration expected prepayment and loss rates together with other
factors.
<TABLE>
<CAPTION>
SECURITIZATION ANTICIPATED
(ISSUER) SUBORDI- YIELD TO
-------- CLASS SIZE NATION/OC MATURITY AT PROSPECTIVE
SINGLE-FAMILY ISSUE RATING ---------- INTEREST LEVEL AT: ----------- YIELD AT
RESIDENTIAL SECURITY DATE RATING AGENCIES ISSUANCE 9/30/00 PERCENTAGE 9/30/00 PURCHASE 9/30/00 9/30/00
-------- ---- ------ -------- -------- ------- ---------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Subordinates:
BCF 1996 R1(5)....... B3 Oct-96 UR (a), (b) $70,773 $18,064 50.00% None 15.70% 7.95% 35.69%
BCF 1997 R1(5)....... B4 Mar-97 UR (b), (c) 21,784 1,556 49.71 None 13.46 (37.23) 46.35
BCF 1997 R2 (5)...... B4 Jun-97 Ba2, BB (b), (c) 6,358 4,104 73.54 5.32 9.58 9.59 48.68
B5 B2,B 6,264 4,044 73.54 2.26 10.74 9.58 187.57
B6 UR 13,883 2,989 73.54 None 15.98 3.50 N/A
BCF 1997 R3 (5)...... B4 Dec-97 UR (b), (d) 69,582 10,215 50.24 None 15.84 (34.70) 96.68
ORMBS 1998 R1 (6).... B4 Mar-98 UR (b), (d) 101,774 44,651 82.48 None 20.50 (29.05) 15.31
ORMBS 1998 R2 (6).... B4A Jun-98 Ba2 (b) 1,056 959 100.00 6.11 13.22 (3.46) 151.49
B4F Ba2 937 865 100.00 5.68 19.23 (5.58) 61.95
B5A B2 880 785 100.00 4.26 23.78 (0.88) 266.21
B5F B2 937 865 100.00 3.13 11.78 (8.61) 164.68
B6A UR 3,696 1,815 100.00 None 16.72 19.93 1,884.16
B6F UR 3,345 1,059 100.00 None 19.50 (20.32) 603.32
ORMBS 1998 R3 (6).... B4 Sep-98 Ba2, BB (b), (d) 11,765 9,754 85.87 3.71 11.71 (37.21) 4.96
B5 B2, B 9,151 7,100 85.87 0.00 16.54 (37.27) 16.20
B6 UR 26,145 -- 85.87 None 18.00 (26.24) N/A
ORMBS 1999 RI (6)... B5A Mar-99 B2, B (b), (d) 1,630 1,511 100.00 4.72 17.73 27.85 19.72
B5F B2, B 1,843 1,572 100.00 4.39 17.74 32.97 34.84
B6A UR 3,586 2,198 100.00 None 18.00 57.36 36.76
B6F UR 4,299 2,595 100.00 None 18.00 97.16 210.29
ORMBS 1999 R2 (6).... B4 Jun-99 BB (a),(c),(d) 10,530 10,186 100.00 7.42 13.45 33.50 7.03
B5 B 4,680 4,535 100.00 2.73 18.45 79.30 625.65
B6 UR 7,020 2,648 100.00 None 18.00 138.43 40,609.22
CSFB 1996-1R
(ITT 94-P1) (7)...... 4B2, Oct-96 UR (b), (c) 1,046 122 100.00 None N/A N/A N/A
(1B)
Subprime residuals:
SBMS 1996 3 (1)...... R Jun-96 UR (a), (b) 130,062 25,846 100.00 22.27 15.52 2.09 18.52
MLM1 1996 1 (2)...... R Sep-96 UR (a), (b) 81,142 14,016 100.00 37.49 15.16 3.23 22.79
MS 1997 1 (3)........ X1 Jun-97 UR (a), (b) 17,727 8,808 100.00 6.50 21.47 18.54 22.51
X2 87,118 14,957 100.00 21.18 20.38 1.19 18.91
1997 OFS 2 (4)....... X Sep-97 UR (a), (b) 102,201 24,003 100.00 11.47 19.65 (0.37) 20.01
1997 OFS 3 (4)....... X Dec-97 UR (a), (b) 208,784 64,253 100.00 14.39 19.59 6.94 18.84
1998 OFS 1 (4)....... X Mar-98 UR (b), (d) 161,400 52,161 100.00 4.24 18.00 (1.28) 8.10
1998 OFS 2 (4)....... X Jun-98 UR (a), (b) 382,715 129,842 100.00 10.64 19.46 (2.86) 10.33
1998 OFS 3 (4)....... X Sep-98 UR (a), (d) 261,649 131,223 100.00 4.85 18.00 (3.21) (0.03)
1998 OFS 4 (4)....... X Dec-98 UR (a), (b), (c) 349,000 231,975 100.00 3.15 18.00 (7.66) (5.01)
1999 OFS 1 (4) ...... X Jun-99 UR (a), (b) 148,628 117,939 100.00 5.47 18.00 0.24 (0.15)
PANAM 1997-1(8)...... X Dec-97 UR (a), (b) 113,544 29,458 100.00 10.35 22.45 0.74 18.61
Prepay UR 25.69 5.74 12.04
Pen.
</TABLE>
40
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITIZATION ANTICIPATED
(ISSUER) SUBORDI- YIELD TO
-------- CLASS SIZE NATION/OC MATURITY AT PROSPECTIVE
SINGLE-FAMILY ISSUE RATING ---------- INTEREST LEVEL AT: ----------- YIELD AT
RESIDENTIAL SECURITY DATE RATING AGENCIES ISSUANCE 9/30/00 PERCENTAGE 9/30/00 PURCHASE 9/30/00 9/30/00
-------- ------ ------ -------- -------- ------- ---------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EQUICON 1994-2 (9)... B Fix Oct-94 UR (a), (b), (c) 78,846 $15,590 100.00% 7.18 18.00% 103.80% 30.59%
B Var. UR 32,306 2,168 100.00 37.32 18.00 31.76 25.10
EQUICON 1995-1 (9)... B Fix, May-95 UR (a), (b), (c) 70,024 10,782 100.00 10.14 18.00 26.54 N/A
B Var. UR 40,519 4,791 100.00 10.85 18.00 104.56 N/A
EQUICON 1995-2 (9)... B Fix Oct-95 UR (a), (b) 79,288 16,361 100.00 12.51 18.00 36.46 1,078.57
B Var. UR 39,667 4,510 100.00 15.27 18.00 97.17 873.97
ACCESS 1996-1 (10)... B Fix, Feb-96 UR (a), (b) 120,015 27,389 100.00 7.62 18.00 30.56 293.69
B Var. UR 55,362 6,709 100.00 8.68 18.00 39.80 N/A
ACCESS 1996-2 (10)... B-I,BI- May-96 UR (a), (b) 142,259 32,293 100.00 9.84 18.00 29.62 N/A
B-II UR 68,345 7,916 100.00 13.16 18.00 15.57 631.51
BII-S
ACCESS 1996-3 (10)... B-I, Aug-96 UR (a), (b) 107,712 25,077 100.00 16.10 18.00 15.77 215.25
BI-S
B-II UR 99,885 12,128 100.00 20.79 18.00 18.45 N/A
BII-S
ACCESS 1996-4 (10)... B, B-S Nov-96 UR (a), (b) 239,778 41,103 100.00 32.34 18.00 11.44 21.45
ACCESS 1997-1 (10)... B, B-S Feb-97 UR (a), (b) 276,442 62,725 100.00 31.91 18.00 10.97 30.59
ACCESS 1997-2 (10)... B, B-S May-97 UR (a), (b) 185,197 41,402 100.00 22.50 18.00 4.37 24.73
ACCESS 1997-3 (10)... B, B-S Oct-97 UR (a), (b) 199,884 50,441 100.00 15.96 18.00 11.97 37.41
CMR1 (11)............ Deferred Apr-96 UR (a), (c) 48,450 14,133 100.00 17.00 18.69 23.86 24.69
Comp
CMR2 (11)............ Deferred Oct-96 UR (a), (c) 97,627 29,852 100.00 15.08 18.69 31.10 32.89
Comp
CMR3 (11)............ Deferred Oct-96 UR (a), (c) 176,047 54,085 100.00 21.16 18.69 59.29 80.99
Comp
CMR4 (11)............ Deferred Jan-97 UR (a), (c) 103,031 34,094 100.00 10.94 18.69 31.63 33.70
Comp
CMR5 (11)............ Deferred Jan-97 UR (a), (c) 54,686 17,621 100.00 54.84 0.00 0.00 0.00
Comp
CMR6 (11)............ Deferred Apr-97 UR (a), (c) 90,498 27,055 100.00 12.23 18.69 38.03 45.57
Comp
MULTI-FAMILY
RESIDENTIAL
Subordinates:
SBMS 1997-HUD1 (12) B5 Apr-97 B2, n.a. (b), (d) 9,785 9,107 100.00 0.14 16.87 3.64 19.75
B6 Apr-97 UR 16,998 226 100.00 None 22.86 (8.97) 1,056.61
GECMS 1994-12 (13) B4 Mar-94 UR (a), (b), (c) 2,069 1,262 100.00 None 19.37 20.76 89.53
<CAPTION>
ISSUERS:
<S> <C> <C>
(1) Salomon Brothers Mortgage Securities VII (8) Pan American Bank, FSB RATING AGENCIES:
(2) Merrill Lynch Mortgage Investors, Inc. (9) Equicon Mortgage Loan Trust (a) S&P
(3) Morgan Stanley ABS Capital I, Inc. (10) Access Financial Mortgage Loan Trust (b) Moody's
(4) Ocwen Mortgage Loan Asset Backed Certificates (11) City Mortgage Receivable (c) Fitch
(5) BlackRock Capital Finance L.P. (12) Salomon Brothers Mortgage Securities (d) DCR
(6) Ocwen Residential MBS Corporation (13) GE Capital Mortgage Services, Inc.
(7) Credit Suisse First Boston (ITT Federal Bank, FSB) (14) Dollar equivalent of amounts in
British pounds at the rate of OTHER:
exchange that prevailed at the N/A - Not Available
time of issuance. NK - Not Known
(15) Dollar equivalent of amounts in
British pounds at the rate of
exchange at 9/30/00.
</TABLE>
41
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED TOTAL ACTUAL LIFE ACTUAL LIFE
AVERAGE AVERAGE DELINQUENCY TO DATE TO DATE COLLATERAL BALANCE
COUPON AT LTV/DSCR AT CPR AT LOSSES AT PRODUCT TYPE AT ------------------
SECURITIZATION (ISSUER) 9/30/00 AT 9/30/00 9/30/00 9/30/00 9/30/00 9/30/00 ISSUANCE 9/30/00
----------------------- ------- ---------- ------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SINGLE-FAMILY RESIDENTIAL
Subordinates:
BCF 1996 R1 (5).......... 10.05% 103.41% 11.11% 13.80% $30,545 98% Fixed, 2% ARM $505,513 $254,264
BCF 1997 R1 (5).......... 10.08 109.93 22.06 14.09 17,830 97% Fixed, 3% ARM 177,823 97,861
BCF 1997 R2 (5).......... 8.50 81.94 19.68 14.06 8,708 25% Fixed, 75% ARM 251,790 132,246
BCF 1997 R3 (5).......... 9.61 120.05 20.75 12.86 46,581 98% Fixed, 2% ARM 579,851 370,485
ORMBS 1998 R1 (6)........ 8.93 120.88 24.99 11.01 44,213 98% Fixed, 2% ARM 565,411 406,507
ORMBS 1998 R2 (6)........ 9.26 86.30 25.01 15.92 3,843 44% Fixed, 56% ARM 123,917 76,447
ORMBS 1998 R3 (6)........ 8.96 126.46 36.43 13.12 25,959 98% Fixed, 2% ARM 261,452 191,635
ORMBS 1999 R1 (6)........ 9.26 84.77 27.63 15.59 2,213 58% Fixed, 42% ARM 147,101 105,641
ORMBS 1999 R2 (6)........ 9.34 112.29 28.94 11.56 4,288 100% Fixed 117,004 96,845
CSFB 1996 1R
(ITT 94-P1) (7) ......... 8.39 N/A 1.09 N/A 153 100% 1-Year CMT 32,487 39,774
Subprime residuals:
SBMS 1996 3 (1).......... 11.43 67.83 16.67 31.20 3,590 63% Fixed, 37% ARM 130,062 25,846
MLM1 1996 1 (2).......... 12.18 73.65 25.85 35.15 2,280 37% Fixed, 63% ARM 81,142 14,016
MS 1997 1 (3)............ 11.74 74.66 17.48 36.28 2,706 37% Fixed, 63% ARM 17,727 8,808
87,118 14,957
1997 OFS 2 (4)........... 11.98 77.18 18.10 37.92 3,059 27% Fixed, 73% ARM 102,201 24,003
1997 OFS 3 (4)........... 11.33 80.95 25.89 34.46 5,647 24% Fixed, 76% ARM 208,784 64,253
1998 OFS 1 (4)........... 11.72 79.43 25.97 36.07 5,378 20% Fixed, 80% ARM 161,400 52,161
1998 OFS 2 (4)........... 11.58 76.98 20.63 37.66 9,571 48% Fixed, 52% ARM 382,715 129,842
1998 OFS 3 (4)........... 11.09 78.02 25.18 28.75 7,377 38% Fixed, 62% ARM 261,649 131,223
1998 OFS 4 (4)........... 10.45 79.73 26.68 19.92 9,401 45% Fixed, 55% ARM 349,000 231,975
1999 OFS 1 (4)........... 9.77 77.69 16.86 16.28 1,619 68% Fixed, 32% ARM 148,628 117,939
PANAM 1997-1(8).......... 11.72 84.05 25.63 38.70 5,606 100% ARM 113,544 29,458
EQUICON 1994-2 (9)....... 10.17 89.45 21.61 31.40 1,804 100% Fixed 78,846 15,590
100% ARM 32,306 2,168
EQUICON 1995-1 (9)....... 12.25 86.33 30.69 29.35 3,334 100% Fixed 70,024 10,782
100% ARM 40,519 4,791
EQUICON 1995-2 (9)....... 11.11 84.71 35.42 31.37 2,706 100% Fixed 79,288 16,361
100% ARM 39,667 4,510
ACCESS 1996-1 (10)....... 11.13 78.92 31.66 30.16 4,068 100% Fixed 120,015 27,389
100% ARM 55,362 6,709
ACCESS 1996-2 (10)....... 11.26 75.23 30.02 33.01 5,591 100% Fixed 142,259 32,293
100% ARM 68,345 7,916
ACCESS 1996-3 (10)....... 11.94 77.74 40.03 35.26 4,360 100% Fixed 107,712 25,077
100% ARM 99,885 12,128
ACCESS 1996-4 (10)....... 12.22 76.99 37.25 38.16 6,570 55% Fixed, 45% ARM 239,778 41,103
ACCESS 1997-1 (10)....... 12.04 82.93 40.06 36.28 10,457 62% Fixed, 38% ARM 276,442 62,725
ACCESS 1997-2 (10)....... 11.87 82.25 35.10 38.93 5,568 62% Fixed, 38% ARM 185,197 41,402
ACCESS 1997-3 (10)....... 12.04 82.40 40.59 38.69 4,245 55% Fixed, 45% ARM 199,884 50,441
</TABLE>
42
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED TOTAL ACTUAL LIFE ACTUAL LIFE
AVERAGE AVERAGE DELINQUENCY TO DATE TO DATE COLLATERAL BALANCE
COUPON AT LTV/DSCR AT CPR AT LOSSES AT PRODUCT TYPE AT ------------------
SECURITIZATION (ISSUER) 9/30/00 AT 9/30/00 9/30/00 9/30/00 9/30/00 9/30/00 ISSUANCE 9/30/00
----------------------- ------- ---------- ------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SINGLE-FAMILY RESIDENTIAL
Subordinates:
CMR1 (11)................ 13.29% NK 36.32% 23.86% $ 920 100% Amortizing $48,450(14) $14,133(15)
CMR2 (11)................ 12.48 NK 28.15 26.66 1,444 90% Amort 10% IO 97,627(14) 29,852(15)
mortgages
CMR3 (11)................ 13.51 NK 16.64 17.43 3,680 71.9% Amort 28.1% 176,047(14) 54,085(15)
IO mortgages
CMR4 (11)................ 13.71 NK 38.61 24.02 2,134 88.5% Amort 11.5% 103,031(14) 34,094(15)
IO mortgages
CMR5 (11)................ 15.81 NK 63.59 23.28 7,391 80.1% Amort 19.9% 54,686(14) 17,621(15)
IO mortgages
CMR6 (11)................ 13.62 NK 34.35 29.51 1,376 95.8% Amort 4.2% IO 90,498(14) 27,055(15)
mortgages
MULTI-FAMILY RESIDENTIAL
Subordinates:
SBMS 1997-HUD1 (12)...... 9.81 112.00 10.37 15.77 16,055 97% Fixed, 3% ARM 326,147 166,968
GECMS 1994-12 (13)...... 6.81 66.13 0.64 8.80 -- 100% Fixed 516,732 192,576
</TABLE>
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 trading subordinated and residual securities at September 30,
2000.
<TABLE>
<CAPTION>
DESCRIPTION CALIFORNIA FLORIDA TEXAS NEW YORK NEW JERSEY OTHER (1) TOTAL
----------- ---------- ---------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Single family residential....... $ 488,269 $ 227,542 $ 224,545 $ 151,385 $ 114,978 $1,492,926 $2,699,645
Commercial...................... 35,140 17,128 3,279 19,310 14,347 77,971 167,175
Multi-family.................... 991 -- -- 62 613 682 2,348
--------- ---------- --------- --------- --------- ---------- ----------
Total .......................... $ 524,400 $ 244,670 $ 227,824 $ 170,757 $ 129,938 $1,571,579 $2,869,168
========= ========== ========= ========= ========= ========== ==========
Percentage (2).................. 18% 9% 8% 6% 4% 55% 100%
========= ========== ========= ========= ========= ========== ==========
</TABLE>
(1) No other individual state makes up more than 8% of the total of other.
(2) Based on a percentage of the total unpaid principal balance of the
underlying loans.
<TABLE>
<CAPTION>
ANTICIPATED ANTICIPATED
ORIGINAL YIELD TO WEIGHTED
ANTICIPATED MATURITY AVERAGE PROSPECTIVE
AMORTIZED PERCENT YIELD TO AT 9/30/00 REMAINING YIELD AT
RATING/DESCRIPTION COST FAIR VALUE OWNED MATURITY (1) COUPON LIFE (2) 9/30/00
----------------------------- ---------- ---------- --------- ----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SINGLE-FAMILY RESIDENTIAL:
BB-rated subordinates.... $ 3,447 $ 4,989 86.86% 13.15% 8.40% 7.13% 3.21 39.36%
B-rated subordinates..... 3,276 3,857 95.60 16.84 9.60 7.51 2.06 118.53
Unrated subordinates..... 10,396 12,417 50.65 14.48 (4.72) 8.25 2.61 71.24
Unrated subprime
residuals.............. 96,023 99,855 99.39 18.33 8.54 N/A 6.39 24.74
MULTI-FAMILY AND COMMERCIAL:
Unrated subordinates..... 2,636 2,636 100.00 22.15 15.87 0.00 2.62 19.14
---------- ----------
$ 115,778 $ 123,754
========== ==========
</TABLE>
(1) Changes in the September 30, 2000 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 the September 30, 2000 book
value.
43
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
The following is a glossary of terms included in the above tables.
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>
-- --
| / \ / \ |
| | 1-Final Aggregate Balance actual | | 12 | |
Actual Life to Date CPR = 100 X | | ----------------------------------- | X | ---------------- | |
| | Final Aggregate Balance scheduled | | Months In Period | |
| \ / \ / |
-- --
</TABLE>
ACTUAL LIFE-TO-DATE LOSSES - Represents cumulative losses of the
original collateral at the indicated date.
ANTICIPATED YIELD TO MATURITY AT JUNE 30, 2000- Effective yield 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 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.
PROSPECTIVE YIELD - Effective yield based on the amortized cost of the
investment, after impairments, and the then current estimate of the future cash
flows under the assumptions at the respective date.
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.
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).
44
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
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. Loans which the Company presently does not
intend to hold to maturity are designated as available for sale and are carried
at the lower of cost or aggregate market value. Loans available for sale, which
are comprised primarily of subprime single family residential loans, decreased
by $32,890 or 73% during the nine months ended September 30, 2000.
Composition of Loans Available for Sale. The following table sets forth
the composition of the Company's loans available for sale by type of loan at the
dates indicated.
September 30, December 31,
2000 1999
------------- -------------
Single family residential loans...... $ 12,257 $ 45,084
Consumer loans....................... 66 129
------------- -------------
$ 12,323 $ 45,213
============= =============
The loans available for sale portfolio is secured by mortgages on
property located throughout the United States. The following table sets forth
the five states in which the largest amount of properties securing the Company's
loans available for sale were located at September 30, 2000:
<TABLE>
<CAPTION>
Single family
Residential Consumer Total
------------ ------------ ------------
<S> <C> <C> <C>
New Jersey.................................. $ 5,217 $ -- $ 5,217
Michigan.................................... 1,645 -- 1,645
California.................................. 1,054 -- 1,054
Florida..................................... 1,001 38 1,039
Ohio........................................ 725 -- 725
Other (1)................................... 2,615 28 2,643
------------ ------------ ------------
Total.................................... $ 12,257 $ 66 $ 12,323
============ ============ ============
</TABLE>
(1) Consists of properties located in 22 other states, none of which
aggregated over $714 in any one state.
45
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
Activity in Loans Available for Sale. 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, 2000 1999 2000 1999
---------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period.......... $ 29,319 $ 132,425 $ 45,213 $ 177,847
Purchases:
Single family residential ........... 7,200 54,303
Originations:
Single family residential (1)........ -- 234,242 -- 715,962
Sales (2).............................. (16,620) (299,843) (24,379) (858,360)
Decrease in lower of cost or market
valuation allowance..................... 1,569 1,215 1,745 3,179
Principal repayments, net of capitalized
interest............................. (1,609) (5,310) (5,857) (15,901)
Transfer to real estate owned........... (336) (3,100) (4,399) (10,201)
--------- --------- --------- ---------
Net (decrease) increase in loans..... (16,996) 65,596 (32,890) (111,018)
--------- --------- --------- ---------
Balance at end of period................ $ 12,323 $ 66,829 $ 12,323 $ 66,829
========= ========= ========= =========
</TABLE>
(1) Includes $216,784 and $509,791 originated by Ocwen UK during the three
and nine months ended September 30, 1999, respectively.
(2) Included the sales for the nine months ended September 30, 1999 is the
securitization of 2,192 of domestic subprime single family residential
loans with an unpaid principal balance of $235,572 and 8,983 foreign
subprime single family loans with an unpaid principal balance of
$295,157. See "Results of Operations - Non-interest Income."
The following table presents a summary of the Company's non-performing
loans in the loans available for sale portfolio at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Non-performing loans:
Single family loans................................. $ 2,857 $ 15,319
Consumer loans...................................... 2 1
------------- -------------
$ 2,859 $ 15,320
============= =============
Non-performing loans as a percentage of:
Total loans available for sale...................... 23.20% 33.88%
Total assets........................................ 0.10% 0.46%
</TABLE>
Non-performing loans available for sale consist primarily of subprime
single family residential loans, reflecting the higher risk associated with such
loans.
LOAN PORTFOLIO, NET. Loans held for investment in the Company's loan
portfolio are carried at amortized cost, less an allowance for loan losses,
because the Company has the ability and presently intends to hold them to
maturity.
46
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
Composition of Loan Portfolio. The following table sets forth the
composition of the Company's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- -------------
<S> <C> <C>
Single family residential loans..................... $ 1,031 $ 4,334
Multi-family residential loans:
Permanent....................................... 13,788 23,430
Construction.................................... 38,845 57,936
-------------- -------------
Total multi-family residential............... 52,633 81,366
-------------- -------------
Commercial real estate:
Hotels:
Construction................................. 38,363 38,645
Office buildings............................... 43,216 64,745
Land........................................... 1 2,238
-------------- -------------
Total commercial real estate.................. 81,580 105,628
Consumer............................................ 56 82
-------------- -------------
Total loans.................................... 135,300 191,410
Undisbursed loan proceeds........................... (13,866) (24,654)
Unamortized deferred fees........................... (1,460) (2,089)
Allowance for loan losses........................... (4,871) (7,259)
-------------- -------------
Loans, net..................................... $ 115,103 $ 157,408
============== =============
</TABLE>
The loan portfolio is secured by mortgages on properties located
throughout the United States. The following table sets forth the five states in
which the largest amount of properties securing the Company's loans were located
at September 30, 2000:
<TABLE>
<CAPTION>
Single Family Multi-family Commercial
Residential Residential Real Estate Consumer Total
--------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
New York........................ $ 157 $ 14,687 $ 19,262 $ -- $ 34,106
California...................... 20 17,855 1 -- 17,876
Delaware........................ 432 -- 13,019 -- 13,451
Florida......................... -- 991 9,763 -- 10,754
Virginia........................ -- -- 7,650 -- 7,650
Other (1)....................... 422 19,100 31,885 56 51,463
------------ ------------ ------------ ------------ ------------
Total........................... $ 1,031 $ 52,633 $ 81,580 $ 56 $ 135,300
============ ============ ============ ============ ============
</TABLE>
(1) Consists of properties located in 15 other states, none of which
aggregated over $7,629 in any one state.
47
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
Activity in the Loan Portfolio. 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, 2000 1999 2000 1999
---------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period...................... $ 148,490 $ 133,678 $ 157,408 $ 230,312
Originations:
Multi-family residential loans................... 14,124 -- 26,614 4,225
Commercial real estate loans..................... 2,471 -- 3,627 11,500
---------- ---------- ---------- ----------
Total loans originated (1)..................... 16,595 -- 30,241 15,725
Sales (2)........................................... (3,162) (1,063) (10,913) (26,549)
Principal repayments................................ (47,005) (9,434) (73,388) (95,665)
Transfer to real estate owned....................... (1,346) -- (2,051) (2,572)
Decrease in undisbursed loan proceeds............... 1,566 3,155 10,788 4,960
Decrease in unamortized deferred fees............... (603) 328 630 1,379
Decrease (increase) in allowance for loan losses.... 568 362 2,388 (564)
---------- ---------- ---------- ----------
Net decrease in loans............................... (33,387) (6,652) (42,305) (103,286)
---------- ---------- ---------- ----------
Balance at end of period......................... $ 115,103 $ 127,026 $ 115,103 $ 127,026
========== ========== ========== ==========
</TABLE>
(1) Originations for the nine months ended September 30, 2000 represent
fundings on previously originated construction loans.
(2) Included in sales for the nine months ended September 30, 1999 is the
securitization of 384 single family residential loans with an aggregate
unpaid principal balance of $24,880.
The following table sets forth certain information relating to the
Company's non-performing loans in its loan portfolio at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Non-performing loans:
Single family residential loans................. $ 98 $ 982
Multi-family residential loans (1).............. 13,760 11,037
Commercial real estate and other (2)............ 14,367 19,360
------------ ------------
Total........................................ $ 28,225 $ 31,379
============ ============
Non-performing loans as a percentage of:
Total loans (3)................................. 23.53% 19.06%
Total assets.................................... 0.99% 0.95%
Allowance for loan losses as a percentage of:
Total loans (3).............................. 4.06% 4.41%
Non-performing loans......................... 17.26% 23.13%
</TABLE>
(1) Non-performing multi-family residential loans at September 30, 2000
were comprised of 13 loans, all of which management believes are
adequately collateralized and reserved.
(2) Non-performing commercial real estate loans at September 30, 2000 were
comprised of 10 loans, all of which management believes are adequately
collateralized and reserved.
(3) Total loans is net of undisbursed loan proceeds and unamortized
deferred fees.
48
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
MATCH FUNDED LOANS AND SECURITIES. Match funded loans and securities
are comprised of the following at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Single family residential loans (1).......................... $ 87,721 $ 105,596
Allowance for loan losses.................................... (367) (495)
------------- -------------
Match funded loans, net................................... 87,354 105,101
Match funded trading securities at fair value................ 36,546 52,693
------------- -------------
Balance at end of period..................................... $ 123,900 $ 157,794
============= =============
</TABLE>
(1) Includes $260 and $1,127 of non-performing loans at September 30, 2000
and December 31, 1999, respectively.
The match funded loans are secured by mortgages on properties located
throughout the United States. The following table sets forth the five states in
which the largest amount of properties securing the Company's loans were located
at September 30, 2000:
Michigan............. $ 17,566
California........... 9,088
Florida.............. 5,926
Texas................ 5,551
Massachusetts........ 4,450
Other (1)............ 45,140
-----------
Total................ $ 87,721
===========
(1) Consists of properties located in 47 other states, none of which
aggregated over $3,628 in any one state.
49
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
The following tables detail the Company's match funded securities at
September 30, 2000, and its estimates of expected yields on such securities,
taking into consideration expected prepayment and loss rates together with other
factors.
<TABLE>
<CAPTION>
OVER
CLASS COLLATERIZATION
ISSUE DESIGNATION RATING COLLATERAL BALANCE LEVEL AT PRODUCT TYPE AT
SECURITIZATION SECURITY DATE LETTER AGENCIES ISSUANCE 9/30/00 9/30/00 9/30/00
------------------- ------------ --------- ----------- --------------- ---------- --------- --------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SASCO 1998-2 (1) X Jan-98 NR S&P, Fitch $ 600,052 $186,524 2.40% OC 40% Fixed, 60% ARM
SASCO 1998-3 (1) X Mar-98 NR S&P, Fitch 769,671 223,628 5.87% OC 18% Fixed, 82% ARM
MLMI 1998-FFI (2) X Jun-98 NR S&P, Fitch 198,155 42,361 7.09% OC 100% ARM
LHELT 1998-2 (3) X Jun-98 NR Moody's, Fitch 209,225 92,282 8.53% OC 49% Fixed, 51% ARM
OCWEN98-OAC-1 (4) N/A Nov-98 NR S&P, Moody's 182,178 92,806 14.23% OC 28% Fixed, 72% ARM
<CAPTION>
ACTUAL ACTUAL
WEIGHTED WEIGHTED ACTUAL LIFE TO LIFE TO
AVERAGE AVERAGE DELINQUENCY DATE DATE YIELD TO
INTEREST RATE LTV AT: AT: CPR AT: LOSSES AT: MATURITY AT:
SECURITIZATION SECURITY AT: 9/30/00 9/30/00 9/30/00 9/30/00 9/30/00 PURCHASE 9/30/00
------------------- ------------ --------------- ------------- -------------- ------------ -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SASCO 1998-2 X 11.35% 73.18% 20.51% 35.06% $10,579 16.00% (1.21)%
SASCO 1998-3 X 11.50 75.02 21.08 38.64 8,596 17.04 0.10
MLMI 1998-FFI X 12.06 77.46 25.87 48.04 986 18.57 3.99
LHELT 1998-2 X 10.98 75.15 11.91 29.06 1,990 18.55 12.20
OCWEN98-OAC-1 N/A 8.86 81.18 7.72 29.11 565 N/A N/A
</TABLE>
ISSUERS:
(1) Structured Asset Securities Corp.
(2) Merrill Lynch Mortgage Investors, Inc.
(3) Lehman Home Equity Loan Trust
(4) Ocwen Mortgage Loan Trust
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 match-funded securities at September 30, 2000.
<TABLE>
<CAPTION>
DESCRIPTION CALIFORNIA FLORIDA WASHINGTON ILLINOIS OREGON OTHER (1) TOTAL
----------- ---------- ---------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Single family residential....... $ 85,926 $ 52,313 $ 22,671 $ 20,472 $ 20,491 $ 292,050 $ 493,923
Commercial...................... 4,331 5,175 1,300 836 1,427 11,121 24,190
Multi-family.................... 4,480 1,695 388 2,515 789 16,814 26,681
--------- ---------- --------- --------- --------- ---------- ---------
Total .......................... $ 94,737 $ 59,183 $ 24,359 $ 23,823 $ 22,707 $ 319,985 $ 544,794
========= ========== ========= ========= ========= ========== =========
Percentage (2).................. 17% 11% 5% 4% 4% 59% 100%
========= ========== ========= ========= ========= ========== =========
</TABLE>
(1) No other individual state makes up more than 7% of the total of other.
(2) Based on a percentage of the total unpaid principal balance of the
underlying loans.
<TABLE>
<CAPTION>
ANTICIPATED
ORIGINAL ANTICIPATED WEIGHTED
ANTICIPATED YIELD TO AVERAGE
YIELD TO MATURITY AT REMAINING
AMORTIZED COST FAIR VALUE PERCENT OWNED MATURITY 9/30/00 (1) COUPON LIFE(2)
-------------- ---------- ------------- ----------- ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Match-funded securities....... $ 46,768 $ 36,546 100.00% 17.24% 2.13% 0.00% 3.97 years
=========== ========
</TABLE>
(1) Changes in the September 30, 2000 anticipated yield to maturity from
that originally anticipated are primarily the result of changes in
prepayment assumptions and, to a lesser extent, loss assumptions.
(2) Equals the weighted average duration based on the September 30, 2000
book value.
For a glossary of the terms included in the above tables, see "Trading
Securities Available for Sale."
50
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
DISCOUNT LOAN PORTFOLIO, NET. The discount loan portfolio decreased
$211,288 or 23% during the nine months ended September 30, 2000. Resolutions and
repayments, transfers to real estate owned and sales more than offset
acquisitions during the period. Substantially all of the Company's discount loan
portfolio is secured by first mortgage liens on real estate.
Composition of the Discount Loan Portfolio. The following table sets
forth the composition of the Company's discount loan portfolio by type of loan
at the dates indicated:
September 30, December 31,
2000 1999
------------- -------------
Single family residential loans......... $ 364,969 $ 597,719
Multi-family residential loans.......... 190,926 191,971
Commercial real estate loans:
Office buildings................... 89,839 97,784
Hotels............................. 73,978 75,095
Retail properties.................. 97,505 105,247
Other properties................... 60,784 87,148
------------- -------------
322,106 365,274
Other loans (1)......................... 20,226 21,615
------------- -------------
Total discount loans................. 898,227 1,176,579
------------- -------------
Unaccreted discount:
Single family residential loans.... (89,546) (147,630)
Multi-family residential loans..... (37,456) (37,981)
Commercial real estate loans....... (45,965) (57,604)
Other loans........................ (272) (954)
------------- -------------
(173,239) (244,169)
------------- -------------
724,988 932,410
Allowance for loan losses............... (23,047) (19,181)
------------- -------------
Discount loans, net..................... $ 701,941 $ 913,229
============= =============
(1) Includes $18,242 and $16,397 at September 30, 2000 and December 31,
1999, respectively, of charged-off unsecured credit card receivables
which were acquired at a discount. Collections are accounted for under
the cost recovery method.
The discount loan portfolio is secured by mortgages on property 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, 2000:
<TABLE>
<CAPTION>
Commercial
Single Family Multi-Family Real Estate
Residential Residential and Other Total
------------------ ------------------- ------------------ ----------------
<S> <C> <C> <C> <C>
California............................ $ 23,209 $ 10,269 $ 73,170 $ 106,648
Illinois.............................. 13,751 55,664 1,283 70,698
New York.............................. 27,657 -- 41,161 68,818
Michigan.............................. 9,520 36,047 18,840 64,407
Florida............................... 20,462 17,483 12,218 50,163
Other (1)............................. 180,824 34,007 149,423 364,254
----------- ----------- ----------- -----------
Total.............................. $ 275,423 $ 153,470 $ 296,095 $ 724,988
=========== =========== =========== ===========
</TABLE>
(1) Consists of properties located in 44 other states, none of which
aggregated over $37,062 in any one state.
51
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
Activity in the Discount Loan Portfolio. The following table sets forth
the activity in the Company's net discount loan portfolio during the periods
indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2000 1999 2000 1999
------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of period.................. $ 803,446 $ 1,008,764 $ 913,229 $ 1,026,511
Acquisitions (1):
Single family residential loans.............. 6,722 61,725 155,881 335,808
Multi - family residential loans.............. 28 3,353 21,322 75,312
Commercial real estate loans.................. 1,000 15,514 19,119 147,304
Other (2)..................................... -- 4,274 10,030 12,900
----------- ----------- ----------- -----------
7,750 84,866 206,352 571,324
----------- ----------- ----------- -----------
Resolutions and repayments (3).................. (55,437) (52,182) (147,154) (176,497)
Loans transferred to real estate owned.......... (39,919) (50,987) (163,985) (159,149)
Sales (4)....................................... (42,538) (25,069) (173,563) (304,101)
Increase in undisbursed loan proceeds........... 201 -- -- --
Decrease (increase) in discount................. 29,099 8,997 70,929 15,304
(Increase) decrease in allowance for loan losses (661) 83 (3,867) 1,080
----------- ----------- ----------- -----------
Balance at end of period........................ $ 701,941 $ 974,472 $ 701,941 $ 974,472
=========== =========== =========== ===========
<CAPTION>
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2000 1999 2000 1999
------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NUMBER OF LOANS
Balance at beginning of period................... 6,363 6,737 8,064 8,100
Acquisitions (1):
Single family residential loans............... 144 734 2,110 3,945
Multi - family residential loans............... 1 3 9 33
Commercial real estate loans................... 1 21 6 137
Other.......................................... -- -- 1 6
----------- ----------- ----------- -----------
146 758 2,126 4,121
----------- ----------- ----------- -----------
Resolutions and repayments (3)................... (559) (471) (1,237) (856)
Loans transferred to real estate owned........... (550) (617) (1,971) (1,787)
Sales (4)........................................ (402) (45) (1,984) (3,216)
----------- ----------- ----------- -----------
Balance at end of period......................... 4,998 6,362 4,998 6,362
=========== =========== =========== ===========
</TABLE>
(1) Acquisitions during the nine months ended September 30, 2000 exclude
commercial and multi-family loans which are accounted for as
investments in real estate. See "Changes in Financial Condition -
Investments in Real Estate."
(2) For the nine months ended September 30, 2000, consists of charged-off
unsecured credit card receivables acquired at a discount.
(3) 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.
(4) Sales for the nine months ended September 30, 1999 include the
securitization of 2,753 performing single family discount loans with an
unpaid principal balance of $202,423. See "Results of Operations -
Non-interest Income."
52
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
Payment Status of Discount Loans. 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, December 31,
2000 1999
------------- -------------
<S> <C> <C>
PRINCIPAL AMOUNT
Loans without Forbearance Agreements:
Current..................................... $ 478,493 $ 509,845
Past due 31 days to 89 days................. 8,075 23,438
Past due 90 days or more.................... 310,565 448,312
Acquired and servicing not yet transferred.. 64 87,538
------------- -------------
Subtotal................................. 797,197 1,069,133
------------- -------------
Loans with Forbearance Agreements:
Current..................................... 4,775 2,958
Past due 31 days to 89 days................. 3,500 8,904
Past due 90 days or more(1)(2).............. 92,755 95,584
------------- -------------
Subtotal................................. 101,030 107,446
------------- -------------
Total ........................................ $ 898,227 $ 1,176,579
============= =============
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
PERCENTAGE OF LOANS
Loans without Forbearance Agreements:
Current..................................... 53.27% 43.33%
Past due 31 days to 89 days................. 0.90 1.99
Past due 90 days or more.................... 34.57 38.10
Acquired and servicing not yet
transferred.............................. 0.01 7.44
------------- -------------
Subtotal................................. 88.75 90.86
------------- -------------
Loans with Forbearance Agreements:
Current..................................... 0.53 0.25
Past due 31 days to 89 days................. 0.39 0.76
Past due 90 days or more.................... 10.33 8.13
------------- -------------
Subtotal................................. 11.25 9.14
------------- -------------
Total......................................... 100.00% 100.00%
============= =============
</TABLE>
(1) Includes $73,153 of loans which were less than 90 days past due under
the terms of the forbearance agreements at September 30, 2000, of which
$66,255 were current and $6,898 were past due 31 to 89 days.
(2) Includes $95,218 of loans which were less than 90 days past due under
the terms of the forbearance agreements at December 31, 1999, of which
$67,897 were current and $27,321 were past due 31 to 89 days.
53
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
The following table sets forth certain information relating to the
Company's allowance for loan losses on discount loans at and for the periods
indicated:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Allowances for loan losses as a percentage of:
Total loans (1)................................................. 3.18% 2.06%
Total assets.................................................... 0.81% 0.58%
<CAPTION>
For the Nine Months Ended
September 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net charge-offs as a percentage of average discount loans........... 1.07% 0.59%
</TABLE>
(1) Total loans are net of undisbursed loan proceeds and unaccreted
discount.
See "Changes in Financial Condition - Allowance for Loan Losses" below
for additional information regarding the allowance for discount loan losses.
ALLOWANCES FOR LOAN LOSSES. The Company maintains an allowance for loan
losses for each of its loan, discount loan and match funded loan portfolios at a
level which management considers adequate to provide for potential losses in
each portfolio based upon an evaluation of known and inherent risks in such
portfolios. The following table sets forth the breakdown of the allowance for
loan losses on the Company's loan portfolio, discount loans and match funded
loans by loan category and the percentage of allowance and loans in each
category to totals in the respective portfolios at the dates indicated:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------------------------------- --------------------------------------------
Allowance Loan Balance Allowance Loan Balance
------------------- -------------------- --------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loan portfolio:
Single family................ $ 3 0.1% $ 1,031 0.8% $ 87 1.2% $ 4,334 2.3%
Multi-family................. 1,516 31.1 52,633 38.9 1,722 23.7 81,366 42.5
Commercial real estate....... 3,352 68.8 81,580 60.3 5,450 75.1 105,628 55.2
Consumer..................... -- -- 56 -- -- -- 82 --
-------- --------- -------- --------- -------- --------- -------- ---------
$ 4,871 100.0% $135,300 100.0% $ 7,259 100.0% $191,410 100.0%
======== ========= ======== ========= ======== ========= ======== =========
Discount loans:
Single family................ $ 7,684 33.3% $275,423 38.0% $ 11,081 57.8% $450,089 48.3%
Multi-family................. 1,353 5.9 153,470 21.2 1,681 8.8 153,990 16.5
Commercial real estate....... 7,476 32.4 276,142 38.0 5,152 26.8 307,670 33.0
Other........................ 6,534 28.4 19,953 2.8 1,267 6.6 20,661 2.2
-------- --------- -------- --------- -------- --------- -------- --------
$ 23,047 100.0% $724,988 100.0% $ 19,181 100.0% $932,410 100.0%
======== ========= ======== ========= ======== ========= ======== ========
Match funded loans:
Single family................ $ 367 100.0% $ 87,721 100.0% $ 495 100.0% $105,596 100.0%
======== ========= ======== ========= ======== ========= ======== ========
</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.
54
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
The following table sets forth an analysis of activity in the allowance
for loan losses relating to the Company's loan portfolio and discount loan
portfolio during the nine months ended September 30, 2000:
<TABLE>
<CAPTION>
Balance Balance
December 31, September 30,
1999 Provision Charge-offs Recoveries 2000
------------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Loan portfolio:
Single family................... $ 87 $ (84) $ -- $ -- $ 3
Multi-family.................... 1,722 (206) -- -- 1,516
Commercial real estate.......... 5,450 (187) (1,911) -- 3,352
---------- ----------- ----------- ----------- -----------
$ 7,259 $ (477) $ (1,911) $ -- $ 4,871
========== =========== =========== =========== ===========
Discount loans:
Single family................... $ 11,081 $ (465) $ (3,550) $ 618 $ 7,684
Multi-family.................... 1,681 535 (863) -- 1,353
Commercial...................... 5,152 7,871 (5,566) 19 7,476
Other........................... 1,267 5,268 (1) -- 6,534
---------- ----------- ----------- ----------- -----------
$ 19,181 $ 13,209 $ (9,980) $ 637 $ 23,047
========== =========== =========== =========== ===========
Match funded loans:
Single family.................... $ 495 $ (128) $ -- $ -- $ 367
========== =========== =========== =========== ===========
</TABLE>
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. The Company
invested in multi-family residential projects which have been allocated
low-income housing tax credits under Section 42 of the Internal Revenue Code of
1986, as amended, 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,
2000 1999
----------------- ----------------
<S> <C> <C>
Investments solely as a limited partner made prior to May 18, 1995.............. $ 6,578 $ 17,327
Investments solely as a limited partner made on or after May 18, 1995........... 31,779 59,541
Investments both as a limited and, through subsidiaries, as a general partner... 29,914 74,121
----------- -----------
Total (1).................................................................. $ 68,271 $ 150,989
=========== ===========
</TABLE>
(1) The decrease in the balance during the nine months ended September 30,
2000 is due to the sale of investments in ten projects during the first
quarter which had an aggregate carrying value of $27,402 for a loss of
$261, and the transfer of twenty-one projects during the third quarter
with an aggregate carrying value of $75,478 to held for sale, offset by
the investment in new and existing projects. See "Low-Income Housing
Tax Credit Interests Held for Sale."
The qualified affordable housing projects underlying the Company's
investments in low-income housing tax credit interests are geographically
located throughout the United States. At September 30, 2000, the Company's
largest single investment was $5,239, relates to a project located in Indiana.
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.
Income on the Company's limited partnership investments made prior to
May 18, 1995 is recorded under the level yield method as a reduction of income
tax expense, and amounted to $508 and $728 for the third quarter of 2000 and
1999, respectively, and $1,849 and $2,247 for the nine months ended September
30, 2000 and 1999, respectively. For limited
55
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
partnership investments made after May 18, 1995, and for investments as a
limited partner and, through subsidiaries, as a general partner, the Company
recognized tax credits of $1,571 and $3,923 for the third quarter of 2000 and
1999, respectively, and $6,647 and $11,467 for the nine months ended September
30, 2000 and 1999, respectively, which are also reported as a reduction of
income tax expense. The Company also recorded a loss from operations on the
underlying real estate after depreciation of $3,691 and $1,094 for the third
quarter of 2000 and 1999, respectively, and $6,030 and $4,558 for the nine
months ended September 30, 2000 and 1999, respectively. The loss for the third
quarter of 2000 of $3,691 included a $3,062 write-down of the carrying value of
tax credit interests held for sale. See "Low-Income Housing Tax Credit Interests
Held for Sale" below.
LOW-INCOME HOUSING TAX CREDIT INTERESTS HELD FOR SALE. On September 1,
2000 the Company entered into a transaction to sell twenty-one of its low-income
housing tax credit properties, together with the related tax credits. Although
this transaction resulted in the transfer of tax credits and operating results
for these properties to the purchaser, it did not qualify as a sale for
accounting purposes under the criteria established in SFAS no. 66 "Accounting
for Sales of Real Estate," primarily due to the amount of cash received at
signing, as well as to certain contingencies with respect to potential
repurchase requirements. As a result, the Company has reclassified these
properties as "held for sale" and has valued them at the lower of cost or fair
value less disposal costs. The Company recorded a charge to earnings of $3,026
reflecting the expected net loss to be incurred upon completion of this
transaction, currently projected to occur on April 1, 2001, when the cash
receipts will meet sale treatment criteria and expiration of repurchase
contingencies is projected to occur.
56
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
The carrying value of the Company's investments in low-income housing
tax credit interests held for sale are as follows at the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ----------------
<S> <C> <C>
Investments solely as a limited partner made prior to May 18, 1995........... $ 8,922 $ --
Investments solely as a limited partner made on or after May 18, 1995........ 19,108 --
Investments both as a limited and, through subsidiaries, as a general partner 47,448 --
----------- -----------
$ 75,478 $ --
=========== ===========
</TABLE>
INVESTMENTS IN UNCONSOLIDATED ENTITIES. Investments in unconsolidated
entities totaled $29,803 at September 30, 2000, a $7,315 decrease as compared to
the balance at December 31, 1999 of $37,118. This decrease was primarily due to
a $6,845 decrease in the Company's 38.7% equity investment in Kensington. The
investment in Kensington declined during this period as a result of the
Company's $5,002 share of Kensington's losses, including goodwill amortization,
and $2,771 of net unrealized foreign currency losses. Additionally, during the
third quarter of 2000, the Company's share ownership in Kensington increased
from 35.84% at December 31, 1999 to 38.71% at September 30,2000. This share
ownership increase was a result of the exercise, during the third quarter, of a
put option issued by the principal shareholder of Kensington to OCN in
connection with the demerger of Ifonline Group plc from Kensington pursuant to
which OCN could require the principal shareholder of Kensington to exchange
shares of Kensington for shares in Infonline Group plc received by OCN in
connection with the demerger. See "Asset and Liability Management - Foreign
Currency Exchange Rate Risk Management" for information regarding the Company's
hedging activities related to its investment in Kensington.
REAL ESTATE OWNED, NET. Real estate owned consists almost entirely of
properties acquired by foreclosure or deed-in-lieu thereof on loans in the
Company's discount loan portfolio.
The following table sets forth certain information relating to the
Company's real estate owned at the dates indicated.
September 30, December 31,
2000 1999
------------ ------------
Discount loan portfolio:
Single family residential............... $ 64,758 $ 72,193
Multi-family residential................ 10,753 2,601
Commercial real estate.................. 90,159 85,233
------------ ------------
Total............................... 165,670 160,027
Loan portfolio............................. 2,508 2,183
Loans available for sale................... 1,022 5,296
------------ ------------
Total............................... $ 169,200 $ 167,506
============ ============
The following table sets forth certain geographical information by type
of property at September 30, 2000 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
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Florida.................. $ 4,709 94 $ 47,501 6 $ 52,210 100
Georgia.................. 1,053 22 15,705 1 16,758 23
Connecticut.............. 1,694 29 12,044 2 13,738 31
Arizona.................. 448 9 9,881 1 10,329 10
California............... 4,497 45 5,678 7 10,175 52
Other (1)................ 53,422 1,287 12,568 16 65,990 1,303
---------- -------- ---------- -------- ---------- --------
Total................. $ 65,823 1,486 $ 103,377 33 $ 169,200 1,519
========== ======== ========== ======== ========== ========
</TABLE>
(1) Consists of properties located in 44 other states, none of which
aggregated over $5,575 in any one state.
57
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
The following tables set forth the activity in the real estate owned
during the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2000 1999 2000 1999
------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of period............. $ 182,676 $ 183,162 $ 167,506 $ 201,551
Properties acquired through foreclosure or
deed-in-lieu thereof:
Discount loans........................... 39,919 50,987 163,985 159,149
Loans available for sale................. 336 3,100 4,399 10,201
Loan portfolio........................... 1,346 -- 2,051 2,572
Less discount transferred................ (13,285) (17,027) (50,299) (51,330)
----------- ----------- ----------- -----------
28,316 37,060 120,136 120,592
----------- ----------- ----------- -----------
Acquired in connection with acquisitions of
discount loans........................... -- 6,358 8,569 37,848
Sales...................................... (42,487) (47,111) (131,559) (178,587)
Change in valuation allowance.............. 695 (1,120) 4,548 (3,055)
----------- ----------- ----------- -----------
Balance at end of period................... $ 169,200 $ 178,349 $ 169,200 $ 178,349
=========== =========== =========== ===========
<CAPTION>
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2000 1999 2000 1999
------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NUMBER OF PROPERTIES
Balance at beginning of period............. 1,732 1,866 1,672 1,999
Properties acquired through foreclosure or
deed-in-lieu thereof:
Discount loans........................... 550 617 1,971 1,787
Loans available for sale................. 2 38 41 129
Loan portfolio........................... 2 -- 7 4
----------- ----------- ----------- -----------
554 655 2,019 1,920
----------- ----------- ----------- -----------
Acquired in connection with acquisitions of
discount loans.......................... -- 93 157 668
Sales...................................... (767) (920) (2,329) (2,893)
----------- ----------- ----------- -----------
Balance at end of period................... 1,519 1,694 1,519 1,694
=========== =========== =========== ===========
</TABLE>
The following table sets forth the amount of time that the Company had
held its real estate owned at the dates indicated.
September 30, December 31,
2000 1999
------------- -------------
One to two months........................... $ 23,720 $ 30,695
Three to four months........................ 17,971 26,532
Five to six months.......................... 11,536 11,263
Seven to 12 months.......................... 29,330 28,606
Over 12 months.............................. 86,643 70,410
------------- -------------
$ 169,200 $ 167,506
============= =============
The Company actively manages its real estate owned. Sales of real
estate owned resulted in (losses) gains, net of the provision for loss, of
$(2,483) and $(7,763) during the three and nine months ended September 30, 2000,
respectively, as compared to $1,690 and $8,257 during the three and nine months
ended September 30, 1999, respectively, which are included in determining the
Company's (loss) income on real estate owned. The average period during which
the Company held the $131,559 and $178,587 of real estate owned which was sold
during the nine months ended September 30, 2000 and 1999, respectively, was 6
months.
58
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
The following table sets forth the activity, in the aggregate, in the
valuation allowances on real estate owned during the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------------- ----------------------------
For the periods ended September 30, 2000 1999 2000 1999
---------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of period.......... $ 21,034 $ 17,260 $ 17,181 $ 15,325
Provisions for losses .................. 7,593 6,494 24,556 21,334
Charge-offs and sales................... (6,898) (5,374) (20,008) (18,279)
----------- ----------- ----------- -----------
Balance at end of period................ $ 21,729 $ 18,380 $ 21,729 $ 18,380
=========== =========== =========== ===========
Valuation allowance as a percentage of
total gross real estate owned (1).... 11.38% 9.34% 11.38% 9.34%
</TABLE>
(1) The increase at September 30, 2000 as compared to September 30, 1999
reflects an increase in the amount of real estate owned which the
Company has held in excess of one year. The increase in the amount of
real estate owned which the Company has held in excess of one year at
September 30, 2000 as compared to September 30, 1999 primarily reflects
the anticipated migration of a large retail property which is currently
being repositioned for sale. At December 31, 1999, the valuation
allowance as a percentage of total gross real estate owned was 9.30%.
INVESTMENTS IN REAL ESTATE. The Company's investment in real estate
consisted of the following at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Properties held for investment (1):
Office buildings.............................................. $ 32,108 $ 202,607
Retail........................................................ 9,471 33,224
Building improvements......................................... 10,027 17,590
Tenant improvements and lease commissions..................... 1,192 8,150
Furniture and fixtures........................................ 52 44
------------- -------------
52,850 261,615
Accumulated depreciation...................................... (2,053) (9,011)
------------- -------------
50,797 252,604
------------- -------------
Loans accounted for as investments in real estate (2):
Multi-family residential...................................... 97 --
Nonresidential................................................ 72,804 --
------------- -------------
72,901 --
------------- -------------
Properties held for lease:
Land and land improvements.................................... 1,256 1,256
Building...................................................... 15,488 14,629
Accumulated depreciation...................................... (675) (248)
------------- -------------
16,069 15,637
------------- -------------
Investment in real estate partnerships (3)....................... 11,475 --
------------- -------------
$ 151,242 $ 268,241
============= =============
</TABLE>
(1) Acquired as a result of the acquisition of OAC. The decline in balances
during the nine months ended September 30, 2000 is due to the transfer
of properties from held for investment to held for sale. See "Real
Estate Held for Sale."
59
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
The Company's properties held for investment at September 30, 2000 are
comprised of the following:
<TABLE>
<CAPTION>
Date %
Acquired Property Location Square Feet Property Type Leased Carrying Value
--------------- ------------------------- -------------------- -------------- --------------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
07/22/98 841 Prudential Drive..... Jacksonville, FL 550,000 Office Bldg. 98.0% $ 32,946
04/09/98 7075 Bayers Road......... Halifax, Nova Scotia 402,529 Shopping Ctr. 64.0 19,904
Accumulated depreciation (2,053)
------------
$ 50,797
============
</TABLE>
(2) Certain acquisition, development and construction loans were acquired
in January 2000 in which the Company participates in the expected
residual profits of the underlying real estate and the borrower has not
contributed substantial equity to the project. As such, the Company has
accounted for these loans under the equity method of accounting as
though it had an investment in a real estate limited partnership.
(3) Consists of interests in five limited partnerships operating as real
estate ventures, consisting of multi-family type properties.
REAL ESTATE HELD FOR SALE. The Company's real estate held for sale at
September 30, 2000 was comprised of the following properties at the dates
indicated:
<TABLE>
<CAPTION>
Date %
Acquired Property Location Square Feet Property Type Leased Carrying Value
--------------- ------------------------- -------------------- -------------- --------------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
04/08/98 225 Bush Street.......... San Francisco, CA 570,637 Office Bldg. 98.0% $ 137,313
11/10/97 Cortez Plaza............. Bradenton, FL 289,686 Shopping Ctr. 95.7 21,618
10/01/98 Holiday Village.......... Havre, MT 223,355 Shopping Ctr. 48.4 1,658
------------
$ 160,589
============
</TABLE>
The Company engaged unaffiliated third parties to market and sell the
properties listed above. These properties were previously held for investment.
The office buildings were reclassified to held for sale during the first quarter
of 2000 and the shopping centers were reclassified during the second quarter of
2000.
During the second quarter of 2000, the Company sold its office building
located at 690 Market Street in San Francisco, for $28,000, less commissions and
closing costs, which had a book value of $23,273, for a gain of $3,897. The net
proceeds consisted of cash of approximately $7,100 and a note receivable of
$19,000.
During the third quarter of 2000, the Company sold its office building
located at 10 United Nations Plaza in San Francisco for $15,500, less
commissions and closing costs, for a gain of $2,722. Also during the third
quarter of 2000, the Company sold its office building located at 450 Sansome
Street in San Francisco for $44,350, less commission and closing costs, for a
gain of $14,054. On November 1, 2000, the Company sold its office building
located at 225 Bush Street in San Francisco for $143.5 million, realizing net
proceeds of approximately $60,300 and a gain of $100.
ESCROW ADVANCES ON LOANS AND LOANS SERVICED FOR OTHERS. Escrow advances
related to loan portfolios and loans serviced for others consisted of the
following at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
----------------- ----------------
2000 1999
<S> <C> <C>
Loan Portfolios:
Principal, interest, taxes and insurance advances...................... $ 12,778 $ 19,967
Other advances......................................................... 12,029 11,594
----------- -----------
24,807 31,561
----------- -----------
Loans Serviced for Others:
Principal, interest, taxes and insurance advances...................... 144,463 100,066
Other advances......................................................... 41,983 30,921
----------- -----------
186,446 130,987
----------- -----------
$ 211,253 $ 162,548
=========== ===========
</TABLE>
60
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
DEPOSITS. Deposits decreased $237,646 or 13% during the nine months
ended September 30, 2000 primarily as a result of a $207,777 decrease in
non-interest bearing checking accounts. The decrease in non-interest bearing
checking accounts is primarily due to the transfer of custodial deposit balances
primarily representing collections of principal and interest from borrowers
which have yet to be remitted to investors, to a correspondent bank. The
following table sets forth information related to the Company's deposits at the
dates indicated.
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
----------------------- -----------------------
% of Total % of Total
Amount Deposits Amount Deposits
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Non-interest bearing checking accounts and escrows...... $ 72,496 5% $ 280,273 15%
NOW and money market checking accounts.................. 13,019 1 30,343 2
Savings accounts........................................ 1,383 -- 1,361 --
----------- --------- ----------- ---------
86,898 6 311,977 17
----------- -----------
Certificates of deposit (1)(2).......................... 1,522,684 1,536,997
Unamortized deferred fees............................... (4,942) (6,688)
----------- -----------
Total certificates of deposit........................... 1,517,742 94 1,530,309 83
----------- --------- ----------- ---------
Total deposits....................................... $ 1,604,640 100% $ 1,842,286 100%
=========== ========= =========== =========
</TABLE>
(1) Included $1,291,982 and $1,449,873 at September 30, 2000 and December
31, 1999, respectively, of deposits originated through national,
regional and local investment banking firms which solicit deposits from
their customers, all of which are non-cancelable.
(2) At September 30, 2000 and December 31, 1999, certificates of deposit
issued on an uninsured basis (greater than $100,000) amounted to
$197,436 and $155,205, respectively. Of the $197,436 of uninsured
deposits at September 30, 2000, $62,861 were from political
subdivisions in New Jersey and secured or collateralized as required
under state law.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under
agreements to repurchase of $5,692 at September 30, 2000, decreased $41,673 or
88% during the nine months ended September 30, 2000. From time to time the
Company utilizes such collateralized borrowings as additional sources of
liquidity. The securities sold under agreements to repurchase at September 30,
2000 are collateralized by two unrated residual securities with a fair value of
$6,801.
BONDS-MATCH FUNDED AGREEMENTS. Bonds-match funded agreements of
$114,687 at September 30, 2000, decreased $26,828 or 19% during the nine months
ended September 30, 2000.
Bonds-match funded agreements were comprised of the following at the
dates indicated:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
OAC Mortgage Residential Securities, Inc (1)............... $ 79,894 $ 100,968
Ocwen NIM Corp. (2)........................................ 34,793 40,547
--------------- ---------------
$ 114,687 $ 141,515
=============== ===============
</TABLE>
(1) Acquired in connection with the acquisition of OAC. Originally arose in
connection with a previous securitization of loans by OAC which was
accounted for as a financing transaction.
(2) In December 1999, the Company transferred four unrated residual
securities to Ocwen NIM Corp. in exchange for non-recourse notes. The
transaction was accounted for as a financing.
61
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
NOTES, DEBENTURES AND OTHER INTEREST-BEARING OBLIGATIONS. Notes,
debentures and other interest-bearing obligations mature as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
2003:
11.875% Notes due October 1........................................ $ 103,850 $ 103,850
2004:
Loan due May 24 (LIBOR plus 250 basis points)...................... 6,235 6,236
2005:
12% Subordinated Debentures due June 15............................ 67,000 67,000
11.5% Redeemable Notes due July 1 (1).............................. 96,477 140,487
----------- -----------
$ 273,562 $ 317,573
=========== ===========
</TABLE>
(1) The $44,010 decline in the outstanding balance is due to repurchases in
the open market during the nine months ended September 30, 2000. These
repurchases resulted in extraordinary gains of $2,980 ($2,056 net of
taxes) and $8,073 ($5,570 net of taxes), for the three and nine months
ended September 30, 2000, respectively.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit decreased $52,222 or 28% during the nine months ended
September 30, 2000. The Company, through its subsidiaries, has obtained secured
lines of credit arrangements from various unaffiliated financial institutions as
follows:
<TABLE>
<CAPTION>
Balance Amount of Committed Maturity
Entity Outstanding Facility Amount Date Interest Rate(5)
----------------------- ---------------- ------------------ ---------------- ---------------- -------------------------------
<S> <C> <C> <C> <C> <C>
SEPTEMBER 30, 2000:
OFS (1)............. $ 1,045 $ 35,000 $ 35,000 May 2001 LIBOR + 175 basis points
429 5,000 -- May 2001 LIBOR + 175 basis points
OAC................. 59,170(2) 115,580 115,580 June 2001 LIBOR + 240 basis points
75,000(3) 75,000 75,000 April 2001 LIBOR + 175 basis points
-------------
$ 135,644
=============
DECEMBER 31, 1999:
OFS (4)............. $ 2,041 $ 200,000 $ 100,000 July 2001 LIBOR + 75 basis points
3,770 115,000 100,000 May 2000 LIBOR + 95 - 150 basis points
15,227 50,000 50,000 May 2000 LIBOR + 137.5 basis points
7,658 25,000 -- May 2000 LIBOR + 175 basis points
OAC................. 84,170(2) 200,000 200,000 June 2001 LIBOR + 175 basis points
75,000(3) 75,000 75,000 April 2001 LIBOR + 175 basis points
-------------
$ 187,866
=============
</TABLE>
(1) These lines were used to fund subprime mortgage loan originations,
generally advanced at a rate of 65% to 75% of the principal balance of
the mortgage loan and are secured by such mortgage loans.
(2) Collateralized by commercial loans and investments in real estate.
(3) Collateralized by the real estate property (office building) located at
225 Bush Street in San Francisco, CA. See "Real Estate Held for Sale."
(4) These lines were used to fund subprime mortgage loan originations,
generally advanced at a rate of 80% to 98% of the principal balance of
the mortgage loan and are secured by such mortgage loans.
(5) LIBOR was 6.62% and 5.82% at September 30, 2000 and December 31, 1999,
respectively.
62
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY. The
outstanding balance of the 10.875% Capital Securities amounted to $99,390 at
September 30, 2000, a decline of $10,610 from the balance outstanding at
December 31, 1999. During the three and nine months ended September 30, 2000,
the Company repurchased $2,000 and $10,610, respectively, of its Capital
Securities in the open market, resulting in an extraordinary gain of $828 ($572
net of taxes) and $4,499 ($3,104 net of taxes) for the three and nine months
ended September 30, 2000, respectively. See Note 4 to the Interim Consolidated
Financial Statements included in Item 1 hereof (which is incorporated herein by
reference).
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $15,682 or 3%
during the nine months ended September 30, 2000. The decrease was primarily due
to a net loss of $7,177 and the repurchase of 1,388,300 shares of common stock
in the aggregate amount of $8,996 during the first quarter. On September 30,
2000, the Company changed its accounting policy for securities available for
sale and match funded securities to account for these securities as trading. As
a result, net unrealized holding gains and losses on trading securities are
included in earnings. Previously, unrealized holding gains and losses for these
securities were reported as a separate component of accumulated other
comprehensive income in stockholders' equity. See Consolidated Statements of
Changes in Stockholders' Equity and Notes 2 and 5 to the Interim Consolidated
Financial Statements included in Item 1 herein (which is incorporated herein by
reference).
LIQUIDITY, COMMITMENTS AND OFF-BALANCE SHEET RISKS
The primary sources of funds for liquidity consist of deposits, FHLB
advances, reverse repurchase agreements, lines of credit and maturities and
payments of principal and interest on loans and securities and proceeds from
sales and securitizations thereof.
Sources of liquidity include certificates of deposit obtained primarily
from wholesale sources. At September 30, 2000, the Company had $1,517,742 of
certificates of deposit, including $1,291,982 of brokered certificates of
deposit obtained through national, regional and local 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, 2001 and 2002,
and thereafter amounted to $836,332, $430,718 and $250,692, respectively.
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, 2000,
the Company was eligible to borrow up to an aggregate of $530,994 from the FHLB
of New York (subject to the availability of acceptable collateral) and had
$30,974 of residential loans and $22,104 of short duration CMOs (all of which
were held by the Bank) pledged as security for any such advances. At September
30, 2000, 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, 2000, the Company had $206,477 of
unrestricted cash and cash equivalents and $350,437 of short duration CMOs which
could be used to secure additional borrowings. At September 30, 2000, the
Company had no outstanding FHLB advances. In addition, at September 30, 2000,
the Company, through the bank, had a line of credit of $150,000. The Company had
no balance outstanding at September 30, 2000 under this line of credit.
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 $91,458 and $187,822
of cash flows during the nine months ended September 30, 2000 and 1999,
respectively. During the nine months ended September 30, 2000, cash flows used
by operating activities primarily related to an increase in escrow advances and
an increase in accrued expenses, interest payable and other liabilities. During
the nine months ended September 30, 1999, cash flows were primarily related to
the purchase, origination and sale of loans available for sale. The decrease in
net cash flows used by operating activities during the nine months ended
September 30, 2000 as compared to the nine months ended September 30, 1999, was
due primarily to a decline in activity related to loans available for sale as a
result of the sale of Ocwen UK and the closing of domestic subprime lending
operations at OFS.
The Company's investing activities provided cash flows totaling
$342,686 and $177,737 during the nine months ended September 30, 2000 and 1999,
respectively. During the foregoing periods, cash flows from investing activities
were used primarily to purchase securities available for sale, purchase discount
loans and for the purchase of and capital improvements
63
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
to real estate held for investment. Cash flows from investing activities were
provided primarily by sales of, maturities of and principal payments received on
securities available for sale, proceeds from sales of and principal payments
received on discount loans, proceeds from sales of real estate owned and
proceeds from the sale of Ocwen UK during the third quarter of 1999. The
increase in net cash provided by investing activities during the nine months
ended September 30, 2000 as compared to the nine months ended September 30, 1999
was due primarily to an increase in proceeds from the sale of securities
available for sale and a decline in purchases of discount loans, offset by an
increase in purchases of securities available for sale, a decline in proceeds
from sales of discount loans and an increase in purchases of and capital
improvements to real estate held for investment.
The Company's financing activities used cash flows of $406,609 and
$178,586 during the nine months ended September 30, 2000 and 1999, respectively.
Cash flows utilized in connection with financing activities were primarily
related to a decline in deposits, a decline in securities sold under agreements
to repurchase, repayment of bonds-match funded agreements, repayment of lines of
credit and repurchases of debt.
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
(currently not less than 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less). The Bank's
liquidity, as measured for regulatory purposes, amounted to 7.60% at September
30, 2000.
As a result of a verbal agreement between the Bank and the OTS to
dividend subordinate and residual mortgage-related securities resulting from
securitization activities conducted by the Bank, the Bank has been limited in
its ability to pay cash dividends to the Company. The Bank held no subordinate
or residual mortgage-related securities at September 30, 2000. See Note 8 to the
Interim Consolidated Financial Statements included in Item 1 herein (which is
incorporated by reference).
There are restrictions on OAC's ability to make certain restricted
payments, including dividends under the Indenture governing OAC's 11.5%
Redeemable Notes. As of September 30, 2000, OAC was permitted to make restricted
payments of approximately $2,500.
At September 30, 2000, the Company had commitments of $13,866 related
to the funding of construction loans. Management believes that the Company has
adequate resources to fund all such unfunded commitments to the extent required
and that substantially all of such unfunded commitments will be funded during
2000. See Note 10 to the Interim Consolidated Financial Statements included in
Item 1 herein (which is incorporated herein by reference).
In addition to commitments to extend credit, the Company is party to
various off-balance sheet financial instruments in the normal course of the
Company's business in order to manage its interest rate risk and foreign
currency exchange rate risk. See Note 7 to the Interim Consolidated Financial
Statements included in Item 1 herein (which is incorporated herein by reference)
and "Asset and Liability Management" included in Item 3 herein.
REGULATORY CAPITAL AND OTHER REQUIREMENTS
See Note 8 to the Interim Consolidated Financial Statements included in
Item 1 herein (which is incorporated by reference).
64
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Dollars in thousands, except
share data)
--------------------------------------------------------------------------------
YEAR 2000 DATE CONVERSION
The Company is currently not aware of any significant Year 2000 or
related problems that have arisen for its customers or vendors.
65
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
(Dollars in Thousands)
--------------------------------------------------------------------------------
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 and foreign
currency exchange rate movements. In general, management's strategy is to match
asset and liability balances within maturity categories and to manage foreign
currency rate exposure related to its investments in non-U.S. dollar functional
currency operations in order to limit the Company's exposure to earnings
variations and variations in the value of assets and liabilities as interest
rates and foreign currency exchange rates change over time. The Company's asset
and liability management strategy is formulated and monitored by the
Asset/Liability Management Committee ( the "Committee"), which is composed of
directors and officers of the Company, in accordance with policies approved by
the Board of Directors of the Company. The Committee meets to review, among
other things, the sensitivity of the Company's assets and liabilities to
interest rate changes and foreign currency exchange 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 Committee also approves and
establishes pricing and funding decisions with respect to overall asset and
liability composition.
The 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.
66
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
(Dollars in Thousands)
--------------------------------------------------------------------------------
The following table sets forth the estimated maturity or repricing of
the Company's interest-earning assets and interest-bearing liabilities at
September 30, 2000. 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) 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 (v) escrow deposits and other
non-interest bearing checking accounts, which amounted to $72,496 at September
30, 2000, 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, 2000
------------------------------------------------------------------------
Within Four to More Than
Three Twelve One Year to Three Years
Months Months Three Years and Over Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Interest-earning deposits....................... $ 16,422 $ -- $ -- $ -- $ 16,422
Federal funds sold.............................. 179,000 -- -- -- 179,000
Trading securities.............................. 107,536 226,943 77,835 83,981 496,295
Loans available for sale (1).................... 368 6,047 3,289 2,619 12,323
Investment securities, net...................... 13,257 -- -- -- 13,257
Loan portfolio, net (1)......................... 77,439 23,370 8,780 5,514 115,103
Discount loan portfolio, net.................... 123,860 289,774 161,635 126,672 701,941
Match funded loans and securities............... 6,986 44,530 36,286 36,098 123,900
------------ ------------ ------------ ------------ ------------
Total rate-sensitive assets.................... 524,868 590,664 287,825 254,884 1,658,241
------------ ------------ ------------ ------------ ------------
RATE-SENSITIVE LIABILITIES:
NOW and money market checking deposits.......... 11,461 179 383 996 13,019
Savings deposits................................ 150 190 375 668 1,383
Certificates of deposit......................... 398,004 438,328 542,217 139,193 1,517,742
------------ ------------ ------------ ------------ ------------
Total interest-bearing deposits................. 409,615 438,697 542,975 140,857 1,532,144
Securities sold under agreements to repurchase.. 5,692 -- -- -- 5,692
Bond-match funded loan agreements............... 80,897 19,858 11,360 2,572 114,687
Obligations outstanding under lines of credit... 135,644 -- -- -- 135,644
Notes, debentures and other..................... 6,235 -- -- 267,327 273,562
------------ ------------ ------------ ------------ ------------
Total rate-sensitive liabilities............... 638,083 458,555 554,335 410,756 2,061,729
------------ ------------ ------------ ------------ ------------
Interest rate sensitivity gap excluding financial
instruments..................................... (113,215) 132,109 (266,510) (155,872) (403,488)
FINANCIAL INSTRUMENTS:
Interest rate swaps............................... 59,000 (59,000) -- -- --
Swaption and put option contracts................. 3 136 -- -- 139
Futures contracts................................. 5,800 -- -- (5,800) --
Interest rate caps................................ -- -- -- 821 821
Interest rate floors.............................. -- -- -- 54 54
------------ ------------ ------------ ------------ ------------
Total rate-sensitive financial instruments........ 64,803 (58,864) -- (4,925) 1,014
------------ ------------ ------------ ------------ ------------
Interest rate sensitivity gap including financial
instruments..................................... $ (48,412) $ 73,245 $ (266,510) $ (160,797) $ (402,474)
============ ============ ============ ============ ============
Cumulative interest rate sensitivity gap.......... $ (48,412) $ 24,833 $ (241,677) $ (402,474)
============ ============ ============ ============
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets....... (2.92)% 1.50% (14.57)% (24.27)%
</TABLE>
67
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
(Dollars in Thousands)
--------------------------------------------------------------------------------
(1) Balances have not been reduced for non-performing loans.
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,
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 (shocks) 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 current NPV Ratio for each of the seven rate scenarios and the
corresponding limits approved by the Board of Directors, and as applied to OCN,
are as follows at September 30, 2000:
Board Limits Current
Rate Shock in basis points (minimum NPV Ratios) NPV Ratios
-------------------------- -------------------------- -----------------------
+300 5.00% 22.59%
+200 6.00% 22.37%
+100 7.00% 22.13%
0 8.00% 21.87%
-100 7.00% 21.65%
-200 6.00% 21.45%
-300 5.00% 21.25%
The 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, and as
applied to OCN. The following table quantifies the potential changes in net
interest income and net portfolio value 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. The base interest rate scenario assumes interest rates at
September 30, 2000. Actual results could differ significantly from the OCN
results estimated in the following table:
Estimated Changes in
---------------------------------------------------
Rate Shock in basis points Net Interest NPV
-------------------------- -------------------------- -----------------------
+300 1.19% 0.79%
+200 0.80% 0.64%
+100 0.40% 0.41%
0 0.00% 0.00%
-100 (0.40)% (0.16)%
-200 (0.80)% (0.24)%
-300 (1.19)% (0.34)%
The Committee is authorized to utilize a wide variety of off-balance
sheet financial techniques to assist it in the management of interest rate risk
and foreign currency exchange rate risk. These techniques include interest rate
exchange or "swap" agreements, U.S. Treasury interest rate futures contracts,
foreign currency futures contracts and foreign currency swap agreements and
European swaptions and put options.
68
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
(Dollars in Thousands)
--------------------------------------------------------------------------------
INTEREST RATE RISK MANAGEMENT. The Company utilizes interest rate swaps
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. The Company
had entered into interest rate swaps with an aggregate notional amount of
$59,000 and $200,780 at September 30, 2000 and December 31, 1999, respectively.
The Company entered into swaption and put option contracts and futures
contracts to mitigate its interest rate exposure on anticipated future fundings
related to certain of its investments in low-income housing tax credit
interests. The Company had entered into European swaptions and put options with
an aggregate notional amount of $14,500 and $20,900 at September 30, 2000 and
December 31, 1999, respectively. The Company had entered into futures contracts
with an aggregate notional amount of $5,800 and $19,000 at September 30, 2000
and December 31, 1999, respectively.
In addition, the Company purchased amortizing Caps and Floors to hedge
its interest rate exposure relating to its match funded loans and securities.
The Company had entered into Caps and Floors with an aggregate notional amount
of $145,883 and $38,772, respectively, at September 30, 2000, and Caps and
Floors with an aggregate notional amount of $159,211 and $41,899, respectively,
at December 31, 1999.
See Note 7 to the Interim Consolidated Financial Statements included in
Item 1 herein (which is incorporated herein by reference) for additional
disclosures regarding the Company's interest rate derivative financial
instruments.
FOREIGN CURRENCY EXCHANGE RATE RISK MANAGEMENT. The Company has entered
into foreign currency derivatives to hedge its equity investment in Kensington,
its investments in foreign subsidiaries which own residual interests backed by
residential loans originated in the UK and in the shopping center located in
Halifax, Nova Scotia.
The Company's hedges the related foreign currency equity investment,
the related investments in foreign subsidiaries, and the net exposures as of
September 30, 2000 and December 31, 1999 were as follows.
<TABLE>
<CAPTION>
Investment Hedge Net Exposure
-------------- -------------- --------------
<S> <C> <C> <C>
SEPTEMBER 30, 2000:
Kensington......................... $ 28,437 $ 29,775 $ 1,338
UK residuals....................... $ 23,722 $ 16,224 $ (7,498)
Nova Scotia Shopping Center........ $ 21,861 $ 21,627 $ (234)
DECEMBER 31, 1999:
Kensington......................... $ 36,215 $ 38,632 $ 2,217
UK residuals....................... $ 28,098 $ 25,689 $ 2,409
Nova Scotia Shopping Center........ $ 14,844 $ 16,389 $ 1,545
</TABLE>
The net exposures are subject to gain or loss if foreign currency
exchange rates fluctuate. See the "Foreign Currency Management" section of Note
7 to the Interim Consolidated Financial Statements included in Item 1 herein
(which is incorporated herein by reference) for additional disclosures regarding
the Company's foreign currency derivative financial instruments.
69
<PAGE>
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, investment companies and real estate
(including regulatory fees, capital requirements, 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, the course of negotiations and the ability to
reach agreement with respect to the material terms of any particular
transaction, satisfactory due diligence results, satisfaction or fulfillment of
agreed upon terms and conditions of closing or performance, the timing of
transaction closings, software integration, development and licensing, damage to
the company's computer equipment and the information stored its data centers,
availability of and costs associated with obtaining adequate and timely sources
of liquidity, 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, availability of discount loans
for purchase, size of, nature of and yields available with respect to the
secondary market for mortgage loans, financial, securities and securitization
markets in general, adequacy of 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, other factors generally understood to affect the real
estate acquisition, mortgage, servicing and leasing markets, securities
investments and the software and technology industry, and other risks detailed
from time to time in the Company's reports and filings with the Commission,
including its periodic reports on Forms 10-Q, 8-K and 10-K and Exhibit 99.1,
titled Risk Factors, to the Company's Form 10-K for the year ended December 31,
1999. 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 release publicly the results 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.
70
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings.
See "Note 7: Commitments and Contingencies" of the Company's
Consolidated Financial Statements.
Item 4. Submissions of Matters to a Vote of Security Holders.
Item 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS.
2.1 Agreement of Merger dated as of July 25, 1999 among Ocwen
Financial Corporation, Ocwen Asset Investment Corp. and
Ocwen Acquisition Company (1)
3.1 Amended and Restated Articles of Incorporation (2)
3.2 Amended and Restated Bylaws (3)
4.0 Form of Certificate of Common Stock (2)
4.1 Form of Indenture between the Company and Bank One, Columbus,
NA as Trustee (2)
4.2 Form of Note due 2003 (included in Exhibit 4.1) (2)
4.3 Certificate of Trust of Ocwen Capital Trust I (4)
4.4 Amended and Restated Declaration of Trust of Ocwen Capital
Trust I (4)
4.5 Form of Capital Security of Ocwen Capital Trust I (5)
4.6 Form of Indenture relating to 10.875% Junior Subordinated
Debentures due 2027 of the Company (4)
4.7 Form of 10.875% Junior Subordinated Debentures due 2027 of
the Company (5)
4.8 Form of Guarantee of the Company relating to the Capital
Securities of Ocwen Capital Trust I (4)
4.9 Form of Indenture between the Company and The Bank of New
York as Trustee (6)
4.10 Form of Subordinated Debentures due 2005 (6)
4.11 Form of Indenture between OAC and Norwest Bank Minnesota,
National Association, as Trustee thereunder for the 11.5%
Redeemable Notes due 2005 (7)
10.1 Ocwen Financial Corporation 1996 Stock Plan for Directors, as
amended (8)
10.2 Ocwen Financial Corporation 1998 Annual Incentive Plan (9)
10.3 Amended and Restated Loan Agreement, dated as of June 10,
1998, among, inter alia, OAIC California Partnership, L.P.,
OAIC California Partnership II, L.P., Salomon Brothers
Realty Corp. and LaSalle National Bank (10)
10.4 Compensation and Indemnification Agreement, dated as of May
6, 1999, between OAC and the independent committee of the
Board of Directors (11)
10.5 Second Amendment to Guarantee of Payment, dated as of July 9,
1999, between Salomon Brothers Realty Corp. and Ocwen
Partnership, L.P. (11)
10.6 Indemnity agreement, dated August 24, 1999, among OCN and
OAC's Board of directors (12)
10.7 Amended Ocwen Financial Corporation 1991 Non-Qualified Stock
Option Plan, dated October 26, 1999 (12)
10.8 First Amendment to Agreement, dated March 30, 2000, between
HCT Investments, Inc. and OAIC Partnership I, L. P. (13)
27.1 Financial Data Schedule for the three months ended September
30, 2000 (filed herewith)
99.1 Risk factors (13)
(1) Incorporated by reference from the similarly described exhibit included
with the Registrant's Current Report on Form 8-K filed with the
Commission on July 26, 1999.
71
<PAGE>
Part II - Other Information
(2) Incorporated by reference from 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.
(3) Incorporated by reference from the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.
(4) Incorporated by reference from 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.
(5) Incorporated by reference from similarly described exhibit included
with Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(6) Incorporated by reference from 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.
(7) Incorporated by reference from OAC's Registration Statement on Form S-4
(File No. 333-64047), as amended, declared effective by the Commission
on February 12, 1999.
(8) Incorporated by reference from 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.
(9) Incorporated by reference from the similarly described exhibit to the
Company's Definitive Proxy Statement with respect to the Company's 1998
Annual Meeting of Shareholders filed with the Commission on March 31,
1998.
(10) Incorporated by reference from OAC's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998.
(11) Incorporated by reference from OAC's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999.
(12) Incorporated by reference from the similarly described exhibit included
with Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2000.
(13) Incorporated by reference from the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
(b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED SEPTEMBER 30, 2000.
(1) A Form 8-K was filed by the Company on August 11, 2000 which
contained a news release announcing the Company's financial
results for the three and six months ended June 30, 2000.
72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
OCWEN FINANCIAL CORPORATION
By: /s/ MARK S. ZEIDMAN
-----------------------------------
Mark S. Zeidman,
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as its principal financial officer)
Date: November 14, 2000
73
