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 March 31, 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
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(Exact name of registrant as specified in its charter)
Florida 65-0039856
- ------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401
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(Address of principal executive offices) (Zip Code)
(561) 682-8000
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(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 May 12,
2000: 61,183,275 shares
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OCWEN FINANCIAL CORPORATION
FORM 10-Q
I N D E X
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PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Interim Consolidated Financial Statements (Unaudited).............. 3
Consolidated Statements of Financial Condition
at March 31, 2000 and December 31, 1999............................ 3
Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999............................... 4
Consolidated Statements of Comprehensive Income /(Loss)
for the three months ended March 31, 2000 and 1999................. 5
Consolidated Statement of Changes in Stockholders' Equity
for the three months ended March 31, 2000.......................... 6
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999............................... 7
Notes to Consolidated Financial Statements......................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........56
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................61
Signature...................................................................63
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<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
March 31, 2000 December 31, 1999
---------------- -----------------
ASSETS:
<S> <C> <C>
Cash and amounts due from depository institutions ........................ $ 68,016 $ 153,459
Interest earning deposits ................................................ 23,024 116,399
Federal funds sold ....................................................... 96,000 112,000
Securities available for sale, at fair value ............................. 838,446 587,518
Loans available for sale, at lower of cost or market ..................... 36,843 45,213
Investment securities .................................................... 13,256 10,965
Loan portfolio, net ...................................................... 156,119 157,408
Match funded loans and securities, net ................................... 145,964 157,794
Discount loan portfolio, net ............................................. 842,178 913,229
Investments in low-income housing tax credit interests ................... 138,778 150,989
Investments in unconsolidated entities ................................... 33,998 37,118
Real estate owned, net ................................................... 185,498 167,506
Investment in real estate ................................................ 238,247 268,241
Real estate held for sale ................................................ 188,808 --
Premises and equipment, net .............................................. 47,344 49,038
Income taxes receivable .................................................. 13,198 --
Deferred tax asset, net .................................................. 140,550 136,920
Excess of purchase price over net assets acquired ........................ 12,433 13,207
Principal, interest and dividends receivable ............................. 10,978 10,024
Escrow advances on loans and loans serviced for others ................... 172,986 162,548
Other assets ............................................................. 76,827 59,737
-------------- --------------
$ 3,479,491 $ 3,309,313
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits ............................................................... $ 1,767,602 $ 1,842,286
Securities sold under agreements to repurchase ......................... 376,454 47,365
Bonds-match funded agreements .......................................... 130,429 141,515
Obligations outstanding under lines of credit .......................... 174,059 187,866
Notes, debentures and other interest bearing obligations ............... 298,023 317,573
Accrued interest payable ............................................... 39,681 32,569
Excess of net assets acquired over purchase price ...................... 54,041 56,841
Income taxes payable ................................................... -- 6,369
Accrued expenses, payables and other liabilities ....................... 36,766 57,487
-------------- --------------
Total liabilities ................................................... 2,877,055 2,689,871
-------------- --------------
Company obligated, mandatorily redeemable securities of
subsidiary trust holding solely junior subordinated debentures
of the Company ......................................................... 110,000 110,000
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 20,000,000 shares authorized; 0 shares
issued and outstanding................................................. -- --
Common stock, $.01 par value; 200,000,000 shares authorized;
67,183,275 and 68,571,575 shares issued and
outstanding at March 31, 2000 and December
31, 1999, respectively .............................................. 672 686
Additional paid-in capital ............................................ 223,372 232,340
Retained earnings ..................................................... 271,904 277,002
Accumulated other comprehensive income (loss), net of taxes:
Net unrealized (loss) gain on securities available for sale ......... (2,924) 163
Net unrealized foreign currency translation loss .................... (588) (749)
-------------- --------------
Total stockholders' equity ............................................ 492,436 509,442
-------------- --------------
$ 3,479,491 $ 3,309,313
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 1999
- --------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
INTEREST INCOME:
Federal funds sold and repurchase agreements .................................. $ 1,709 $ 3,396
Securities available for sale ................................................. 12,869 17,189
Loans available for sale ...................................................... 807 8,130
Investment securities and other ............................................... 327 651
Loans ......................................................................... 3,968 6,165
Match funded loans and securities ............................................. 3,311 --
Discount loans ................................................................ 25,099 30,003
------------ ------------
48,090 65,534
------------ ------------
INTEREST EXPENSE:
Deposits ...................................................................... 24,685 26,828
Securities sold under agreements to repurchase ................................ 2,640 1,491
Obligations outstanding under lines of credit ................................. 3,471 3,724
Bonds-match funded agreements ................................................. 3,356 --
Notes, debentures and other interest bearing obligations ...................... 9,244 6,755
------------ ------------
43,396 38,798
------------ ------------
Net interest income before provision for loan losses .......................... 4,694 26,736
Provision for loan losses ..................................................... 2,608 3,739
------------ ------------
Net interest income after provision for loan losses ........................... 2,086 22,997
------------ ------------
NON-INTEREST INCOME:
Servicing fees and other charges .............................................. 20,668 18,251
Gain on interest earning assets, net .......................................... 10,994 20,225
Impairment charges on securities available for sale ........................... (6,833) (83)
(Loss) gain on real estate owned, net ......................................... (7,007) 629
Amortization of excess of net assets acquired over purchase price ............. 2,794 --
Other income .................................................................. 4,775 6,553
------------ ------------
25,391 45,575
------------ ------------
NON-INTEREST EXPENSE:
Compensation and employee benefits ............................................ 16,583 27,211
Occupancy and equipment ....................................................... 3,263 5,766
Technology and communication costs ............................................ 5,281 5,744
Loan expenses ................................................................. 3,930 4,128
Net operating (gains) losses on investments in real estate and certain
low-income housing tax credit interests ..................................... (4,054) 1,848
Amortization of excess of purchase price over net assets acquired ............. 773 230
Other operating expenses ...................................................... 6,745 7,196
------------ ------------
32,521 52,123
------------ ------------
Distributions on Company-obligated, mandatory redeemable
securities of subsidiary trust holding
solely junior subordinated debentures ....................................... 3,194 3,399
Equity in losses of investments in unconsolidated entities ...................... (2,260) (1,245)
------------ ------------
(Loss) income before income taxes and extraordinary gain ........................ (10,498) 11,805
Income tax benefit (expense) .................................................... 3,255 (2,368)
Minority interest in net loss of consolidated subsidiary ........................ -- 33
------------ ------------
(Loss) income before extraordinary gain ......................................... (7,243) 9,470
Extraordinary gain on repurchase of debt, net of taxes .......................... 2,145 --
------------ ------------
Net (loss) income ............................................................... $ (5,098) $ 9,470
============ ============
(LOSS) EARNINGS PER SHARE:
Basic:
Net (loss) income before extraordinary gain ................................. $ (0.10) $ 0.16
Extraordinary gain .......................................................... 0.03 --
------------ ------------
Net (loss) income ........................................................... $ (0.07) $ 0.16
============ ============
Diluted:
Net (loss) income before extraordinary gain ................................. $ (0.10) $ 0.16
Extraordinary gain .......................................................... 0.03 --
------------ ------------
Net (loss) income ........................................................... $ (0.07) $ 0.16
============ ============
Weighted average common shares outstanding:
Basic ......................................................................... 68,222,987 60,800,357
============ ============
Diluted ....................................................................... 68,222,987 60,843,572
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 1999
------------ ------------
<S> <C> <C>
Net (loss) income .......................................................................... $ (5,098) $ 9,470
------------ ------------
Other comprehensive (loss) income, net of taxes:
Change in unrealized loss (gain) on securities
available for sale arising during the year ............................................. (3,792) 4,813
Less: Reclassification adjustment ........................................................ 544 (2,604)
------------ ------------
Net change in unrealized loss on securities available for sale (net of a tax
benefit (expense) of $1,899 and $(1,051) for 2000 and 1999, respectively) ............. (3,248) 2,209
------------ ------------
Change in unrealized foreign currency translation adjustment
arising during the year (net of tax expense of $95, respectively)....................... 161 175
------------ ------------
Net change in unrealized foreign currency translation loss (net of tax) .................. 161 175
------------ ------------
Other comprehensive (loss) income ........................................................ (3,087) 2,384
------------ ------------
Comprehensive (loss) income ................................................................ $ (8,185) $ 11,854
============ ============
Disclosure of reclassification adjustment:
Unrealized holding losses arising during the year on securities sold or impaired ......... $ (4,208) $ 231
Add: Adjustment for realized losses and impairment
charges on securities available for sale included in net income (loss) ................. 4,752 (2,835)
------------ ------------
Net reclassification adjustment for (gains) losses
recognized in other comprehensive income (loss) in prior
years (net of tax benefit (expense) of $238 and $(_____) for 2000
and 1999, respectively) ................................................................ $ 544 $ (2,604)
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(DOLLARS IN THOUSANDS)
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 ................................ -- -- -- (5,098) -- (5,098)
Repurchase of common stock .............. (1,388,300) (14) (8,968) -- -- (8,982)
Other comprehensive income, net of taxes:
Change in unrealized gain (loss) on
securities available for sale ..... -- -- -- -- (3,087) (3,087)
Change in unrealized foreign currency
translation loss .................. -- -- -- -- 161 161
----------- ----------- ----------- ----------- ----------- -----------
Balances at March 31, 2000 .............. 67,183,275 $ 672 $ 223,372 $ 271,904 $ (3,512) $ 492,436
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the three months ended March 31, 2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income ...................................................................... $ (5,098) $ 9,470
Adjustments to reconcile net (loss) income to net cash
used by operating activities:
Net cash provided by trading activities .............................................. -- 11,992
Proceeds from sales of loans available for sale ...................................... 2,434 100,817
Purchases of loans available for sale ................................................ -- (14,663)
Origination of loans available for sale .............................................. -- (286,238)
Principal payments received on loans available for sale .............................. 2,258 5,925
Principal payments on match funded loans ............................................. 12,809 --
Premium amortization on securities, net .............................................. (17,362) 6,609
Depreciation and amortization ........................................................ 5,066 5,137
Provision for loan losses ............................................................ 2,608 3,739
Provision for real estate owned ...................................................... 9,212 5,061
Gain on interest-earning assets, net ................................................. (10,994) (20,225)
Impairment charges on securities available for sale .................................. 6,833 83
Gain on sale of low-income housing tax credit interests .............................. 261 --
Loss (gain) on real estate owned, net ................................................ 4,556 (9,202)
Loss on sale of investment in real estate held ....................................... -- (50)
Equity in losses (earnings) of unconsolidated entities ............................... 2,260 1,245
(Increase) decrease in principal, interest and dividends receivable .................. (954) 4,927
(Increase) decrease in income taxes receivable ....................................... (19,567) 3,144
Increase in deferred tax asset ....................................................... (3,630) (1,012)
Increase in escrow advances .......................................................... (10,438) (8,974)
Decrease in other assets, net ........................................................ 4,564 30,600
Increase in accrued expenses, interest payable and other liabilities ................. (16,392) (5,324)
------------ ------------
Net cash used by operating activities ....................................... (31,574) (156,939)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ................................. 83,163 633
Purchase of securities available for sale ............................................ (449,954) (105,401)
Maturities of and principal payments received on securities available for sale ....... 106,099 128,598
Federal Home Loan Bank Stock ......................................................... (2,432) --
Purchase of low-income housing tax credit interests .................................. (16,189) (11,746)
Proceeds from sales of low-income housing tax credit interests ....................... 10,162 --
Proceeds from sales of discount loans, net ........................................... 64,507 143,225
Proceeds from sale of real estate held for investment ................................ -- 4,358
Proceeds from sales of loans held for investment ..................................... 227 29,284
Purchase and originations of loans held for investment,
net of undisbursed loan funds ...................................................... (9,788) (9,630)
Purchase of discount loans, net ...................................................... (68,887) (86,117)
Decrease (increase) in investment in unconsolidated entities ......................... 456 --
Principal payments received on loans held for investment ............................. 11,310 32,578
Principal payments received on discount loans, net ................................... 31,232 31,771
Purchase of and capital improvements to real estate held for investment .............. (159,314) (8,099)
Proceeds from sale of real estate owned .............................................. 39,728 64,135
Purchase of real estate owned in connection with discount loan purchases ............. (3,591) (8,160)
Additions to premises and equipment .................................................. (1,379) (7,648)
------------ ------------
Net cash (used) provided by investing activities ....................................... (364,650) 197,781
------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
For the three months ended March 31, 2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in deposits ........................................................... $ (74,684) $ (325,322)
Increase in securities sold under agreements to repurchase ..................... 329,089 6,423
Proceeds from obligations under lines of credit, net of repayments ............. (13,396) 145,475
Payments on bonds-match funded agreements ...................................... (11,057) --
Repurchases of notes and subordinate debentures ............................... (19,550) (2,000)
Repurchase of common stock ..................................................... (8,996) --
------------ ------------
Net cash provided (used) by financing activities ................................. 201,406 (175,424)
------------ ------------
Net decrease in cash and cash equivalents ........................................ (194,818) (134,582)
Cash and cash equivalents at beginning of period ................................. 381,858 419,154
------------ ------------
Cash and cash equivalents at end of period ....................................... $ 187,040 $ 284,572
============ ============
RECONCILIATION OF CASH AND CASH EQUIVALENTS AT END OF PERIOD:
Cash and amounts due from depository institutions .............................. $ 68,016 $ 65,274
Interest-earning deposits ...................................................... 23,024 18,798
Federal funds sold and repurchase agreements ................................... 96,000 200,500
------------ ------------
$ 187,040 $ 284,572
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ....................................................................... $ 36,284 $ 32,009
============ ============
Income taxes ................................................................... $ 18,721 $ 802
============ ============
Supplemental schedule of non-cash investing and financing activities:
Real estate owned acquired through foreclosure ................................. $ 54,595 $ 57,094
============ ============
Exchange of discount loans and loans available for sale for securities ......... $ -- $ 224,210
============ ============
</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 - (CONTINUED)
MARCH 31, 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 98.9% of Ocwen Financial
Services, Inc. ("OFS"), with the remaining 1.1% owned by the shareholders of
Admiral Home Loan and reported in the consolidated financial statements as a
minority interest. The Company sold its investment in its foreign subsidiary,
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 March 31, 2000 and
December 31, 1999, the results of its operations for the three months ended
March 31, 2000 and 1999, its comprehensive income/(loss) for the three months
ended March 31, 2000 and 1999, its cash flows for the three months ended March
31, 2000 and 1999, and its changes in stockholders' equity for the three months
ended March 31, 2000. The results of operations and other data for the
three-month period ended March 31, 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 March 31, 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 periods covered. Actual results could differ from
those estimates and assumptions.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT 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 has made an investment in a real estate
limited partnership.
INVESTMENT 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 or 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.
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.
9
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 3: CAPITAL SECURITIES
In August 1997, the Ocwen Capital Trust ("OCT") issued $125,000 of
10-7/8% Capital Securities (the "Capital Securities"). Proceeds from the
issuance of the Capital Securities were invested in 10-7/8% Junior Subordinated
Debentures issued by Ocwen. The Junior Subordinated Debentures, which represent
the sole assets of 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).
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 10-7/8% of the liquidation amount of
$1,000 per Capital Security. Payment of distributions out of moneys held by OCT,
and payments on liquidation of OCT or the redemption of Capital Securities, are
guaranteed by the Company to the extent OCT has funds available. If the Company
does not make principal or interest payments on the Junior Subordinated
Debentures, OCT will not have sufficient funds to make distributions on the
Capital Securities, in which event the guarantee shall not apply to such
distributions until OCT has sufficient funds available therefore. Accumulated
distributions payable on the Capital Securities amounted to $2,027 and $4,815 at
March 31, 2000 and December 31, 1999, respectively, and is 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.
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 statement of operations of the Company.
The Company intends to continue this method of accounting going forward.
10
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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 $4,004 and $4,041 at March 31, 2000 and December 31, 1999,
respectively, and is included in other assets.
NOTE 4: 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.
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
March 31, 2000 and December 31, 1999, respectively, are as follows:
<TABLE>
<CAPTION>
Notional LIBOR Floating Rate
Maturity Amount Index Fixed Rate at End of Year Fair Value
------------------- ------------ -------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
MARCH 31, 2000:
2001................. $ 75,000 1-Month 6.00% 5.92% $ 593
2003................. 100,000 1-Month 5.75 6.07 3,438
------------ ------------
$ 175,000 $ 4,031
============ ============
DECEMBER 31, 1999:
2001................. $ 75,000 1-Month 6.00% 6.48% $ 482
2001................. 17,000 1-Month 6.00 6.48 108
2002................. 8,780 1-Month 6.04 6.48 129
2003................. 100,000 1-Month 5.75 6.46 2,983
------------ ------------
$ 200,780 $ 3,702
============ ============
The Company also enters into short sales of U.S. Treasury interest rate
futures contracts as part of its overall interest rate risk management activity.
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 terms of the outstanding interest rate futures at March 31, 2000 and
December 31, 1999, respectively, are as follows:
Notional Strike
Amount Maturity Price Fair Value
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
MARCH 31, 2000:
U.S. 2-year Treasury futures........ $ 20,000 2000 $ 98.98 $ (48)
U.S. 10-year Treasury futures....... 8,000 2000 $ 98.08 (206)
----------- -----------
$ 28,000 $ (254)
=========== ===========
DECEMBER 31, 1999:
U.S. 2-year Treasury futures........ $ 12,000 2000 $ 99.31 $ 62
U.S. 10-year Treasury futures....... 7,000 2000 $ 95.86 116
----------- -----------
$ 19,000 $ 178
=========== ===========
</TABLE>
11
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
The Company also manages its interest rate risk by purchasing European
swaptions and put options 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 March 31, 2000 and December
31, 1999, respectively:
<TABLE>
<CAPTION>
Notional Strike
Amount Maturity Rate/Price Fair Value
----------- ----------- ---------- -----------
MARCH 31, 2000:
<S> <C> <C> <C> <C>
European 10-year treasury swaptions............ $ 6,000 2001 6.78% $ 295
5,800 2000 6.72% 239
2,300 2000 7.11% 47
----------- -----------
$ 14,100 $ 581
=========== ===========
DECEMBER 31, 1999:
European 10-year treasury swaptions............ $ 7,500 2000 6.78% $ 282
5,800 2000 6.72% 264
2,800 2000 7.20% 34
2,300 2000 7.11% 63
----------- -----------
$ 18,400 $ 643
=========== ===========
European 10-year treasury put
options, 4.75% due 11/05/08.................. $ 2,500 2000 $ 91.45 $ 83
=========== ===========
</TABLE>
FOREIGN CURRENCY MANAGEMENT
The Company enters 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 ("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 March 31, 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>
MARCH 31, 2000:
Currency swaps.............. 2003 (pound)27,500 $ 43,546 1.5835 $ 1,002 $ (289)
============= ============= ========== =========
DECEMBER 31, 1999:
Currency swaps.............. 2003 (pound)27,500 $ 43,546 1.5835 $ 1,119 $ (976)
============= ============= ========== =========
</TABLE>
12
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Strike
Maturity Notional Amount Rate Fair Value
-------- --------------- -------- -----------
<S> <C> <C> <C> <C>
MARCH 31, 2000:
Canadian Dollar currency futures............................. 2000 C$ 26,700 .6876 $ (94)
British Pound currency futures............................... 2000 (pound) 11,563 1.5800 (162)
2000 (pound) 6,063 1.5766 105
---------
$ (151)
=========
DECEMBER 31, 1999:
Canadian Dollar currency futures............................. 2000 C$ 22,100 .6786 $ (300)
2000 C$ 1,600 .6800 (20)
British Pound currency futures............................... 2000 (pound) 3,750 1.6018 65
2000 (pound) 15,875 1.6225 56
---------
$ (199)
=========
</TABLE>
NOTE 5: REGULATORY REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions subject to 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 March 31, 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 March 31, 2000, the Bank was "well capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To be
categorized as "well capitalized," the Bank must maintain minimum core capital,
Tier 1 risk-based capital and 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 March 31, 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 as well as 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.
13
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
The following tables summarize the Bank's actual and required
regulatory capital at March 31, 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 .......................... 10.22% $ 265,481
Net unrealized loss on certain available
for sale securities....................... 718
Non-includable subsidiary.................... (8,325)
Acquired real estate......................... (3,424)
Disallowed deferred tax assets............... (13,266)
Disallowed servicing assets.................. (1,007)
----------
Tangible capital, and ratio to adjusted
total assets.............................. 9.33% $ 240,177 1.50% $ 38,602
========== =========
Tier 1 (core) capital, and ratio to adjusted
total assets.............................. 9.33% $ 240,177 4.00% $ 77,203 5.00% $ 128,672 9.00%
========== ========= =========
Tier 1 capital, and ratio to risk-weighted
assets.................................... 12.84% $ 240,177 6.00% $ 112,247
========== =========
Allowance for loan and lease losses.......... 23,386
Subordinated debentures...................... 67,000
----------
Tier 2 capital............................... 90,386
----------
Total risk-based capital, and ratio to
risk-weighted assets...................... 17.67% $ 330,563 8.00% $ 149,663 10.00% $ 187,079 13.00%
========== ========= =========
Total regulatory assets...................... $2,598,747
==========
Adjusted total assets........................ $2,573,443
==========
Risk-weighted assets......................... $1,870,791
==========
</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 "undercapitalized," "significantly undercapitalized"
or "critically under capitalized," as defined in the OTS capital regulations,
following the capital distribution, (b) the proposed capital distribution raises
safety and soundness concerns or (c) the proposed capital distribution violates
a prohibition contained in any statute, regulation 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 ("Debentures") the due
2005 and issued by the Bank on June 12, 1995 in the original amount of $100,000,
limits the declaration or payment of dividends and the purchase or redemption of
common or preferred stock in the aggregate to the sum of 50% of consolidated net
income and 100% of all capital contributions and proceeds from the issuance or
sale (other than to a subsidiary) of common stock, since the date the Debentures
were issued.
14
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
NOTE 6: BUSINESS SEGMENT REPORTING
SFAS No. 131 requires public enterprises to report financial and
descriptive information about its 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 MARCH 31, 2000:
- ---------------------------------------------------
Single family residential discount loans .......... $ 6,930 $ 1,020 $ 1,966 $ 3,472 $ 601,993
Commercial loans .................................. 1,636 2,983 2,522 720 1,574,244
Domestic residential mortgage loan servicing ...... 280 18,109 13,867 2,804 154,036
Investment in low-income housing tax credits ...... (2,922) 1,096 2,568 1,119 190,216
OTX ............................................... (187) 4,536 12,191 (4,862) 27,956
Commercial real estate ............................ (3,031) 1,098 (1,093) (583) 273,924
UK operations ..................................... (285) -- (117) (1,551) 31,843
Domestic subprime single family
residential lending ............................. (1,169) (6,941) (593) (4,691) 204,086
Unsecured collections ............................. (38) 1 2,066 (2,226) 17,319
Corporate items and other ......................... 3,480 3,489 (856) 700 403,874
----------- ----------- ----------- ----------- -----------
$ 4,694 $ 25,391 $ 32,521 $ (5,098) $ 3,479,491
=========== =========== =========== =========== ===========
Net Interest Non-Interest Non-Interest Net(Loss) Total
Income Income Expense Income Assets
----------- ----------- ----------- ----------- -----------
AT OR FOR THE THREE MONTHS ENDED MARCH 31, 1999:
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Single family residential discount loans .......... $ 6,882 $ 9,571 $ 4,301 $ 4,385 $ 481,096
Commercial loans .................................. 9,785 8,638 7,425 4,952 899,152
Domestic residential mortgage loan servicing ...... 1,193 13,957 12,830 1,439 88,899
Investment in low-income housing tax credits ...... (2,360) 796 3,394 1,438 215,228
OTX ............................................... 6 392 4,243 (2,384) 23,481
UK operations ..................................... 7,161 5,594 10,438 294 391,800
Domestic subprime single family
residential lending ............................. 4,330 1,616 6,906 (563) 217,507
Unsecured collections ............................. 78 -- 1,799 (972) 11,348
Corporate items and other ......................... (339) 5,011 787 881 800,272
----------- ----------- ----------- ----------- -----------
$ 26,736 $ 45,575 $ 52,123 $ 9,470 $ 3,130,694
=========== =========== =========== =========== ===========
</TABLE>
NOTE 7: COMMITMENTS AND CONTINGENCIES
At March 31, 2000, the Company had commitments of $26,049 to fund
construction loans including loans accounted for as investments in real estate
secured by multi-family and commercial properties and $2,440 to purchase loans
secured by commercial properties. In addition, the Company through the Bank had
commitments under outstanding letters of credit in the amount of $20,626. The
Company, through its investment in subordinated securities and subprime
residuals, which had a carrying value of $138,251 at March 31, 2000, supports
senior classes of securities.
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 putative classes of public shareholders
of OAC in the Circuit Court of the Fifteenth Judicial
15
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
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. 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 million. OAC believes this suit is without
merit and continues to vigorously defend against the same. Discovery is ongoing.
The Company is subject to various other pending legal proceedings. In
management's opinion the resolution of these claims will not have a material
effect on the consolidated financial statements.
16
<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 business activities currently consist of the
acquisition, servicing and resolution of subperforming and non-performing
residential and commercial mortgage loans, as well as the related development of
loan servicing technology and business-to-business e-commerce solutions for the
mortgage and real estate industries.
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).
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.
RECENT DEVELOPMENTS
OCN has entered into an agreement to sell its office building located
at 690 Market Street in San Francisco for $28.0 million less commissions and
closing costs and as adjusted for prorations of certain contractual obligations
that survive closing. The buyer has posted a $1,400 deposit, and the closing is
expected to occur during the second quarter of 2000. Closing is subject to the
fulfillment of certain conditions, including but not limited to delivery of
clear title and receipt of required tenant estoppels.
The Board of Directors approved an additional stock repurchase program
to repurchase up to an additional 6 million shares of issued and outstanding OCN
common stock. As with our original program, any such purchases will be at times,
at prices per share, in amounts, and through solicited or unsolicited
transactions in the open market, on the New York Stock Exchange or in privately
negotiated transactions, in each case as OCN deems appropriate depending on the
availability of excess liquidity, market conditions, corporate requirements and
applicable securities laws. No limit has been placed on the duration of the
stock repurchase program, and OCN reserves the right to discontinue the
repurchase program at any time.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION March 31, December 31, Increase
2000 1999 (Decrease)
-------------- -------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA
Total assets..................................................... $ 3,479,491 $ 3,309,313 5.1%
Securities available for sale, at fair value..................... 838,446 587,518 42.7
Loans available for sale, at lower of cost or market............. 36,843 45,213 (18.5)
Loan portfolio, net.............................................. 156,119 157,408 (0.8)
Match funded loans and securities, net........................... 145,964 157,794 (7.5)
Discount loan portfolio, net..................................... 842,178 913,229 (7.8)
Investment in low-income housing tax credit interests............ 138,778 150,989 (8.1)
Investment in unconsolidated entities............................ 33,998 37,118 (8.4)
Real estate owned, net........................................... 185,498 167,506 10.7
Total liabilities................................................ 2,877,055 2,689,871 7.0
Deposits......................................................... 1,767,602 1,842,286 (4.1)
Securities sold under agreements to repurchase................... 376,454 47,365 694.8
Bonds-match funded agreements.................................... 130,429 141,515 (7.8)
Obligations outstanding under lines of credit.................... 174,059 187,866 (7.4)
Notes, debentures and other interest bearing obligations......... 298,023 317,573 (6.2)
Capital Securities............................................... 110,000 110,000 --
Stockholders' equity............................................. 492,436 509,442 (3.3)
</TABLE>
17
<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 March 31,
-----------------------------------------------------------
Increase
2000 1999 (Decrease)
------------------ --------------- ------------
<S> <C> <C> <C>
OPERATIONS DATA
Net interest income.............................................. $ 4,694 $ 26,736 (82)%
Provision for loan losses........................................ 2,608 3,739 (30)
Non-interest income ............................................. 25,391 45,575 (47)
Non-interest expense............................................. 32,521 52,123 (40)
Equity in losses of investment in unconsolidated entities....... (2,260) (1,245) (82)
Income tax benefit (expense)..................................... 3,255 (2,368) 238
Net (loss) income................................................ (5,098) 9,470 (154)
PER COMMON SHARE
Net (loss) income:
Basic......................................................... $ (0.07) $ 0.16 (144)%
Diluted....................................................... (0.07) 0.16 (144)
Stock price:
High ......................................................... $ 9.250 11.6250 (20)
Low .......................................................... 5.250 7.7500 (32)
Close......................................................... 8.000 8.8125 (9)
Repurchase of common stock (1)................................... 6.480 -- --
KEY RATIOS
Annualized return on average assets ............................ (0.60)% $ 1.20% (150)%
Annualized return on average equity ............................ (4.07) 8.62 (147)
Efficiency ratio (2) .......................................... 116.88 73.34 59
Core (leverage) capital ratio.................................... 9.33 10.83 (14)
Risk-based capital ratio......................................... 17.67 19.35 (9)
</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) earnings of investment in unconsolidated
entities.
RESULTS OF OPERATIONS: THREE MONTHS ENDED MARCH 31, 2000 VERSUS THREE MONTHS
ENDED MARCH 31, 1999
GENERAL. The Company recorded a net loss of $(5,098), or $(0.07) per
share, for the first quarter of 2000, as compared to net income of $9,470, or
$0.16 per diluted share, for the first quarter of 1999. There were a number of
key factors and transactions that contributed to the results for the first
quarter of 2000 as compared to the first quarter of 1999, including: the sale of
Ocwen UK in September 1999; the acquisition of Ocwen Asset Investment Corp.
("OAC") in October 1999; a reduction in gains on sales of interest earning
assets from $20,225 in the first quarter of 1999 to $10,994 for the first
quarter of 2000, primarily reflecting the Company's decision in the third
quarter of 1999 to discontinue the practice of structuring securitizations as
sales transactions, thus precluding recognition of gain-on-sale accounting; the
reversal of $6,012 of expense recognized in prior periods in connection with the
Company's long-term incentive plan which was suspended in March 2000; and an
increase in net losses incurred by Ocwen Technology Xchange, Inc. ("OTX") from
$(2,384) in the first quarter of 1999 to $(4,862) in the first quarter of 2000,
reflecting the Company's ongoing commitment to the development of this business.
18
<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 Ended March 31,
-----------------------------------------------------------
Favorable
2000 1999 (Unfavorable)
------------- -------------- -------------
<S> <C> <C> <C>
Single family residential discount loans............. $ 3,472 $ 4,385 $ (913)
Commercial loans..................................... 720 4,952 (4,232)
Domestic residential mortgage loan servicing......... 2,804 1,439 1,365
Investment in low-income housing tax credits (1)..... 1,119 1,438 (319)
OTX.................................................. (4,862) (2,384) (2,478)
Commercial real estate............................... (583) -- (583)
UK operations........................................ (1,551) 294 (1,845)
Domestic subprime single family residential lending.. (4,691) (563) (4,128)
Unsecured collections................................ (2,226) (972) (1,254)
Corporate items and other (1)........................ 700 881 (181)
------------- -------------- ------------
$ (5,098) $ 9,470 $ (14,568)
============= ============== ============
</TABLE>
(1) As amended from the first quarter 2000 earnings release dated May 9,
2000.
The following is a discussion of the contribution by business segment to the
Company's net income (loss) for the years indicated.
o Single Family Residential Discount Loans. Net income for the first quarter
of 2000 included a gain of $7,794 from the sale of loans. This compares to
a securitization gain of $13,899 in the first quarter of 1999. See "Results
of Operations -Non-Interest Income." The results for the first quarter of
2000 also reflect a decline of $4,714 in the provision for loan losses and
a $2,216 increase in losses from the sale and operation of real estate
owned.
o Commercial Loans. Net income for the first quarter of 1999 included $3,803
of gains on sales of commercial subordinate securities, as compared to
$2,768 for the first quarter of 2000. Net income for the first quarter of
1999 also included a gain of $1,184 on the sale of commercial discount
loans. The results for the first quarter of 2000 also reflect a $1,439
decline in gains from the sale and operation of real estate owned.
o Domestic Residential Mortgage Loan Servicing. The increase in net income
reflects an increase in servicing fees and other charges as a result of an
increase in loans serviced for others. See "Results of Operations -
Non-Interest Income." Domestic residential servicing fees and other
charges amounted to $18,053 for the first quarter of 2000, as compared to
$13,945 for the first quarter of 1999.
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. Losses for the first quarter of 2000 relate to the Company's 35.84%
equity investment in Kensington Group plc ("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.
o Domestic Subprime Single Family Residential Lending. The loss for the first
quarter of 2000 included $6,173 of impairment charges on subprime residual
securities. No such impairment charges were recorded for the first quarter
of 1999. 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.
See Note 6 to the Consolidated Financial Statements, included in Item 1
herein, for additional information related to the Company's operating segments
(which is incorporated herein by reference).
NET INTEREST INCOME: Net interest income, which 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
19
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
interest spread (i.e., the difference between the yield earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities),
the relative amount of interest-earning assets and interest-bearing liabilities
and the degree of mismatch in the maturity and repricing characteristics of its
interest-earning assets and interest-bearing liabilities.
The following table sets forth, for the three months 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 three months.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------------------------
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 ............................. $ 121,953 $ 1,709 5.61% $ 285,701 $ 3,396 4.75%
Securities available for sale (1)......... 655,283 12,869 7.86 510,013 17,189 13.48
Loans available for sale (2).............. 44,493 807 7.26 259,905 8,130 12.51
Investment securities and other........... 28,995 327 4.51 35,957 651 7.24
Loan portfolio (2)........................ 161,898 3,968 9.80 217,364 6,165 11.35
Match funded loans and securities......... 155,574 3,311 8.51 -- -- --
Discount loan portfolio................... 930,632 25,099 10.79 956,023 30,003 12.57
----------- ----------- ---------- -----------
Total interest earning assets.......... 2,098,828 48,090 9.17 2,264,963 65,534 11.57
----------- -----------
Non-interest earning cash................. 102,503 66,742
Allowance for loan losses................. (26,902) (24,903)
Low-income housing tax credit interests... 155,710 147,201
Investment in unconsolidated entities..... 35,091 86,286
Real estate owned, net.................... 181,880 213,783
Investment in real estate................. 374,846 40,268
Escrow advances on loans and loans
serviced for others.................... 180,631 115,338
Other assets.............................. 280,029 248,877
----------- ----------
Total assets........................... $ 3,382,616 $3,158,555
=========== ==========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits.......... $ 16,452 178 4.33% $ 74,135 640 3.45%
Savings deposits.......................... 1,451 10 2.76 1,566 9 2.30
Certificates of deposit................... 1,568,476 24,497 6.25 1,733,722 26,179 6.04
----------- ----------- ---------- -----------
Total interest-bearing deposits........ 1,586,379 24,685 6.22 1,809,423 26,828 5.93
Securities sold under agreements to
repurchase............................. 166,559 2,640 6.34 77,557 1,491 7.69
Bonds-match funded agreements............. 138,177 3,356 9.72 -- -- --
Obligations outstanding under lines of
credit.................................. 179,230 3,471 7.75 229,564 3,724 6.49
Notes, debentures and other............... 298,591 9,244 12.38 225,000 6,755 12.01
----------- ----------- ---------- -----------
Total interest-bearing liabilities..... 2,368,936 43,396 7.33 2,341,544 38,798 6.63
----------- -----------
Non-interest bearing deposits............. 9,544 21,292
Escrow deposits........................... 209,629 202,357
Excess of net assets acquired
over purchase price..................... 55,961 --
Other liabilities......................... 126,915 28,687
----------- ----------
Total liabilities...................... 2,770,985 2,593,880
Capital securities........................ 110,000 125,000
Stockholders' equity...................... 501,631 439,675
----------- ----------
Total liabilities and stockholders'
equity............................... $ 3,382,616 $3,158,555
=========== ==========
Net interest income....................... $ 4,694 $ 26,736
=========== ===========
Net interest spread....................... 1.84% 4.94%
Net interest margin....................... 0.89% 4.72%
Ratio of interest-earning assets
to interest-bearing liabilities........ 89% 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.
20
<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
three months 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>
2000 vs. 1999
----------------------------------------------------
Increase (Decrease) Due To
----------------------------------------------------
For the three months ended March 31, Rate Volume Total
- ----------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold and repurchase agreements............... $ 525 $ (2,212) $ (1,687)
Securities available for sale.............................. (8,387) 4,067 (4,320)
Loans available for sale................................... (2,464) (4,859) (7,323)
Investment securities and other............................ (214) (110) (324)
Loan portfolio............................................. (763) (1,434) (2,197)
Match funded loans and securities.......................... 3,311 -- 3,311
Discount loan portfolio.................................... (4,125) (779) (4,904)
------------- ------------- -------------
Total interest-earning assets........................... (12,117) (5,327) (17,444)
------------- ------------- -------------
Interest-Bearing Liabilities:
Interest-bearing demand deposits........................... 131 (593) (462)
Savings deposits........................................... 2 (1) 1
Certificates of deposit.................................... 876 (2,558) (1,682)
------------- ------------- -------------
Total interest-bearing deposits......................... 1,009 (3,152) (2,143)
Securities sold under agreements to repurchase............. (302) 1,451 1,149
Bonds-match funded agreements.............................. 3,356 -- 3,356
Obligations outstanding under lines of credit.............. 648 (901) (253)
Notes, debentures and other interest-bearing obligations... 217 2,272 2,489
------------- ------------- -------------
Total interest-bearing liabilities.................... 4,928 (330) 4,598
------------- ------------- -------------
Decrease in net interest income............................ $ (17,045) $ (4,997) $ (22,042)
============= ============= =============
</TABLE>
The Company's net interest income before provision for loan losses of
$4,694 decreased $22,042 or 82% during the first quarter of 2000 as compared to
the same period in the prior year. The decrease was primarily due to a decrease
in average interest-earning assets and a decrease in the net interest spread.
Average interest-earning assets decreased by $166,135 or 7% during the three
months ended March 31, 2000 and reduced interest income by $5,237. The impact of
volume changes resulted in a $4,997 decrease in net interest income. The net
interest spread decreased 310 basis points during the three months ended March
31, 2000 as a result of a 240 basis-point decrease in the weighted average rate
on interest-earning assets and a 70 basis-point increase in the weighted average
rate on interest-bearing liabilities. The impact of these rate changes resulted
in a $17,344 decrease in net interest income. The net interest spread related to
Ocwen UK for the first quarter of 1999 was 11.55%.
<TABLE>
<CAPTION>
Average Balance Increase Average Yield Increase
--------------------------- (Decrease) -------------------------- (Decrease)
For the three months ended March 31, 2000 1999 $ 2000 1999 Basis Points
- ------------------------------------ ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and repurchase
agreements........................ $ 121,953 $ 285,701 $ (163,748) 5.61% 4.75% 86
Securities available for sale....... 655,283 510,013 145,270 7.86 13.48 (562)
Loans available for sale (1)........ 44,493 259,905 (215,412) 7.26 12.51 (525)
Investment securities and other..... 28,995 35,957 (6,962) 4.51 7.24 (273)
Loan portfolio...................... 161,898 217,364 (55,466) 9.80 11.35 (155)
Match funded loans and securities... 155,574 -- 155,574 8.51 -- 851
Discount loan portfolio............. 930,632 956,023 (25,391) 10.79 12.56 (177)
----------- ----------- -----------
$ 2,098,828 $ 2,264,963 $ (166,135) 9.17% 11.57% (240)
=========== =========== ===========
</TABLE>
(1) Includes an average balance of $147,814 with an average yield earned of
18.24% for the first quarter of 1999 related to Ocwen UK.
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Interest income on federal funds sold and repurchase agreements
declined $1,687 or 50% primarily due to a $163,748 or 57% decline in the average
balance.
Interest income on securities available for sale decreased $4,320 or
25% during the three months ended March 31, 2000 as compared to the same period
in 1999 as a result of a 562 basis-point decrease in the weighted average yield
earned, offset by a $145,270 or 28% increase in the average balance. As
indicated in the table below, the decrease in the weighted average yield during
the three months ended March 31, 2000 is due in large part to changes in the
composition of the securities available for sale portfolio.
<TABLE>
<CAPTION>
Average Balance Average Yield
----------------------------------------------- ---------------------
For the three months ended March 31, 2000 1999 2000 1999
- ---------------------------------------------- ---------------------- --------------------- --------- --------
Amount Percent Amount Percent
--------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
CMOs (AAA-rated) (1).......................... $ 489,503 74.70% $ 291,199 57.10% 6.25% 5.91%
Subordinates and residuals (2)................ 165,780 25.30 218,814 42.90 12.60 23.56
--------- --------- --------- --------
$ 655,283 100.00% $ 510,013 100.00% 7.86% 13.48%
========= ========= ========= ========
</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 $70,143 with an average yield earned of
29.37% for the first quarter of 1999 related to Ocwen UK.
Interest income on loans available for sale decreased $7,323 or 90%
during 2000 as compared to the same period in 1999 as a result of a $215,412 or
83% decrease in the average balance and a 525 basis-point decline in the average
yield. The decrease in the average balance reflects the closure of the domestic
subprime origination business, as well as the sale of Ocwen UK. See "Changes in
Financial Condition - Loans Available for Sale."
Interest income on the loan portfolio decreased by $2,197 or 36% during
the three months ended March 31, 2000 versus the same period in 1999 due to a
$55,466 or 26% decrease in the average balance and a 155 basis-point decrease in
the average yield. The decrease in the average balance was due to the repayment
of multi-family residential and commercial real estate loans. 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 such loans. Such
additional interest amounted to $15 and $780 during the first quarter of 2000
and 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".
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Interest income on discount loans decreased by $4,904 or 16% during the
three months ended March 31, 2000 primarily as a result of a 177 basis-point
decrease in the average yield and a $25,391 or 3% decline in the average
balance. 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.
<TABLE>
<CAPTION>
Average Balance Increase Average Rate Increase
------------------------- (Decrease) --------------------- (Decrease)
For the three months ended March 31, 2000 1999 $ 2000 1999 Basis Points
- -------------------------------------------------- ----------- ----------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits......................... $ 1,586,379 $ 1,809,423 $ (223,044) 6.22% 5.93% 29
Securities sold under agreements to repurchase (1) 166,559 77,557 89,002 6.34 7.69 (135)
Bonds-match funded agreements..................... 138,177 -- 138,177 9.72 -- 972
Obligations outstanding under lines of credit (2). 179,230 229,564 (50,334) 7.75 6.49 126
Notes, debentures and other....................... 298,591 225,000 73,591 12.38 12.01 37
----------- ----------- -----------
$ 2,368,936 $ 2,341,544 $ 27,392 7.33% 6.63% 70
=========== =========== ===========
</TABLE>
(1) Includes an average balance of $27,849 with an average yield of 8.44%
for the first quarter of 1999 related to Ocwen UK.
(2) Includes an average balance of $143,855 with an average yield of 6.33%
for the first quarter of 1999 related to Ocwen UK.
Interest expense on interest-bearing deposits decreased $2,143 or 8%
during the three months ended March 31, 2000 due to a $223,044 or 12% decrease
in the average balance, offset by a 29-basis point increase in the average rate.
The decline in the average balance was primarily related to certificates of
deposit.
Interest expense on securities sold under agreements to repurchase
increased $1,149 or 77% due to an $89,002 or 115% increase in the average
balance, offset by a 135 basis-point decline in the average rate. 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
decreased $253 or 7% during the three months ended March 31, 2000 as compared to
the same period in 1999 due to a $50,334 or 22% decrease in the average balance
offset by an 126 basis-point increase in the weighted average interest rate. For
the first quarter of 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 decrease in the average balance reflects the 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 $2,489 or 37%
during the three months ended March 31, 2000 due to a $73,591 increase in the
average balance and a 37 basis-point increase in the weighted average interest
rate. The increase in the average balance is primarily due to the assumption of
$140,487 of 11.5% 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.
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table presents the provisions for loan losses by the
discount loan, loan portfolio and match funded loans for the three months
indicated.
For the three months ended March 31, 2000 1999
--------------------------------------------- ---------- ----------
Discount loan................................ $ 2,732 $ 4,689
Loan portfolio............................... (155) (950)
Match funded loans........................... 31 --
---------- ----------
$ 2,608 $ 3,739
========== ==========
The decline in the provision for losses on the discount loan portfolio
reflects the Company's strengthening of its allowance for loan losses through
the reallocation of allowance from real estate owned during the first quarter of
1999. The negative provisions for loan losses in the loan portfolio reflect a
continuing decline in the gross loan portfolio. See "Changes in Financial
Condition - Loan Portfolio, Net," "Match Funded Loans and Securities" and
"Discount Loan Portfolio." The following table sets forth the allowance for loan
losses as a percentage of the respective loan balances at the dates indicated.
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
-------------------------------------- --------------------------------------
Loan Allowance Loan Allowance
Allowance Balance as a % Allowance Balance as a %
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Discount Loans.................. $ 20,189 $ 862,367 2.34% $ 23,868 $ 917,048 2.60%
Loan portfolio.................. 7,104 163,223 4.35 3,970 181,481 2.19
Match funded loans.............. 526 99,998 0.53 -- -- --
---------- ---------- ---------- ----------
$ 27,819 $1,125,588 2.47% $ 27,838 $1,098,529 2.53%
========== ========== ========== ==========
</TABLE>
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."
NON-INTEREST INCOME. Non-interest income decreased $20,184 or 44%
during the three months ended March 31, 2000. The following table sets forth the
principal components of the Company's non-interest income during the three
months indicated.
<TABLE>
<CAPTION>
For the three months ended March 31, 2000 1999
------------------------------------------------------------------ --------- ---------
<S> <C> <C>
Servicing fees and other charges.................................. $ 20,668 $ 18,251
Gain on interest-earning assets, net.............................. 10,994 20,225
Impairment charges on securities available for sale............... (6,833) (83)
(Loss) gain on real estate owned, net............................. (7,007) 629
Amorization of excess of net assets acquired over purchase price.. 2,794 --
Other income...................................................... 4,775 6,553
--------- ---------
Total............................................................. $ 25,391 $ 45,575
========= =========
</TABLE>
The increases in servicing fees and other charges reflect an increase
in loan servicing and related fees as a result of increases in the average
balance of loans serviced for others. The average unpaid principal balance of
loans serviced for others amounted to $10,787,325 and $10,439,310, during the
three months ended March 31, 2000 and 1999, respectively. The increases in the
average balance of loans serviced for others was primarily related to the
acquisition of servicing, net of repayments. Servicing fees for the three months
ended March 31, 2000 and 1999 included $3,790 and $2,407, respectively, of
special servicing fees. The Company began entering into special servicing
arrangements in 1998 wherein the Company has acted 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.
24
<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 Company's loans serviced for others
at March 31, 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.................. $ 999,749 16,240 $ 995,348 9,940 $ -- -- $ 1,995,097 26,180
Loans serviced for third parties... 907,780 15,600 6,895,712 85,882 933,499 573 8,736,991 102,055
---------- --------- ---------- --------- ---------- --------- ----------- ---------
$1,907,529 31,840 $7,891,060 95,822 $ 933,499 573 $10,732,088 128,235
========== ========= ========== ========= ========== ========= =========== =========
</TABLE>
Net gains on interest-earning assets for the three months ended March
31, 2000 of $10,994 were primarily comprised of a $7,794 gain recognized in
connection with the sale of 845 single family residential discount loans with an
unpaid principal balance of $70,631 and a gain of $2,768 on the sale of a
commercial subordinate security.
Net gains on interest-earning assets in the three months ended March
31, 1999 of $20,225 were primarily comprised of $16,616 of net gains recognized
in connection with the securitization of single family discount loans and
domestic single family subprime loans, as presented in the table below, $4,394
of gains on sales of commercial subordinate securities and $1,184 of gains on
sales of commercial discount loans.
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 three months ended March 31, 2000. The
following table sets forth the Company's net gains recognized in connection with
the securitization of loans during the three months ended March 31, 1999.
<TABLE>
<CAPTION>
Book Value of
Loans Securitized Securities
- ----------------------------------------------------------------------------- Retained
Types of Loans Principal No. of Loans Net Gain (Non-Cash Gain) Cash Gain
- --------------------------------------------- ----------- ------------ ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
For the three months ended March 31, 1999:
- ------------------------------------------
Single family discount(1).................... $ 137,266 1,694 $ 13,899 $ 1,907 $ 11,992
Domestic single family subprime.............. 86,944 811 2,717 4,432 --
----------- ----------- ----------- ----------- -----------
$ 224,210 2,505 $ 16,616 $ 6,339 $ 11,992
=========== =========== =========== =========== ===========
</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 three months indicated.
For the three months ended March 31, 2000 1999
- ------------------------------------------------- --------- ---------
Gains on sales................................... $ 4,556 $ 9,202
Provision for losses in fair value............... (9,212) (5,061)
Carrying costs, net.............................. (2,351) (3,512)
--------- ---------
(Loss) income on real estate owned, net.......... $ (7,007) $ 629
========= =========
See "Changes in Financial Condition - Real Estate Owned" for additional
information regarding real estate owned.
Amortization of excess of net assets acquired over a purchase price of
$2,794 for the first quarter of 2000 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
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
unamortized balance of the excess of net assets acquired over purchase price at
March 31, 2000 was $54,041, as compared to $56,841 at December 31, 1999.
Other income for the three months ended March 31, 2000 was primarily
comprised of $3,497 of property valuation service fees earned by Ocwen Realty
Advisors ("ORA"). Other income for the three months ended March 31, 1999 was
primarily comprised of $3,689 of brokerage commissions earned in connection with
Ocwen UK loan originations and $1,524 of management fees earned from OAC.
NON-INTEREST EXPENSE. Non-interest expense decreased $19,602 or 38%
during the three months ended March 31, 2000 as compared to the three months
ended March 31, 1999. The decrease was due in 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 expense 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 three months indicated.
<TABLE>
<CAPTION>
For the three months ended March 31, 2000 1999
- ---------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Compensation and employee benefits.............................. $ 16,583 $ 27,211
Occupancy and equipment......................................... 3,263 5,766
Technology and communication costs.............................. 5,281 5,744
Loan expenses................................................... 3,930 4,128
Net operating (gains) losses on investment in real estate and
certain low-income housing tax credit interests.............. (4,054) 1,848
Amortization of excess of purchase price over net assets
acquired..................................................... 773 230
Other operating expenses........................................ 6,745 7,196
---------- ----------
Total........................................................ $ 32,521 $ 52,123
========== ==========
</TABLE>
Compensation and employee benefits decreased during the first quarter
of 2000 due in part to a decrease in the average number of full-time equivalent
employees from 1,620 during the three months ended March 31, 1999 to 1,284 the
three months ended March 31, 2000. The decrease in the average number of
full-time equivalent employees reflects the sale of Ocwen UK and the closing of
the domestic subprime lending operations. Compensation and employee benefit
expense for the first quarter of 1999 included $5,149 related to Ocwen UK. Also
contributing to the decline in compensation and employee benefits is 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.
The decrease in occupancy and equipment costs of $2,503 during the
first quarter of 2000 was primarily due to a $1,113 decrease in rent expense and
a $502 decrease in general office operating expenses. Occupancy and equipment
expense for the first quarter of 1999 included $1,420 related to Ocwen UK.
Technology and communication costs consists primarily of depreciation
expense on computer hardware and software, technology-related consulting fees
(primarily OTX) and telephone expense.
Loan expenses for the first quarter of 1999 included $1,308 and $980
related to Ocwen UK and OFS, respectively. Excluding these amounts, loan
expenses increased $2,090 in the first quarter of 2000, primarily due to a
$1,856 increase in appraisal fees in connection with property valuation services
provided by ORA.
Net operating gains on investments in real estate and certain
low-income housing tax credits during the three months ended March 31, 2000
includes $3,764 of operating income from investments in real estate acquired as
a result of the OAC acquisition in October 1999. The first quarter of 2000 also
includes $1,761 of equity in earnings related to certain loans which are
accounted for as investments in real estate. See "Changes in Financial Condition
- - Investments in Real Estate."
Other operating expenses are primarily comprised of professional fees,
marketing costs and travel costs. Other operating expenses for the first quarter
of 1999 included $1,242 related to Ocwen UK.
26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
DISTRIBUTIONS ON COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE
COMPANY. In August 1997, Ocwen Capital Trust I ("OCT"), a wholly-owned
subsidiary of the Company, issued $125.0 million of 10-7/8% Capital Securities,
of which $15.0 million were repurchased during the fourth quarter of 1999. Cash
distributions on the Capital Securities accrue from the date of original
issuance and are payable semi-annually in arrears on February 1 and August 1 of
each year, commencing on February 1, 1998, at an annual rate of 10-7/8% of the
liquidation amount of $1,000 per Capital Security. The Company recorded $3,194
and $3,399 of distributions to holders of the Capital Securities during the
three months ended March 31, 2000 and 1999, respectively. See Note 3 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
first quarter of 2000, the Company recorded equity in the losses of investments
in unconsolidated entities of $2,260, as compared to losses of $1,245 for the
first quarter of 1999. The increased losses are primarily related to the
Company's investment in Kensington.
During the first quarter of 2000 and 1999, the Company recorded equity
in losses of Kensington of $2,334 and $1,142, respectively, including goodwill
amortization. At March 31, 2000, the Company owned 35.84% of the total
outstanding common stock of Kensington, an originator of non-conforming
residential mortgages in the U.K.
Equity in the losses of investments in unconsolidated entities for the
first quarter of 1999 included the Company's equity in the losses of its
investments in OAC and OPLP of $218. 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
$3,255 and ($2,368) during the three months ended March 31, 2000 and 1999,
respectively. The Company's effective tax rate was 31% and 19.8% during the
three months ended March 31, 2000 and 1999, respectively. The Company's
effective tax rates reflect tax credits resulting from the Company's investment
in low-income housing tax credit interests of $3,715 and $4,464 during the three
months ended March 31, 2000 and 1999, respectively. See "Changes in Financial
Condition - Investments in Low-Income Housing Tax Credit Interests."
CHANGES IN FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE. At March 31, 2000, securities available
for sale amounted to $838,446 as compared to $587,518 at December 31, 1999, an
increase of $250,928 or 43%. Securities available for sale are carried at fair
value with unrealized gains or losses reported as a separate component of
accumulated other comprehensive income in stockholders' equity, net of taxes.
Unrealized losses on securities that reflect a decline in value which is other
than temporary are charged to earnings. At March 31, 2000, securities available
for sale included an aggregate of $1,496 of unrealized losses ($6,264 of gross
losses and $4,768 of gross gains), as compared to $1,036 of unrealized gains
($6,967 of gross gains and $5,931 of gross losses), at December 31, 1999.
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 sets forth the fair value of the Company's securities
available for sale at the dates indicated.
<TABLE>
<CAPTION>
Increase (Decrease)
March 31, December 31, -----------------------------
2000 1999 Dollars Percent
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Mortgage-related securities:
Single family residential:
Collateralized mortgage obligations (AAA-rated)....... $ 700,195 $ 392,387 $ 307,808 78%
BB-rated subordinates................................. 5,149 5,908 (759) (13)
B-rated subordinates.................................. 5,179 6,098 (919) (15)
Unrated subordinates ................................. 13,564 17,287 (3,723) (22)
Unrated subprime residuals ........................... 111,157 124,087 (12,930) (10)
------------ ------------ ------------
835,244 545,767 289,477 53
------------ ------------ ------------
Multi-family residential and commercial:
BB-rated subordinates................................. -- 38,234 (38,234) (100)
Unrated subordinates.................................. 3,188 3,503 (315) (9)
Unrated interest only................................. 14 14 -- --
------------ ------------ ------------
3,202 41,751 (38,549) (92)
------------ ------------ ------------
Total............................................ $ 838,446 $ 587,518 $ 250,928 43
============ ============ ============
</TABLE>
The increase in securities available for sale during the three months
ended March 31, 2000 was due primarily to $449,954 of purchases and $17,362 of
net premium accretion offset by $106,099 of maturities and principal repayments,
$83,163 of sales, $21,081 of principal shortfalls and $6,833 of impairment
charges on certain subordinates and residual securities.
At March 31, 2000, the fair value of the Company's investment in
subordinate and residual interests amounted to $138,237 ($138,542 amortized
cost) or 16% of total securities available for sale and supported senior classes
of securities.
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% and 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 10% - 45%). During 1999, the Company estimated annual losses
of between 0.60% and 7.00% 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
28
<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 first quarter of 2000, the Company recorded $6,833 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."
29
<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 securities available for sale
portfolio at March 31, 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 PROSPECTIVE
- -------------- CLASS SIZE NATION/OC MATURITY AT YIELD TO
SINGLE-FAMILY ISSUE RATING ---------- INTEREST LEVEL AT: ----------- MATURITY AT:
RESIDENTIAL SECURITY DATE RATING AGENCIES ISSUANCE 3/31/00 PERCENTAGE 3/31/00 PURCHASE 3/31/00 3/31/00
-------- ----- ------ -------- -------- ------- ---------- -------- -------- ------- ------------
Subordinates:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BCF 1996 R1(5)........ B3 Oct-96 UR (a), (b) $70,773 $40,400 50.00% None 15.70% 8.37% 31.84%
BCF 1997 R1(5)........ B4 Mar-97 UR (b), (c) 21,784 5,629 49.71 None 13.46 (37.67) 41.76
BCF 1997 R2 (5)....... B4 Jun-97 Ba2, BB (b), (c) 6,358 5,663 73.54 7.49% 9.58 9.27 43.46
B5 B2,B 6,264 5,581 73.54 3.65 10.74 9.58 145.27
B6 UR 13,883 5,302 73.54 None 15.98 3.83 N/A
BCF 1997 R3 (5)....... B4 Dec-97 UR (b), (d) 69,582 31,464 50.24 None 15.84 (34.76) 66.32
ORMBS 1998 R1 (6)..... B4 Mar-98 UR (b), (d) 101,774 66,841 50.34 None 20.50 (31.55) 13.31
ORMBS 1998 R2 (6)..... B4A Jun-98 Ba2 (b) 1,056 970 100.00 6.18 13.22 (6.49) 62.22
B4F Ba2 937 880 100.00 6.05 19.23 (8.63) 28.99
B5A B2 880 839 100.00 4.43 23.78 (2.10) 116.20
B5F B2 937 880 100.00 3.74 11.78 (11.12) 31.98
B6A UR 3,696 2,114 100.00 None 16.72 18.31 427.67
B6F UR 3,345 1,419 100.00 None 19.50 (20.14) 39.39
ORMBS 1998 R3 (6)..... B4 Sep-98 Ba2, BB (b), (d) 11,765 11,444 85.87 8.79 11.71 (32.52) 24.85
B5 B2, B 9,151 8,901 85.87 4.76 16.54 (29.77) 100.78
B6 UR 26,145 10,529 85.87 None 18.00 (22.54) 415.03
ORMBS 1999 RI (6).... B5A Mar-99 B2, B (b), (d) 1,630 1,540 100.00 5.47 17.73 27.25 17.77
B5F B2, B 1,843 1,647 100.00 5.41 17.74 30.94 28.04
B6A UR 3,586 2,890 100.00 None 18.00 56.50 45.40
B6F UR 4,299 3,630 100.00 None 18.00 83.91 118.16
ORMBS 1999 R2 (6) .... B4 Jun-99 BB (a),(c),(d) 10,530 10,292 100.00 9.35 13.45 27.02 25.16
B5 B 4,680 4,581 100.00 5.03 18.45 61.44 98.05
B6 UR 7,020 5,325 100.00 None 18.00 147.53 521.80
CSFB 1996-1R
(ITT 94-P1) (7)....... 4B2 Oct-96 UR (b), (c) 1,046 153 100.00 None N/A N/A N/A
Subprime residuals:
SBMS 1996 3 (1)....... R Jun-96 UR (a), (b) 130,062 29,825 100.00 17.47 15.52 1.80 21.26
MLM1 1996 1 (2)....... R Sep-96 UR (a), (b) 81,142 17,632 100.00 27.39 15.16 3.04 23.27
MS 1997 1 (3)......... X1 Jun-97 UR (a), (b) 17,727 10,510 100.00 5.92 21.47 18.12 25.82
X2 87,118 20,293 15.21 20.38 1.32 16.18
1997 OFS 2 (4)........ X Sep-97 UR (a), (b) 102,201 31,801 100.00 10.08 19.65 2.79 20.04
1997 OFS 3 (4)........ X Dec-97 UR (a), (b) 208,784 84,429 100.00 10.82 19.59 8.41 28.24
1998 OFS 1 (4)........ X Mar-98 UR (b), (d) 161,400 74,886 100.00 3.72 18.00 4.24 14.43
1998 OFS 2 (4)........ X Jun-98 UR (a), (b) 382,715 175,274 100.00 7.91 19.46 1.41 15.85
1998 OFS 3 (4)........ X Sep-98 UR (a), (d) 261,649 177,247 100.00 4.45 18.00 6.71 15.46
1998 OFS 4 (4)........ X Dec-98 UR (a), (b), (c) 349,000 277,269 100.00 3.86 18.00 4.98 19.91
1999 OFS 1 (4) ....... X Jun-99 UR (a), (b) 148,628 134,800 100.00 4.75 18.00 14.09 15.18
SASCO 1998-2(11)...... X Jan-98 UR (a), (c) 600,052 238,959 100.00 2.20 16.00 0.95 15.94
SASCO 1998-3(11)...... X Mar-98 UR (a), (c) 769,671 312,843 100.00 4.31 17.04 1.94 15.61
MLMI 1998-FF 1(2)..... X Jun-98 UR (a), (c) 198,155 71,328 100.00 4.17 18.57 6.18 9.72
PANAM 1997-1(12)...... X Dec-97 UR (a), (b) 113,544 42,368 100.00 8.02 22.45 1.66 14.98
Prepay UR 25.69 7.64 (2.46)
Pen
LHELT 1998-2 (13)..... X Jun-98 UR (b), (c) 209,225 111,641 100.00 18.55 14.84 38.81
</TABLE>
30
<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 PROSPECTIVE
- -------------- CLASS SIZE NATION/OC MATURITY AT YIELD TO
SINGLE-FAMILY ISSUE RATING ---------- INTEREST LEVEL AT: ----------- MATURITY AT:
RESIDENTIAL SECURITY DATE RATING AGENCIES ISSUANCE 3/31/00 PERCENTAGE 3/31/00 PURCHASE 3/31/00 3/31/00
-------- ----- ------ -------- -------- ------- ---------- -------- -------- ------- ------------
Subordinates:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EQUICON 1994-2 (14). B Fix Oct-94 UR (a), (b), (c) $78,846 $17,809 100.00% 6.32 18.00% 103.70% 29.69%
B Var UR 32,306 3,475 100.00 30.21 18.00 35.05 28.38
B-2
EQUICON 1995-1 (14). B Fix, May-95 UR (a), (b), (c) 70,024 12,787 100.00 10.68 18.00 30.70 --
B Var UR 40,519 5,489 100.00 12.64 18.00 100.12 --
EQUICON 1995-2 (14). B Fix Oct-95 UR (a), (b) 79,288 18,105 100.00 13.59 18.00 33.35 163.45
B Var UR 39,667 5,065 100.00 16.71 18.00 86.31 100.04
ACCESS 1996-1 (15).. B.Fix, Feb-96 UR (a), (b) 120,015 30,133 100.00 7.28 18.00 28.12 143.39
B Var UR 55,362 8,164 100.00 17.26 18.00 29.38 68.80
ACCESS 1996-2 (15).. B-I,BI-S May-96 UR (a), (b) 142,259 37,646 100.00 12.52 18.00 17.59 40.59
B-II UR 68,345 9,790 100.00 14.44 18.00 16.35 55.49
BII-S
ACCESS 1996-3 (15).. B-I, Aug-96 UR (a), (b) 107,712 29,154 100.00 16.02 18.00 10.61 53.79
BI-S
B-II UR 99,885 14,781 100.00 21.86 18.00 16.02 84.00
BII-S
ACCESS 1996-4 (15).. B, B-2 Nov-96 UR (a), (b) 239,778 50,549 100.00 25.98 18.00 11.16 21.03
ACCESS 1997-1 (15).. B, B-S Feb-97 UR (a), (b) 276,442 75,867 100.00 26.55 18.00 11.05 27.61
ACCESS 1997-2 (15).. B, B-S May-97 UR (a), (b) 185,197 51,880 100.00 18.43 18.00 4.82 19.72
ACCESS 1997-3 (15).. B, B-S Oct-97 UR (a), (b) 199,884 61,317 100.00 13.12 18.00 12.21 33.91
OCWEN 98 - OAC 1 N/A Nov-98 UR (a), (b) 182,178 106,362 100.00 11.70 N/A N/A N/A
(16)................
CMR1 (17)........... Deferred Apr-96 UR (a), (e) 47,802(9) 19,180(19) 100.00 11.34 19.80 21.17 21.46
Comp
CMR2 (17)........... Deferred Nov-96 UR (a), (c), (e) 106,692(18) 41,120(19) 100.00 12.28 18.00 27.60 26.83
Comp
CMR3 (17)........... Deferred Nov-96 UR (a), (c), (e) 195,610(18) 79,196(19) 100.00 16.81 18.00 35.42 36.97
Comp
CMR4 (17)........... Deferred Feb-97 UR (a), (c), (e) 108,630(18) 49,803(19) 100.00 8.65 18.00 27.26 27.74
Comp
CMR6 (17)........... Deferred May-97 UR (a), (c), (e) 91,442(18) 41,745(19) 100.00 8.88 18.00 27.39 27.38
Comp
MULTI-FAMILY
RESIDENTIAL
Subordinates:
SBMS 1997-HUD1 (20) B5 Apr-97 B2, n.a. (b), (d) 9,785 9,271 100.00 1.48 16.87 4.09 17.69
B6 Apr-97 UR 16,998 2,702 100.00 None 22.86 (9.53) 44.26
ORMBS 1998-R1 (21) B4 Mar-98 UR (b), (d) 101,774 66,841 32.15 None 13.75 (24.49) 17.80
GECMS 1994-12 (22) B4 Mar-94 UR (a), (b), (c) 2,069 1,349 100.00 None 19.37 21.09 69.14
</TABLE>
<TABLE>
<CAPTION>
ISSUERS:
<S> <C> <C>
(1) Salomon Brothers Mortgage Securities VII (14) Equicon Mortgage Loan Trust Rating Agencies:
(2) Merrill Lynch Mortgage Investors, Inc. (15) Access Financial Mortgage Loan Trust (a) S&P
(3) Morgan Stanley ABS Capital I, Inc. (16) Ocwen Residential Mortgage-Backed Securities (b) Moody's
(4) Ocwen Mortgage Loan Asset Backed Certificates (17) City Mortgage Receivable (c) Fitch
(5) BlackRock Capital Finance L.P. (18) Dollar equivalent of amounts in British (d) DCR
(6) Ocwen Residential MBS Corporation pounds at the rate of exchange that (e) Duff
(7) Ocwen Mortgage Loans prevailed at the time of Issuance.
(8) Credit Suisse First Boston (ITT Federal Bank, FSB) (19) Dollar equivalent of amounts in British Other:
(9) Federal National Mortgage Association pounds at the rate of exchange at 12/31/99 N/A - Not Available
(10) Berkley Federal Bank & Trust (20) Salomon Brothers Mortgage Securities
(11) Structured Asset Securities Corp. (21) Ocwen Mortgage Loan Trust. RF - Reserve funds are
(12) Pan American Bank, FSB (22) GE Capital Mortgage Services, Inc. actual cash reserves
(13) Lehman Home Equity Loan Trust
</TABLE>
31
<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) 3/31/00 AT 3/31/00 3/31/00 3/31/00 3/31/00 3/31/00 ISSUANCE 3/31/00
- ------------------------- --------- ---------- ----------- ----------- ----------- --------------- -------- -------
SINGLE-FAMILY RESIDENTIAL
Subordinates:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BCF 1996 R1 (5)......... 10.04% 103.34% 11.07% 13.85% $ 26,680 98% Fixed, 2% ARM $505,513 $276,219
BCF 1997 R1 (5)......... 10.07 109.78 21.03 13.87 15,372 97% Fixed, 3% ARM 177,823 107,155
BCF 1997 R2 (5)......... 8.16 83.18 23.71 14.04 7,537 25% Fixed, 75% ARM 251,790 145,256
BCF 1997 R3 (5)......... 9.62 119.48 18.95 12.28 35,681 98% Fixed, 2% ARM 579,851 406,324
ORMBS 1998 R1 (6)....... 8.92 122.29 22.91 10.23 32,008 98% Fixed, 2% ARM 565,411 450,712
ORMBS 1998 R2 (6)....... 9.02 86.62 24.74 15.51 3,185 44% Fixed, 56% ARM 123,917 85,745
ORMBS 1998 R3 (6)....... 8.95 127.23 34.68 10.25 14,906 99% Fixed, 1% ARM 261,452 221,063
ORMBS 1999 R1 (6)....... 9.08 85.65 26.76 13.97 634 57% Fixed, 43% ARM 147,101 119,866
ORMBS 1999 R2 (6)....... 9.37 113.38 26.55 9.53 1,573 100% Fixed 117,004 105,906
CSFB 1996 1R
(ITT 94-P1) (7) ........ 7.26 N/A 0.00 N/A 156 100% 1-Year CMT 32,487 4,992
Subprime residuals:
SBMS 1996 3 (1)......... 11.15 67.93 20.50 32.07 3,499 61% Fixed, 39% ARM 130,062 29,825
MLM1 1996 1 (2)......... 11.69 73.34 26.50 34.96 2,193 36% Fixed, 64% ARM 81,142 17,632
MS 1997 1 (3)........... 10.54 76.01 17.48 35.56 2,055 17,727 10,510
11.85 73.88 34% Fixed, 66% ARM 87,118 20,293
1997 OFS 2 (4).......... 11.50 78.81 16.28 36.93 2,436 23% Fixed, 77% ARM 102,201 31,801
1997 OFS 3 (4).......... 10.95 80.33 24.86 32.72 3,905 21% Fixed, 79% ARM 208,784 84,429
1998 OFS 1 (4).......... 11.15 79.75 22.47 31.56 3,483 17% Fixed, 83% ARM 161,400 74,886
1998 OFS 2 (4).......... 11.11 77.11 18.13 35.50 5,962 43% Fixed, 57% ARM 382,715 175,274
1998 OFS 3 (4).......... 10.39 78.64 22.73 22.41 3,238 31% Fixed, 69% ARM 261,649 177,247
1998 OFS 4 (4).......... 10.45 79.11 24.90 15.78 3,122 43% Fixed, 57% ARM 349,000 277,269
1999 OFS 1 (4).......... 9.86 76.71 15.58 11.58 119 66% Fixed, 34% ARM 146,628 134,800
SASCO 1998-2(11)........ 11.13 73.44 20.00 34.19 6,573 34% Fixed, 66% ARM 600,052 238,959
SASCO 1998-3(11)........ 11.11 75.34 17.36 35.85 5,664 14% Fixed, 86% ARM 769,671 312,843
MLMI 1998-FF 1(2)....... 11.14 77.47 18.08 42.34 411 100% ARM 198,155 71,328
PANAM 1997-1(12)........ 11.17 85.02 22.46 35.46 4,441 100% ARM 113,544 42,368
LHELT 1998-2 (13)....... 10.81 75.27 13.89 28.51 1,118 47% Fixed, 53% ARM 209,225 111,641
EQUICON 1994-2 (14)..... 9.94 90.35 20.99 32.08 1,361 100% Fixed 78,846 17,809
11.37 96.06 100% ARM 32,306 3,475
EQUICON 1995-1 (14)..... 11.99 84.63 34.71 30.50 2,708 100% Fixed 70,024 12,787
12.10 90.21 100% ARM 40,519 5,489
EQUICON 1995-2 (14)..... 10.77 87.55 33.38 34.38 2,559 100% Fixed 79,288 18,105
11.92 76.38 100% ARM 39,667 5,065
ACCESS 1996-1 (15)...... 10.81 79.89 31.50 32.58 3,683 100% Fixed 120,015 30,133
11.92 78.65 100% ARM 55,362 8,164
ACCESS 1996-2 (15)...... 10.96 75.25 30.83 34.39 4,719 100% Fixed 142,259 37,646
11.74 76.56 100% ARM 68,345 9,790
ACCESS 1996-3 (15)...... 11.44 76.72 38.15 36.99 3,996 100% Fixed 107,712 29,154
12.33 78.32 100% ARM 99,885 14,781
ACCESS 1996-4 (15)...... 12.01 76.95 38.04 39.33 5,227 53% Fixed, 47% ARM 239,778 50,549
ACCESS 1997-1 (15)...... 11.78 82.81 39.94 37.47 8,162 60% Fixed, 40% ARM 276,442 75,867
ACCESS 1997-2 (15)...... 11.57 81.56 36.63 39.67 4,059 56% Fixed, 44% ARM 185,197 51,880
ACCESS 1997-3 (15)...... 11.57 81.72 34.64 40.18 2,984 51% Fixed, 49% ARM 199,884 61,317
OCWEN 98 - OAC 1 (16)... 8.73 80.92 5.93 31.03 350 27% Fixed, 73% ARM 182,178 106,362
</TABLE>
32
<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) 3/31/00 AT 3/31/00 3/31/00 3/31/00 3/31/00 3/31/00 ISSUANCE 3/31/00
- ----------------------- ------- ---------- ------- ------- ------- ------- -------- -------
SINGLE-FAMILY RESIDENTIAL
Subordinates:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CMR1 (17)............... 13.37 N/A 38.12 22.60 814 100% Amortizing 47,802(9) 19,180(10)
CMR2 (17)............... 12.55 N/A 27.60 24.03 1,259 89.86% Amort 10.14% 106,692(9) 41,120(10)
IO mortgages
CMR3 (17)............... 13.49 N/A 16.39 20.45 2,917 62.25% Amort 27.75% 195,610(9) 79,196(10)
IO mortgages
CMR4 (17)............... 13.71 N/A 35.73 22.28 1,548 89.05% Amort 10.95% 108,630(9) 49,803(10)
IO mortgages
CMR6 (17)............... 13.58 N/A 34.48 24.42 1,063 95.61% Amort 4.39% 91,442(9) 41,745(10)
IO mortgages
MULTI-FAMILY RESIDENTIAL
Subordinates:
FNMA 1995 M2 (3) FNMA 9.57 1.35 -- 12.59 -- 100% Multi-family 216,797 116,413
1995-M2 (9)
SBMS 1997-HUD1 (20)..... 9.79 111.69 10.44 15.98 13,600 97% Fixed 326,147 182,499
ORMBS 1998-R1 (21)...... 8.92 122.29 22.91 10.23 32,008 98% Fixed 565,411 450,712
GECMS 1994-12 (22)..... 6.81 66.06 -- 8.70 -- 100% Fixed 516,732 211,487
</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 subordinated and residual securities available for sale at March
31, 2000.
<TABLE>
<CAPTION>
DESCRIPTION CALIFORNIA FLORIDA TEXAS NEW YORK UK OTHER (1) TOTAL
- ----------- ---------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Single family residential....... $ 640,287 $289,877 $284,015 $195,693 $200,311 $2,089,410 $3,699,593
Commercial...................... 45,102 21,716 4,226 25,206 -- 117,115 213,365
Multi-family ................... 1,026 -- -- 62 -- 1,626 2,714
--------- -------- -------- -------- -------- ---------- ----------
Total .......................... $ 686,415 $311,593 $288,241 $220,961 $200,311 $2,208,151 $3,915,672
========= ======== ======== ======== ======== ========== ==========
Percentage (2).................. 18% 8% 7% 6% 5% 56% 100%
======== ======== ======== ======== ======== ========== ==========
</TABLE>
(1) No other individual state makes up more than 4% 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 PROSPECTIVE
AMORTIZED PERCENT YIELD TO MATURITY REMAINING YIELD AT
RATING/DESCRIPTION COST FAIR VALUE OWNED MATURITY AT 3/31/00 (1) COUPON LIFE (2) 3/31/00
- ----------------------------- --------- ---------- ------- ----------- -------------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SINGLE-FAMILY RESIDENTIAL:
BB-rated subordinates.... $ 4,285 $ 5,149 87.26% 13.15% 0.82% 6.91% 2.97 32.31%
B-rated subordinates..... 4,468 5,179 93.81 16.84 8.16 7.44 2.46 47.43
Unrated subordinates..... 13,680 13,564 52.02 14.48 (8.70) 8.13 2.78 38.95
Unrated subprime 113,095 111,157 99.28 18.33 9.30 N/A 5.80 21.50
residuals..............
MULTI-FAMILY AND COMMERCIAL:
Unrated subordinates..... 3,188 3,188 100.00 22.15 15.47 0.00 2.98 14.21
Unrated interest only.... -- 14 N/A -- 47.53 -- N/A N/A
--------- ---------
$ 138,716 $ 138,251
========= =========
</TABLE>
(1) Changes in the March 31, 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 March 31, 2000 book
value.
33
<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>
Actual Life to Date CPR = 100 x [(1 - Final Aggregate Balance actual ) x ( 12 )]
[( ------------------------------------- ) (--------------- )]
[( 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 MARCH 31, 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).
34
<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 $8,370 or 19% during the first quarter of 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.
March 31, December 31,
2000 1999
------------ ------------
Single family residential loans...... $ 36,736 $ 45,084
Consumer loans....................... 107 129
------------ ------------
$ 36,843 $ 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 March 31, 2000:
Single family
Residential Consumer Total
----------- ------------ -----------
New Jersey................... $ 7,332 $ -- $ 7,332
Florida...................... 5,010 51 5,061
Illinois..................... 3,120 -- 3,120
New York..................... 3,013 -- 3,013
California................... 2,385 -- 2,385
Other (1).................... 15,876 56 15,932
----------- ------------ -----------
Total........................ $ 36,736 $ 107 $ 36,843
=========== ============ ===========
(1) Consists of properties located in 35 other states, none of which
aggregated over $2,303 in any one state.
35
<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 three
months indicated:
For the three months ended March 31, 2000 1999
- ------------------------------------------------------ --------- ---------
Balance at beginning of period ....................... $ 45,213 $ 177,847
Purchases:
Single family residential ......................... -- 14,663
Originations:
Single family residential (1) ..................... -- 298,803
Sales (2) ........................................... (2,961) (101,465)
Decrease (increase) in lower of cost or market
valuation allowance .................................. 42 (645)
Principal repayments, net of capitalized interest .... (2,322) (10,290)
Transfer to real estate owned ........................ (3,129) (4,819)
--------- ---------
Net (decrease) increase in loans .................. (8,370) 196,247
--------- ---------
Balance at end of period ............................. $ 36,843 $ 374,094
========= =========
(1) Includes $140,525 originated by Ocwen UK during the first quarter of
1999.
(2) Includes the securitization of 811 domestic subprime single family
residential loans during the three months ended March 31, 1999 which
had an unpaid principal balance of $86,944. 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:
March 31, December 31,
2000 1999
----------- -----------
Non-performing loans:
Single family loans.................. $ 11,851 $ 15,319
Consumer loans....................... 4 1
----------- -----------
$ 11,855 $ 15,320
=========== ===========
Non-performing loans as a percentage of:
Total loans available for sale........ 32.18% 33.88%
Total assets.......................... 0.34% 0.46%
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.
36
<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.
March 31, December 31,
2000 1999
----------- -----------
Single family residential loans................ $ 3,418 $ 4,334
Multi-family residential loans:
Permanent.................................. 21,592 23,430
Construction............................... 67,781 57,936
----------- -----------
Total multi-family residential.......... 89,373 81,366
----------- -----------
Commercial real estate:
Hotels:
Construction............................ 38,635 38,645
Office buildings.......................... 58,071 64,745
Land...................................... 1,195 2,238
Other..................................... -- --
----------- -----------
Total commercial real estate............. 97,901 105,628
Consumer....................................... 68 82
----------- -----------
Total loans............................... 190,760 191,410
Undisbursed loan proceeds...................... (26,049) (24,654)
Unamortized deferred fees...................... (1,488) (2,089)
Allowance for loan losses...................... (7,104) (7,259)
----------- -----------
Loans, net................................ $ 156,119 $ 157,408
=========== ===========
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 March 31, 2000:
<TABLE>
<CAPTION>
Single Family Multi-family Commercial
Residential Residential Real Estate Consumer Total
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
New York................. $ 647 $ 41,222 $ 19,769 $ 30 $ 61,668
California............... 403 18,749 2,920 -- 22,072
Delaware................. 500 44 13,293 -- 13,837
Florida.................. 88 -- 12,780 -- 12,868
Massachusetts............ -- -- 10,218 -- 10,218
Other (1)................ 1,780 29,358 38,921 38 70,097
------------ ------------ ------------ ------------ ------------
Total.................... $ 3,418 $ 89,373 $ 97,901 $ 68 $ 190,760
============ ============ ============ ============ ============
</TABLE>
(1) Consists of properties located in 21 other states, none of which
aggregated over $9,251 in any one state.
37
<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 three months
indicated.
For the three months ended March 31, 2000 1999
- -------------------------------------------------- ---------- ----------
Balance at beginning of period.................... $ 191,410 $ 244,819
Originations:
Single family residential loans................ -- --
Multi-family residential loans................. -- 2,467
Commercial real estate loans................... 10,213 5,100
Commercial non-mortgage and consumer loans..... 970 --
---------- ----------
Total loans originated....................... 11,183 7,567
---------- ----------
Sales (1)......................................... (251) (28,880)
Principal repayments.............................. (11,308) (31,051)
Transfer to real estate owned..................... (274) (2,466)
---------- ----------
Net (decrease) increase in loans.................. (650) (54,830)
---------- ----------
Balance at end of period.......................... $ 190,760 $ 189,989
========== ==========
(1) Included in sales for the three months ended March 31, 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:
March 31, December 31,
2000 1999
---------- ----------
Non-performing loans:
Single family residential loans............... $ 544 $ 982
Multi-family residential loans (1)............ 9,555 11,037
Commercial real estate and other (2).......... 25,062 19,360
---------- ----------
Total...................................... $ 35,161 $ 31,379
========== ==========
Non-performing loans as a percentage of:
Total loans (3)............................... 21.54% 19.06%
Total assets.................................. 1.01% 0.95%
Allowance for loan losses as a percentage of:
Total loans (3)............................ 4.35% 4.41%
Non-performing loans....................... 20.20% 23.13%
(1) Non-performing multi-family residential loans at March 31, 2000 were
primarily attributable to 11 loans with an aggregate balance of $9,555,
all of which management believes are well collateralized.
(2) Non-performing commercial real estate loans at March 31, 2000 were
primarily attributable to 13 loans with an aggregate balance of
$25,062, all of which management believes are well collateralized
(3) Total loans is net of undisbursed loan proceeds and unamortized
deferred fees.
38
<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:
March 31, December 31,
2000 1999
--------- ------------
Single family residential loans (1)................ $ 99,998 $ 105,596
Allowance for loan losses.......................... (526) (495)
--------- ---------
Match funded loans, net......................... 99,472 105,101
Match funded securities available for sale......... 46,492 52,693
--------- ---------
Balance at end of period........................... $ 145,964 $ 157,794
========= =========
(1) Includes $1,350 and $1,127 of non-performing loans at March 31, 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 March 31, 2000:
Michigan............. $ 21,623
California........... 10,907
Florida.............. 6,649
Texas................ 5,942
Massachusetts........ 4,686
Other (1)............ 50,191
--------
Total................ $ 99,998
========
(1) Consists of properties located in 42 other states, none of which
aggregated over $3,947 in any one state.
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 match funded securities at
March 31, 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 COLLATERAL COLLATERIZATION
ISSUE DESIGNATION RATING BALANCE LEVEL AT PRODUCT TYPE AT
SECURITIZATION SECURITY DATE LETTER AGENCIES ISSUANCE 3/31/00 3/31/00 3/31/00
- ------------------ -------- ---- ----------- -------- -------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SASCO 1998-2(1) X Jan-98 NR S&P, Fitch $600,052 $ 238,959 2.20% OC 34% Fixed, 66% ARM
SASCO 1998-3(1) X Mar-98 NR S&P, Fitch 769,671 312,843 4.31% OC 14% Fixed, 86% ARM
MLMI 1998-FF1(2) X Jun-98 NR S&P, Fitch 198,155 71,328 4.17% OC 100% ARM
LHELT 1998-2(3) X Jun-98 NR Moody's, Fitch 209,225 111,641 7.05% OC 47% Fixed, 53% ARM
OCWEN 98-OAC-1(4) N/A Nov-98 NR S&P, Moody's 182,178 106,362 11.70% OC 27% Fixed, 73% ARM
</TABLE>
<TABLE>
<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: 3/31/00 3/31/00 3/31/00 3/31/00 3/31/00 PURCHASE 3/31/00
- -------------------- -------- ----------- ------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SASCO 1998-2 X 11.13% 73.44% 20.00% 34.19% $6,573 16.00% 0.95%
SASCO 1998-3 X 11.11 75.34 17.36 38.85 5,664 17.04 1.94
MLMI 1998-FF1 X 11.14 77.47 18.08 42.34 411 18.57 6.18
LHELT 1998-2 X 10.81 75.27 13.89 28.51 1,118 18.55 14.84
OCWEN 98-OAC-1 N/A 8.73 80.92 5.93 31.03 350 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.
<TABLE>
<CAPTION>
ANTICIPATED
ORIGINAL ANTICIPATED WEIGHTED
ANTICIPATED YIELD TO AVERAGE
YIELD TO MATURITY AT REMAINING
RATING/DESCRIPTION AMORTIZED COST FAIR VALUE PERCENT OWNED MATURITY 3/31/00 (1) COUPON LIFE(2)
- ------------------ -------------- ---------- ------------- -------- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Match-funded securities........... $ 50,275 $ 46,492 100.00% 17.24% 4.43% 0.00% 3.89 years
=========== =========
</TABLE>
(1) Changes in the March 31, 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 March 31, 2000 book
value.
For a glossary of the terms included in the above tables, see
"Securities Available for Sale."
DISCOUNT LOAN PORTFOLIO, NET. The discount loan portfolio decreased
$71,051 or 8% during the three months ended March 31, 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.
40
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
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:
March 31, December 31,
2000 1999
----------- -----------
Single family residential loans......... $ 499,170 $ 597,719
Multi-family residential loans.......... 194,480 191,971
Commercial real estate loans:
Office buildings................... 96,463 97,784
Hotels............................. 74,984 75,095
Retail properties.................. 108,929 105,247
Other properties................... 81,983 87,148
----------- -----------
362,359 365,274
Other loans (1)......................... 22,753 21,615
----------- -----------
Total discount loans................. 1,078,762 1,176,579
----------- -----------
Unaccreted discount:
Single family residential loans.... (122,604) (147,630)
Multi-family residential loans..... (38,396) (37,981)
Commercial real estate loans....... (54,952) (57,604)
Other loans........................ (443) (954)
----------- -----------
(216,395) (244,169)
----------- -----------
862,367 932,410
Allowance for loan losses............... (20,189) (19,181)
----------- -----------
Discount loans, net..................... $ 842,178 $ 913,229
=========== ===========
(1) Includes $17,319 and $16,397 at March 31, 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 March 31, 2000:
Commercial
Single Family Multi-Family Real Estate
Residential Residential and Other Total
------------- ------------ ----------- -----------
California............ $ 32,220 $ 7,455 $ 82,118 $ 121,793
New York.............. 40,760 2,192 36,375 79,327
Illinois.............. 16,805 55,719 1,292 73,816
Michigan.............. 13,439 36,047 21,573 71,059
Florida............... 31,005 17,507 15,362 63,874
Other (1)............. 242,337 37,164 172,997 452,498
----------- ----------- ----------- -----------
Total.............. $ 376,566 $ 156,084 $ 329,717 $ 862,367
=========== =========== =========== ===========
(1) Consists of properties located in 45 other states, none of which
aggregated over $41,443 in any one state.
41
<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 three
months indicated:
<TABLE>
<CAPTION>
For the three months ended March 31, 2000 1999
---------------------------------------------- -------------- --------------
AMOUNT
<S> <C> <C>
Balance at beginning of period................ $ 913,229 $ 1,026,511
Acquisitions (1):
Single family residential loans............ 58,937 40,876
Multi - family residential loans............ 15,317 32,684
Commercial real estate loans................ 6,787 24,801
Other (2)................................... 5,493 6,596
-------------- --------------
86,534 104,957
-------------- --------------
Resolutions and repayments (3)................ (41,927) (49,063)
Loans transferred to real estate owned........ (71,435) (70,694)
Sales (4)..................................... (70,989) (162,397)
Decrease in discount.......................... 27,774 46,332
Increase in allowance......................... (1,008) (2,466)
-------------- --------------
Balance at end of period...................... $ 842,178 $ 893,180
============== ==============
For the three months ended March 31, 2000 1999
---------------------------------------------- -------------- --------------
NUMBER OF LOANS
Balance at beginning of period................ 8,064 8,100
Acquisitions (1):
Single family residential loans............ 937 6,606
Multi - family residential loans............ 7 34
Commercial real estate loans................ 4 202
Other....................................... 1 6
-------------- --------------
949 6,848
-------------- --------------
Resolutions and repayments (3)................ (362) (1,241)
Loans transferred to real estate owned........ (774) (2,367)
Sales (4)..................................... (846) (3,276)
-------------- --------------
Balance at end of period...................... 7,031 8,064
============== ==============
</TABLE>
(1) Acquisitions during the first quarter of 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 three months ended March 31, 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 three months ended March 31, 1999 include the
securitization of performing single family discount loans. See "Results
of Operations - Non-interest Income."
42
<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>
March 31, December 31,
2000 1999
--------------- ---------------
PRINCIPAL AMOUNT
<S> <C> <C>
Loans without Forbearance Agreements:
Current..................................... $ 484,731 $ 509,845
Past due 31 days to 89 days................. 44,155 23,438
Past due 90 days or more.................... 400,081 448,312
Acquired and servicing not yet transferred.. 57,829 87,538
--------------- ---------------
Subtotal................................. 986,796 1,069,133
--------------- ---------------
Loans with Forbearance Agreements:
Current..................................... 4,217 2,958
Past due 31 days to 89 days................. 6,482 8,904
Past due 90 days or more (1)(2)............. 81,267 95,584
--------------- ---------------
Subtotal................................. 91,966 107,446
--------------- ---------------
Total......................................... $ 1,078,762 $ 1,176,579
=============== ===============
March 31, December 31,
2000 1999
--------------- ---------------
PERCENTAGE OF LOANS
Loans without Forbearance Agreements:
Current..................................... 44.94% 43.33%
Past due 31 days to 89 days................. 4.09 1.99
Past due 90 days or more.................... 37.09 38.10
Acquired and servicing not yet
transferred.............................. 5.36 7.44
--------------- ---------------
Subtotal................................. 91.48 90.86
--------------- ---------------
Loans with Forbearance Agreements:
Current..................................... 0.39 0.25
Past due 31 days to 89 days................. 0.60 0.76
Past due 90 days or more.................... 7.53 8.13
--------------- ---------------
Subtotal................................. 8.52 9.14
--------------- ---------------
Total......................................... 100.00% 100.00%
=============== ===============
</TABLE>
(1) Includes $81,090 of loans which were less than 90 days past due under
the terms of the forbearance agreements at March 31, 2000, of which
$65,094 were current and $15,996 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.
43
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
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>
March 31, 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 ................... $ 63 0.9% $ 3,418 1.8% $ 87 1.2% $ 4,334 $ 2.3%
Multi-family .................... 1,506 21.2 89,373 46.9 1,722 23.7 81,366 42.5
Commercial real estate .......... 5,535 77.9 97,901 51.3 5,450 75.1 105,628 55.2
Consumer ........................ -- -- 68 -- -- -- 82 --
-------- --------- -------- ---------- -------- --------- ---------- ---------
$ 7,104 100.0% $190,760 100.0% $ 7,259 100.0% $ 191,410 $ 100.0%
======== ========= ======== ========== ======== ========= ========== =========
Discount loan:
Single family ................... $ 10,256 50.8% $376,566 43.7% $ 11,081 57.8% $ 450,089 $ 48.3%
Multi-family .................... 1,285 6.4 156,084 18.1 1,681 8.8 153,990 16.5
Commercial real estate .......... 5,725 28.3 307,407 35.7 5,152 26.8 307,670 33.0
Other ........................... 2,923 14.5 22,310 2.5 1,267 6.6 20,661 2.2
-------- --------- -------- ---------- -------- --------- ---------- ---------
$ 20,189 100.0% $862,367 100.0% $ 19,181 100.0% $ 932,410 $ 100.0%
======== ========= ======== ========== ======== ========= ========== =========
Match funded loans:
Single family residential loans.. $ 526 100.0% $ 99,998 100.0% $ 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.
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 three months ended March 31, 2000:
<TABLE>
<CAPTION>
Balance Balance
December 31, March 31,
1999 Provision Charge-offs Recoveries 2000
------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Loan portfolio:
Single family................... $ 87 $ (24) $ -- $ -- $ 63
Multi-family.................... 1,722 (216) -- -- 1,506
Commercial real estate.......... 5,450 85 -- -- 5,535
Consumer........................ -- -- -- -- --
---------- ----------- ---------- ---------- ----------
$ 7,259 $ (155) $ -- $ -- $ 7,104
========== =========== ========== ========== ==========
Discount loans:
Single family................... $ 11,081 $ 201 $ (1,196) $ 170 $ 10,256
Multi-family.................... 1,681 105 (501) -- 1,285
Commercial...................... 5,152 768 (195) -- 5,725
Other........................... 1,267 1,658 (2) -- 2,923
---------- ----------- ---------- ---------- ----------
$ 19,181 $ 2,732 $ (1,894) $ 170 $ 20,189
========== =========== ========== ========== ==========
Match funded loans:
Single family residential loans $ 495 $ 31 $ -- $ -- $ 526
========== =========== ========== ========== ==========
</TABLE>
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. The Company
invests 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.
44
<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 are as follows at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Investments solely as a limited partner made prior to May 18, 1995.............. $ 16,701 $ 17,327
Investments solely as a limited partner made on or after May 18, 1995 (1)....... 47,738 59,541
Investments both as a limited and, through subsidiaries, as a general partner... 74,339 74,121
----------- -----------
$ 138,778 $ 150,989
=========== ===========
</TABLE>
(1) The decrease in the balance during the three months ended March 31, 2000 is
due to the sale of investments in ten projects which had an aggregate
carrying value of $27,402 for a loss of $261, offset by the investment in
new and existing projects.
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 March 31, 2000, the Company's largest
single investment was $8,023, which related to a project located in Columbia,
South Carolina.
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 $682 and $770 for the three months ended March 31,
2000 and 1999, respectively. For limited partnership investments made after May
18, 1995, and for investments as a limited and, through subsidiaries, as a
general partner, the Company recognized tax credits of $3,032 and $3,695 for the
three months ended March 31, 2000 and 1999, respectively, and recorded a loss
after depreciation of $1,500 and $1,864 from operations on the underlying real
estate for the three months ended March 31, 2000 and 1999, respectively.
INVESTMENTS IN UNCONSOLIDATED ENTITIES. Investments in unconsolidated
entities decreased $3,120 during the three months ended March 31, 2000 to
$33,998 from $37,118 at December 31, 1999, primarily as a result of a $2,739
decrease in the Company's 35.84% equity investment in Kensington. The decrease
was primarily due to the Company's $2,334 share of Kensington's losses recorded
for the three months ended March 31, 2000.
REAL ESTATE OWNED, NET. Real estate owned, net, increased by $17,992 or
11% during the first quarter of 2000 due primarily to foreclosures and
acquisitions in excess of sales. 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.
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Discount loan portfolio:
Single family residential.................. $ 76,546 $ 72,193
Multi-family residential................... 12,536 2,601
Commercial real estate..................... 89,818 85,233
------------ ------------
Total.................................. 178,900 160,027
Loan portfolio................................ 1,986 2,183
Loans available for sale...................... 4,612 5,296
------------ ------------
Total.................................. $ 185,498 $ 167,506
============ ============
</TABLE>
45
<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 geographical information by type
of property at March 31, 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.................. $ 6,759 120 $ 47,549 5 $ 54,308 125
Georgia.................. 1,533 21 15,299 1 16,832 22
Connecticut.............. 3,726 45 12,524 2 16,250 47
California............... 8,732 104 3,897 5 12,629 109
Arizona.................. 1,182 18 9,713 1 10,895 19
Other (1)................ 59,695 1,365 14,889 29 74,584 1,394
-------- -------- --------- -------- --------- --------
Total................. $ 81,627 1,673 $ 103,871 43 $ 185,498 1,716
======== ======== ========= ======== ========= ========
</TABLE>
(1) Consists of properties located in 45 other states, none of which
aggregated over $6,632 in any one state.
The following tables set forth the activity in the real estate owned
during the three months indicated.
<TABLE>
<CAPTION>
For the three months ended March 31, 2000 1999
---------------------------------------------- ------------- -------------
AMOUNT
<S> <C> <C>
Balance at beginning of period................ $ 167,506 $ 201,551
Properties acquired through foreclosure or
deed-in-lieu thereof:
Discount loans.............................. 71,435 70,694
Loans available for sale.................... 3,129 4,819
Loan portfolio.............................. 274 2,466
Less discount transferred................... (20,243) (20,885)
------------ ------------
54,595 57,094
------------ ------------
Acquired in connection with acquisitions
of discount loans .......................... 3,591 8,160
Sales......................................... (38,204) (59,754)
Change in valuation allowance................. (1,990) 1,780
------------ ------------
Balance at end of period...................... $ 185,498 $ 208,831
============ ============
For the three months ended March 31, 2000 1999
---------------------------------------------- ------------ ------------
NUMBER OF PROPERTIES
Balance at beginning of period................ 1,672 1,999
Properties acquired through foreclosure or
deed-in-lieu thereof:
Discount loans.............................. 774 702
Loans available for sale.................... 21 56
Loan portfolio.............................. 3 2
------------ ------------
798 760
------------ ------------
Acquired in connection with acquisitions
of discount loans .......................... 3 146
Sales......................................... (757) (1,032)
------------ ------------
Balance at end of period...................... 1,716 1,873
============ ============
</TABLE>
46
<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 amount of time that the Company had
held its real estate owned at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
One to two months................................ $ 49,188 $ 30,695
Three to four months............................. 16,981 26,532
Five to six months............................... 15,925 11,263
Seven to 12 months............................... 18,864 28,606
Over 12 months................................... 84,540 70,410
--------------- ---------------
$ 185,498 $ 167,506
=============== ===============
</TABLE>
The Company actively manages its real estate owned. Sales of real
estate owned resulted in (losses) gains, net of the provision for loss, of
$(4,656) and $4,141 during the first three months of 2000 and 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 $38,204
and $59,754 of real estate owned which was sold during the three months ended
March 31, 2000 and 1999, respectively, was 6 months and 6 months, respectively.
The following table sets forth the activity, in the aggregate, in the
valuation allowances on real estate owned during the three months indicated.
<TABLE>
<CAPTION>
For the three months ended March 31, 2000 1999
------------------------------------------------- -------------- --------------
<S> <C> <C>
Balance at beginning of year..................... $ 17,181 $ 15,325
Provisions for losses............................ 9,212 5,061
Charge-offs and sales............................ (7,222) (6,841)
-------------- --------------
Balance at end of period......................... $ 19,171 $ 13,545
============== ==============
Valuation allowance as a percentage of total
gross real estate owned (1)................... 9.37% 6.09%
</TABLE>
(1) The increase at March 31, 2000 as compared to March 31, 1999 reflects
an increase in the amount of real estate owned which the Company has
held in excess of one year and a decline in the balance of total gross
real estate owned. Additionally, the provision for the first quarter of
1999 reflects a reallocation of $3,665 of allowance to loans (primarily
discount loans). The increase in the amount of real estate owned which
the Company has held in excess of one year at March 31, 2000 as
compared to March 31, 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%.
47
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
INVESTMENTS IN REAL ESTATE. The Company's investment in real estate
consisted of the following at the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Properties held for investment (1):
Office buildings......................................... $ 32,097 $ 202,607
Retail................................................... 33,305 33,224
Building improvements.................................... 7,443 17,590
Tenant improvements and lease commissions................ 584 8,150
Furniture and fixtures................................... 59 44
------------- -------------
73,488 261,615
Accumulated depreciation................................. (2,641) (9,011)
------------- -------------
70,847 252,604
------------- -------------
Loans accounted for as investments in real estate (2):
Multi-family residential................................. 3,341 --
Nonresidential........................................... 136,801 --
------------- -------------
140,142 --
------------- -------------
Properties held for lease:
Land and land improvements............................... 1,256 1,256
Building................................................. 14,755 14,629
Accumulated depreciation................................. (461) (248)
------------- -------------
15,550 15,637
------------- -------------
Investment in real estate partnerships (3)............... 11,708 --
------------- -------------
$ 238,247 $ 268,241
============= =============
</TABLE>
(1) Acquired as a result of the acquisition of OAC. The decline in balances
during the first quarter of 2000 is due to the transfer of the
Company's four properties located in San Francisco, California from
held for investment to held for sale. See "Real Estate Held for Sale."
(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 five limited partnership interests in multi-family real
estate ventures.
The Company's properties held for investment at March 31, 2000 are
comprised of the following:
<TABLE>
<CAPTION>
Date %
Acquired Property Location Square Feet Property Type Leased Book Value
- -------- ------------------------ -------------------- ----------- ------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
07/22/98 841 Prudential Drive.... Jacksonville, FL 550,000 Office Bldg. 98.0% 32,405
11/10/97 Cortez Plaza............ Bradenton, FL 289,686 Shopping Ctr. 94.5 22,608
04/09/98 7075 Bayers Road........ Halifax, Nova Scotia 402,529 Shopping Ctr. 67.0 16,957
10/01/98 Holiday Village......... Havre, MT 223,355 Shopping Ctr. 47.0 1,518
Accumulated depreciation (2,641)
-------------
$ 70,847
=============
</TABLE>
48
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
49
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
REAL ESTATE HELD FOR SALE. The Company's real estate held for sale at
March 31, 2000 is comprised of the following properties:
<TABLE>
<CAPTION>
Date %
Acquired Property Location Square Feet Property Type Leased Book Value
- -------- ------------------------ ----------------- ----------- ------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
04/08/98 225 Bush Street......... San Francisco, CA 570,637 Office Bldg. 98.0% $ 127,061
09/23/97 450 Sansome Street ..... San Francisco, CA 130,437 Office Bldg. 100.0 28,447
01/23/98 690 Market Street ...... San Francisco, CA 124,692 Office Bldg. 97.0 21,558
09/03/97 10 U.N. Plaza .......... San Francisco, CA 71,636 Office Bldg. 100.0 11,742
-------------
$ 188,808
=============
</TABLE>
On March 23, 2000, the Company engaged Grubb & Ellis Company to market
and sell these four properties. These properties were previously held for
investment. On March 30, 2000, Company entered into an agreement to sell its
office building located at 690 Market Street in San Francisco for $28,000 less
commissions and closing costs and as adjusted for prorations of certain
contractual obligations that survive closing. Closing is subject to the
fulfillment of certain conditions, including but not limited to delivery of
clear title and receipt of required tenant estoppels. The closing is expected to
occur during the second quarter of 2000.
50
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
51
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
DEPOSITS. Deposits decreased $74,684 or 4% during the three months
ended March 31, 2000 primarily as a result of a decrease in non-interest bearing
checking accounts offset by an increase in certificates of deposit.
The following table sets forth information related to the Company's
deposits at the dates indicated.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
--------------------------- ------------------------
% of Total % of Total
Amount Deposits Amount Deposits
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Non-interest bearing checking accounts........ $ 189,147 11% $ 280,273 15%
NOW and money market checking accounts........ 15,369 1 30,343 2
Savings accounts.............................. 1,552 -- 1,361 --
----------- --------- ----------- ---------
206,068 12 311,977 17
----------- -----------
Certificates of deposit (1)(2)................ 1,568,024 1,536,997
Unamortized deferred fees..................... (6,490) (6,688)
----------- -----------
Total certificates of deposit................. 1,561,534 88 1,530,309 83
----------- --------- ----------- ---------
Total deposits............................. $ 1,767,602 100% $ 1,842,286 100%
=========== ========= =========== =========
</TABLE>
(1) Includes Brokered deposits obtained through national, regional and
local investment banking firms which solicit deposits from their
customer, amounted to $1,398,675 at March 31, 2000, as compared to
$1,449,873 at December 31, 1999.
(2) At March 31, 2000 and December 31, 1999, certificates of deposit issued
on an uninsured basis (greater than $100,000) amounted to $165,802 and
$155,205, respectively. Of the $165,802 of uninsured deposits at March
31, 2000, $63,014 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 $376,454 at March 31, 2000, increased $329,089 or
695% during the three months ended March 31, 2000. From time to time the Company
utilizes such collateralized borrowings as additional sources of liquidity. The
securities sold under agreements to repurchase at March 31, 2000 are primarily
collateralized by CMOs.
BONDS-MATCH FUNDED AGREEMENTS. Bonds-match funded agreements of
$130,429 at March 31, 2000, decreased $11,086 or 8% during the three months
ended March 31, 2000.
Bonds-match funded agreements were comprised of the following at the
dates indicated:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
--------------- -----------------
<S> <C> <C>
OAC Mortgage Residential Securities, Inc.(1)............... $ 94,302 $ 100,968
Ocwen NIM Corp (2)......................................... 36,127 40,547
--------------- ---------------
$ 130,429 $ 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.
52
<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:
March 31, December 31,
2000 1999
----------- ------------
2003:
11.875% Notes due October 1........................ $ 103,850 $ 103,850
2004:
Loan due May 24 (LIBOR plus 150 basis points)...... 6,236 6,236
2005:
12% Subordinated Debentures due June 15............ 67,000 67,000
11.5% Senior Notes due July 1 (1).................. 120,937 140,487
----------- -----------
$ 298,023 $ 317,573
=========== ===========
(1) The decline in the outstanding balance is due to the repurchase of
notes in the open market. The $19,550 repurchase resulted in
extraordinary gains of $3,109 ($2,145 after tax).
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit decreased $13,807 or 7% during the three months ended
March 31, 2000. The decrease is primarily due to the repayment of lines of
credit at OFS. 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(3)
- -------------------- ------------- ---------- --------- ---------- -------------------------------
MARCH 31, 2000:
<S> <C> <C> <C> <C> <C>
OFS (1)............. $ 990 $ 15,000 $ -- May 2000 LIBOR + 150 basis points
13,899 25,000 -- May 2000 LIBOR + 175 basis points
OAC (2)............. 84,170 200,000 200,000 June 2001 LIBOR + 175 basis points
75,000 75,000 75,000 April 2001 LIBOR + 175 basis points
-------------
$ 174,059
=============
DECEMBER 31, 1999:
OFS (1)............. $ 2,041 $ 200,000 $ 100,000 July 2001 LIBOR + 75 basis points
3,770 115,000 100,000 May 2000 LIBOR + 95 +0+ 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 (2)............. 84,170 200,000 200,000 June 2001 LIBOR + 175 basis points
75,000 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 50% to 80% of the principal balance of the
mortgage loan are secured by such mortgage loans.
(2) These lines are collateralized by commercial loans and investments in real
estate
(3) LIBOR was 6.13% and 5.82% at March 31, 2000 and December 31, 1999,
respectively.
COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY. In August
1997, OCT, a wholly-owned subsidiary of Ocwen, issued $125.0 million of 10-7/8%
Capital Securities. Proceeds from the issuance of the Capital Securities were
invested in 10-7/8% Junior Subordinated Debentures issued by Ocwen. The Junior
Subordinated Debentures, which represent the sole assets of OCT, will mature on
August 1, 2027. During 1999, the Company repurchased $15,000 of the Capital
Securities in the open market. Intercompany transactions between OCT and the
53
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Company, including the Junior Subordinated Debentures, are eliminated in the
consolidated financial statements of the Company.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $17,006 or 3%
during the three months ended March 31, 2000. The decrease in stockholders'
equity during the three months ended March 31, 2000 was primarily due to a net
loss of $5,098, the repurchase of 1,388,300 shares of common stock in the
aggregate amount of $8,982 and a $3,087 decline in unrealized gains on
securities available for sale. See Consolidated Statements of Changes in
Stockholders' Equity in 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 March 31, 2000, the Company had $1,561,534 of
certificates of deposit, including $1,398,675 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 March 31, 2001 and 2002, and
thereafter amounted to $763,599, $630,185 and $167,751, 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 March 31, 2000, the
Company was eligible to borrow up to an aggregate of $649,687 from the FHLB of
New York (subject to the availability of acceptable collateral) and had $8,951
of residential loans and $21,197 of short duration CMOs (all of which were held
by the Bank) pledged as security for any such advances. At March 31, 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 March 31, 2000, the Company had $152,884 of unrestricted cash and
cash equivalents, $678,998 of short duration CMOs and $141,227 of subordinate
and residual securities, which could be used to secure additional borrowings. At
March 31, 2000, the Company had no outstanding FHLB advances.
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 $31,574 and $156,939 of cash
flows during the first quarter of 2000 and 1999, respectively. During the first
quarter of 2000, cash flows used by operating activities primarily related to an
increase in income taxes paid and an the increase in escrow advances on loans
and loans serviced for others. During the first quarter of 1999, resources of
cash were used primarily to purchase and originate loans available for sale. The
decrease in net cash flows used by operating activities during the first quarter
of 2000 as compared to the first quarter of 1999, was due primarily to a decline
in purchases and originations of loans available for sale.
The Company's investing activities (used) provided cash flows totaling
($364,650) and $ 197,781 during the first quarter of 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 improvments to real estate held for
investment. Cash flows from investing activities were provided primarily by
maturities of and principal payments received on securities available for sale,
proceeds from sales of discount loans and proceeds from sales of real estate
owned. The increase in net cash used by investing activities during increase in
purchases of securities available for sale and an increase in purchases of and
capital improvements to real estate held for investment.
The Company's financing activities provided (used) cash flows of
$201,406 and ($175,424) during the first quarter of 2000 and 1999, respectively.
Cash flows from financing activities were primarily provided by securities sold
under agreements to repurchase and proceeds from obligations under lines of
credit. Cash flows utilized in connection with financing activities were
primarily related to a decline in deposits, repayment of bonds-match funded
agreements, repurchase of debt and repurchase of common stock. The increase in
cash provided by financing acitivities during the first quarter of 2000 as
compared to the first quarter of 1999 was due primarily to an increase in
securities sold under agreements to repurchase, partially offset by the decline
in the proceeds from obligations outstanding under lines of credit.
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 8.23% at March 31,
2000.
54
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
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 March 31, 2000. See "Regulatory
Capital Requirements."
There are restrictions on OAC's ability to pay dividends under the
Indenture governing OAC's 11.5% Redeemable Notes. As of March 31, 2000, OAC was
not permitted to pay dividends under the Indenture.
At March 31, 2000, the Company had commitments of $26,049 related to
the funding of construction loans and $2,440 related to the purchase of loans.
Management of the Company 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 1999. See Note 7 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 4 to the Interim Consolidated Financial
Statements included in Item 1 (which is incorporated herein by reference) herein
and "Asset and Liability Management" included in Item 3 herein.
REGULATORY CAPITAL AND OTHER REQUIREMENTS
Following an examination in late 1996 and early 1997, the Bank
committed to the OTS to maintain a core capital (leverage) ratio and a total
risk-based capital ratio of at least 9% and 13%, respectively. The Bank
continues to be in compliance with this commitment as well as the regulatory
capital requirements of general applicability, as indicated in Note 5 to the
Interim Consolidated Financial Statements included in Item 1 herein (which is
incorporated herein by reference). The Bank's core capital, Tier 1 risk-based
capital and total risk-based capital ratios at March 31, 2000 were 9.33%, 12.84%
and 17.67%, respectively, placing the Bank in the "well-capitalized" category as
defined by federal regulations. 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.
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.
55
<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, which is composed of directors and
officers of the Company, in accordance with policies approved by the Board of
Directors of the Company. The Asset/Liability Committee meets to review, among
other things, the sensitivity of the Company's assets and liabilities to
interest rate changes 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 Asset/Liability Committee also
approves and establishes pricing and funding decisions with respect to overall
asset and liability composition.
The Asset/Liability Committee's methods for evaluating interest rate
risk include an analysis of the Company's interest rate sensitivity "gap," which
is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities. A gap is considered
negative when the amount of interest-rate sensitive liabilities exceeds
interest-rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to affect net
interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
56
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
(Dollars in thousands)
- --------------------------------------------------------------------------------
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.
The following table sets forth the estimated maturity or repricing of
the Company's interest-earning assets and interest-bearing liabilities at March
31, 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 $189,147 at March 31, 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>
March 31, 2000
--------------------------------------------------------------------------
Within Four to More Than
Three Twelve One Year to Three Years
Months Months Three Years and Over Total
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Interest-earning deposits ....................... $ 23,024 $ -- $ -- $ -- $ 23,024
Federal funds sold .............................. 96,000 -- -- -- 96,000
Securities available for sale ................... 386,795 211,212 159,931 80,508 838,446
Loans available for sale (1) .................... 1,024 19,727 8,688 7,404 36,843
Investment securities, net ...................... 13,256 -- -- -- 13,256
Loan portfolio, net (1) ......................... 91,661 39,836 14,902 9,720 156,119
Match funded loan and securities ................ 5,343 14,953 34,769 90,899 145,964
Discount loan portfolio, net .................... 78,937 460,131 189,442 113,668 842,178
----------- ----------- ----------- ----------- -----------
Total rate-sensitive assets .................... 696,040 745,859 407,732 302,199 2,151,830
----------- ----------- ----------- ----------- -----------
RATE-SENSITIVE LIABILITIES:
NOW and money market checking deposits .......... 13,875 171 367 956 15,369
Savings deposits ................................ 116 221 437 778 1,552
Certificates of deposit ......................... 286,869 475,189 630,921 168,555 1,561,534
------- ------- ------- ------- ---------
Total interest-bearing deposits ................. 300,860 475,581 631,725 170,289 1,578,455
Securities sold under agreements to repurchase... 376,454 -- -- -- 376,454
Bond-match funded loan agreements ............... 98,055 10,652 21,722 -- 130,429
Obligations outstanding under lines of credit ... 174,059 -- -- -- 174,059
Notes, debentures and other ..................... 6,236 -- -- 291,787 298,023
----------- ----------- ----------- ----------- -----------
Total rate-sensitive liabilities ............... 955,664 486,233 653,447 462,076 2,557,420
----------- ----------- ----------- ----------- -----------
Interest rate sensitivity gap before
financial instruments ........................... (259,624) 259,626 (245,715) (159,877) (405,590)
FINANCIAL INSTRUMENTS:
Interest rate swaps ............................... 175,000 -- (175,000) -- --
Swaption and put option contracts ................. 286 295 -- -- 581
Futures contracts ................................. 28,000 -- (20,000) (8,000) --
----------- ----------- ----------- ----------- -----------
Total rate-sensitive financial instruments ........ 203,286 295 (195,000) (8,000) 581
----------- ----------- ----------- ----------- -----------
Interest rate sensitivity gap including financial
instruments ..................................... $ (56,338) $ 259,921 $ (440,715) $ (167,877) $ (405,009)
=========== =========== =========== =========== ===========
Cumulative interest rate sensitivity gap .......... $ (56,338) $ 203,583 $ (237,132) $ (405,009)
=========== =========== =========== ===========
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets ....... (2.62)% 9.46% (11.02)% (18.82)%
</TABLE>
(1) Balances have not been reduced for non-performing loans.
57
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
(Dollars in thousands)
- --------------------------------------------------------------------------------
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 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,
is as follows at March 31, 2000:
Rate Shock Board Limits Current
(in basis points) (minimum NPV Ratios) NPV Ratios
- -------------------------- ------------------------- ----------------------
+300 5.00% 18.75%
+200 6.00% 18.48%
+100 7.00% 18.17%
0 8.00% 17.86%
-100 7.00% 17.57%
-200 6.00% 17.27%
-300 5.00% 17.01%
The Asset/Liability Committee also regularly reviews interest rate risk
by forecasting the impact of alternative interest rate environments on net
interest income and NPV and evaluating such impacts against the maximum
potential changes in net interest income and NPV that is authorized by the Board
of Directors, 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 March 31, 2000. Actual results could differ
significantly from the OCN results estimated in the following table:
Estimated Changes in
Change in Interest Rates -------------------------------
(Rate Shock in basis points) Net Interest NPV
---------------------------- ------------ -------
+300 1.54% 2.45%
+200 1.02% 1.80%
+100 0.51% 0.90%
0 0.00% 0.00%
-100 (0.51)% (0.74)%
-200 (1.02)% (1.58)%
-300 (1.54)% (2.21)%
The Asset/Liability Committee is authorized to utilize a wide variety
of off-balance sheet financial techniques to assist it in the management of
interest rate risk 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, foreign currency swap
agreements and European swaptions and put options.
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
$175,000 and $200,780 at March 31, 2000 and December 31, 1999, respectively.
The Company also enters into U.S. Treasury futures contracts to offset
declines in the market value of its fixed-rate loans and certain fixed-rate
mortgage-backed and related securities available for sale in the event of an
increasing interest rate environment. The Company had entered into futures
contracts with an aggregate notional amount of $28,000 and $19,000 at March 31,
2000 and December 31, 1999, respectively.
The Company entered into swaption and put option contracts to mitigate
its interest rate exposure on anticipated future funding 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 $14,100 and $20,900 at March 31, 2000 and December 31, 1999,
respectively.
See Note 4 to the Interim Consolidated Financial Statements for
additional disclosures regarding the Company's interest rate derivative
financial instruments included in Item 1 herein (which is incorporated herein by
reference).
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 ("UK residuals") and in the shopping
center located in Halifax, Nova Scotia (the "Nova Scotia Shopping Center").
The Company's hedges (currency futures and swaps), the related foreign
currency equity investment, the related investments in foreign subsidiaries, and
the net exposures as of March 31, 2000 and December 31, 1999 were as follows.
58
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
(Dollars in thousands)
- --------------------------------------------------------------------------------
Investment Hedge Net Exposure
---------- ----------- ------------
MARCH 31, 2000:
Kensington....................... $ 33,477 $ 33,966 $ 489
UK residuals..................... $ 24,582 $ 18,269 $ (6,313)
Nova Scotia shopping center...... $ 16,957 $ 18,359 $ 1,402
DECEMBER 31, 1999:
Kensington....................... $ 36,215 $ 37,546 $ 1,331
UK residuals..................... $ 28,098 $ 25,758 $ (2,340)
Nova Scotia shopping center...... $ 14,844 $ 16,074 $ 1,230
The net exposures are subject to gain or loss if foreign currency
exchange rates fluctuate. See the "Foreign Currency Management" section of Note
4 to the Interim Consolidated Financial Statements which is included in Item 1
herein for additional disclosures regarding the Company's foreign currency
derivative financial instruments (which is incorporated herein by reference).
59
<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,
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, 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 and leasing markets and securities investments, 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.
60
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- --------------------------------------------------------------------------------
(a) EXHIBITS.
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (2)
4.0 Form of Certificate of Common Stock (1)
4.1 Form of Indenture between the Company and Bank One, Columbus,
NA as Trustee (1)
4.2 Form of Note due 2003 (included in Exhibit 4.1) (1)
4.3 Certificate of Trust of Ocwen Capital Trust I (3)
4.4 Amended and Restated Declaration of Trust of Ocwen Capital
Trust I (3)
4.5 Form of Capital Security of Ocwen Capital Trust I (4)
4.6 Form of Indenture relating to 10 7/8% Junior Subordinated
Debentures due 2027 of the Company (3)
4.7 Form of 10 7/8% Junior Subordinated Debentures due 2027 of
the Company (4)
4.8 Form of Guarantee of the Company relating to the Capital
Securities of Ocwen Capital Trust I (3)
4.9 Form of Indenture between the Company and The Bank of New
York as Trustee (5)
4.10 Form of Subordinated Debentures due 2005 (5)
4.11 Form of Indenture between OAC and Norwest Bank Minnesota,
National Association, as Trustee thereunder for the 11.5%
Redeemable Notes due 2005 (6)
10.1 Ocwen Financial Corporation 1996 Stock Plan for Directors, as
amended (8)
10.2 Ocwen Financial Corporation 1998 Annual Incentive Plan (8)
10.3 Loan Facility Agreement, dated April 23, 1999, among Ocwen
Limited, National Westminster Bank plc and Ocwen Financial
Corporation (9)
10.4 Loan Agreement, dated as of April 7, 1998, between OAIC Bush
Street, LLC and Salomon Brothers Realty Corp. (11)
10.5 Loan Agreement, dated as of April 24, 1998, between OAC and
Greenwich Financial Products Inc. (12)
10.6 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 (12)
10.7 Compensation and Indemnification Agreement, dated as of May
6, 1999, between OAC and the independent committee of the
Board of Directors (13)
10.8 Second Amendment to Guarantee of Payment, dated as of July 9,
1999, between Salomon Brothers Realty Corp. and Ocwen
Partnership, L.P. (13)
10.9 Indemnity agreement, dated August 24, 1999, among OCN and
OAC's Board of directors (13)
10.10 Amended Ocwen Financial Corporation 1991 Non-Qualified Stock
Option Plan, dated October 26, 1999 (filed herewith)
10.11 First Amendment to Agreement dated March 30, 2000 between HCT
and OAIC (14).
27.1 Financial Data Schedule for the three months ended March 31,
2000 (filed herewith)
99.1 Risk factors (15)
(1) 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.
(2) 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.
(3) 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.
61
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
- --------------------------------------------------------------------------------
(4) Incorporated by reference from similarly described exhibit included with
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(5) 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.
(6) Incorporated by reference from OAC's Registration Statement on Form S-4
(File No. 333-64047), as amended, as declared effective by the Commission
on February 12, 1999.
(7) 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.
(8) 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 as filed with the Commission on March 31,
1998.
(9) Incorporated by reference from the similarly described exhibit filed in
connection with the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.
(10) 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.
(11) Incorporated by reference from OAC's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998.
(12) Incorporated by reference from the Current Report on Form 8-K filed by
OAC with the Commission on April 23, 1998.
(13) Incorporated by reference from OAC's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999.
(14) Incorporated by reference from the similarly described exhibit included
with OAC's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2000.
(15) Incorporated by reference from a 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 MARCH 31, 2000
(1) A Form 8-K was filed by the Company on February 10, 2000 which
contained a news release announcing the Company's financial results
for the three and twelve months ended December 31, 1999.
62
<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: May 15, 2000
63
AS AMENDED THROUGH OCTOBER 26,1999
(And Reflecting Adjustment for the
Ten-for-One Stock Split in July 1996
and the Two-for-One Stock Split in
November 1997)
OCWEN FINANCIAL CORPORATION
1991 NON-QUALIFIED STOCK OPTION PLAN
ARTICLE I
DEFINITIONS
As used herein, the following terms have the meanings hereinafter set
forth unless the context clearly indicates to the contrary:
(a) "Board" shall mean the Board of Directors of the
Company.
(b) "Committee" shall mean the Compensation Committee of the Board, which
shall consist of not less than the minimum number of persons from
time to time required by Rule 16b-3, each of whom, to the extent
necessary to comply with Rule 16b-3 only, shall be a "Non-Employee
Director" within the meaning of Rule 16b-3.
(c) "Company" shall mean Ocwen Financial Corporation, a Florida
corporation.
(d) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(e) "Fair Value" shall mean the book value of the Stock as determined by
the Committee until such time as the Stock is registered under the
Exchange Act, following which time the Committee shall determine the
method to establish fair market value.
(f) "Option" shall mean an option to purchase Stock granted pursuant to
the provisions of Article VI hereof.
(g) "Optionee" shall mean a person to whom an Option has
been granted hereunder.
(h) "Option Price" shall mean the price at which an Optionee may purchase
a share of stock under a Stock Option Agreement which price may be
less than Fair Value at the time the Option is granted.
(i) "Plan" shall mean the Ocwen Financial Corporation 1991 Non-Qualified
Stock Option Plan, as amended.
(j) "Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by
the Securities and Exchange Commission under the Exchange Act, or any
successor rule or regulation thereto as in effect from time to time.
(k) "Stock" shall mean the common stock, $.01 par value, of the Company
or, in the event that the outstanding shares of Stock are hereinafter
changed into or exchanged
<PAGE>
for shares of a different stock or securities of the Company or some
other corporation, such other stock or securities.
(l) "Stock Option Agreement" shall mean an agreement between the Company
and the Optionee under which the Optionee may purchase Stock
hereunder.
(m) "Subsidiary" shall mean any corporation, the majority of the
outstanding voting stock of which is owned, directly or indirectly,
by the Company.
ARTICLE II
THE PLAN
2.1 NAME. This plan shall be known as the "Ocwen Financial Corporation
1991 Non-Qualified Stock Option Plan."
2.2 PURPOSE. The purpose of the Plan is to advance the interests of the
Company, its Subsidiaries and its shareholders by affording certain officers and
other key employees of the Company and its Subsidiaries an opportunity to
acquire or increase their proprietary interests in the Company by granting such
persons Options to purchase Stock in the Company. The Options will promote the
growth and profitability of the Company and its Subsidiaries because the
Optionees will be provided with an additional incentive to achieve the Company's
objectives through participation in its success and growth and by encouraging
their continued employment with the Company.
2.3 EFFECTIVE DATE; TERMINATION DATE. The effective date of the Plan is
December 1, 1991. The Plan shall terminate, and no further Options shall be
granted hereunder, after November 30, 2006.
ARTICLE III
PARTICIPANTS
Any "key employee," as determined by the Committee, including executive
personnel, department heads and directors, of the Company or its Subsidiaries
shall be eligible to participate in the Plan, provided that they are full-time
employees of the Company or any of its Subsidiaries.
ARTICLE IV
ADMINISTRATION
4.1 DUTIES AND POWERS OF COMMITTEE. The Plan shall be administered by the
Committee. In administering the Plan, the Committee's actions and determinations
shall be binding on all interested parties. Subject to the express provisions of
the Plan, the Committee shall have the sole discretion and authority to
determine from among eligible key employees those to whom an Option shall be
granted, the number of shares of Stock subject to the Option, and the terms and
2
<PAGE>
conditions of the Stock Option Agreement. Subject to the express provisions of
the Plan, the Committee shall also have complete authority to interpret the
Plan, to prescribe, amend and rescind rules and regulations relating to it, to
determine the details and provisions of each Stock Option Agreement, and to make
all other determinations necessary or advisable in the administration of the
Plan, including, without limitation, the amending or altering of the Plan and
any Options granted hereunder as may be required to comply with or to conform to
any federal, state or local laws or regulations. The Committee shall have the
power to authorize the issuance of Stock in accordance with the provisions of
the Plan. No member of the Committee shall be liable to any person for any
determination made in good faith with respect to the Plan or any Option granted
hereunder.
4.2 COMMITTEE PROCEDURES. The Committee may make such rules and
regulations for the conduct of its business as it may deem necessary or
appropriate. A majority of the members of the Committee shall constitute a
quorum, and any action taken by a majority at a meeting at which a quorum is
present or any action taken without a meeting evidenced by a writing executed by
all the members of the Committee, shall constitute the action of the Committee.
The Committee shall keep minutes of its meetings.
The Company shall supply full and timely information to the Committee on
all matters relating to eligible persons as the Committee may require. The
Company shall furnish the Committee with such clerical and other assistance as
is necessary in the performance of its duties.
4.3 AUTHORITY OF THE BOARD. Notwithstanding anything to the contrary
contained in the Plan, the Plan also may be administered by the Board only to
the extent permitted by Rule 16b-3. In the event of such administration by the
Board, all references to the Committee in the Plan shall be deemed to refer to
the Board and any employee-director of the Company shall be eligible to be
designated a "key employee" for purposes of the Plan.
ARTICLE V
SHARES OF STOCK SUBJECT TO PLAN
5.1 LIMITATIONS. Subject to any adjustment pursuant to the provisions of
Section 5.2 hereof, the maximum number of shares of Stock which may be issued
and sold hereunder shall not exceed 20,000,000 shares. Shares subject to an
Option may be either authorized and unissued shares or shares issued and later
acquired by the Company. Any shares of Stock that are subject to an Option and
which are forfeited, and any shares of Stock that for any other reason are not
issued to an Optionee, shall automatically become available again for use under
the Plan if Rule 16b-3 under the Exchange Act, as such rule may be amended, or
any successor rule, and interpretations thereof by the Securities and Exchange
Commission or its staff permit such share replenishment.
5.2 ANTIDILUTION. In the event that the outstanding shares of Stock are
changed into or exchanged for a different number or kind of shares or other
securities of the Company or of another
3
<PAGE>
corporation by reason of merger, consolidation, reorganization,
recapitalization, reclassification, combination of shares, stock splitup or
stock dividend:
(a) The aggregate number and kind of shares of Stock on which
Options may be granted hereunder shall be adjusted
appropriately;
(b) The rights under outstanding Options granted hereunder, both as
to the number of subject shares and the Option Price, shall be
adjusted appropriately; and
(c) Where dissolution or liquidation of the Company is involved, the
Optionee shall have the right, immediately prior to such
dissolution or liquidation, to exercise his Option, in whole or
in part, to the extent that it shall not have been exercised,
subject, however, to the limitations set forth in Article VI
hereof.
The foregoing adjustments and the manner of application thereof shall be
determined solely by the Committee, and any such adjustment may provide for the
elimination of fractional share interests. The adjustments required under this
Article shall apply to any successor or successors of the Company and shall be
made regardless of the number or type of successive events requiring adjustments
hereunder.
ARTICLE VI
OPTIONS
6.1 OPTION GRANT AND AGREEMENT. Each Option granted hereunder shall be
evidenced by minutes of a meeting or the written consent of the Committee and by
a written Stock Option Agreement dated as of the date of grant and executed by
the Company and the Optionee. As to each grant hereunder, the terms of the
Option, including the Option's exercise price, shall be stated in the Stock
Option Agreement or incorporated therein by reference to the resolution or
written consent of the Committee setting the terms of the Option. The terms and
conditions of the Option shall be consistent with the Plan.
6.2 OPTION PRICE. The Option Price of the Stock subject to each Option
shall be determined by the Committee.
6.3 EXERCISE PERIOD. The period for the exercise of each Option shall be
ten years from the date of grant, unless the Option is earlier terminated as may
be provided in the Stock Option Agreement.
6.4 OPTION EXERCISE. An Option shall be exercisable in full or in part,
subject to the terms of the Stock Option Agreement, prior to expiration or
termination of the Option.
4
<PAGE>
An Option may be exercised at any time or from time to time during the
term of the Option as to any or all full shares, but not at any time as to less
than 50 shares unless the remaining shares subject to the Option are less than
50 shares. The Option Price is to be paid in full in cash upon the exercise of
the Option, and the Company shall not be required to deliver certificates for
such shares until such payment has been made; provided, however, that in lieu of
cash all or any portion of the Option Price may be paid in such other manner as
may be acceptable to the Committee prior to delivery of the certificate(s)
representing said Stock which may, in the sole discretion of the Committee,
include the tendering to the Company shares of Stock duly endorsed for transfer
and owned by the Optionee, to be credited against the Option Price at their Fair
Value on the date of exercise. The holder of an Option shall not have any of the
rights of a stockholder with respect to the shares of Stock subject to the
Option until such shares have been issued or transferred to him upon the
exercise of his Option.
An Option shall be exercised by written notice of intent to exercise the
Option with respect to a specified number of shares of Stock, which notice shall
include the agreement to sign and abide by the terms and conditions of all then
applicable stockholders' agreements and transfer restrictions and by payment in
full to the Company in accordance with the preceding paragraph of the Option
Price for the number of shares of Stock with respect to which the Option is then
being exercised. The foregoing notice and payment shall be delivered to the
Secretary of the Company. In addition to and at the time of payment of the
Option Price, the Optionee shall pay to the Company in cash the full amount of
any federal and state withholding or other employment taxes applicable to the
taxable income of such Optionee resulting from such exercise; provided, however,
that in lieu of cash all or any portion of such tax obligations, together with
additional taxes not exceeding the actual additional taxes to be owed by the
Optionee as a result of such exercise, may, in the sole discretion of the
Committee and upon the irrevocable election of the Optionee, be paid by
tendering to the Company shares of Stock duly endorsed for transfer and owned by
the Optionee for more than six months, in that number of shares having a Fair
Value at the time of exercise equal to the amount of such taxes thereby being
paid.
6.5 NONTRANSFERABILITY OF OPTION. No Option shall be transferred by an
Optionee otherwise than by will or the laws of descent and distribution. During
the lifetime of an Optionee, his Option shall be exercisable only by him (or by
his guardian or legal representative, should one be appointed).
ARTICLE VII
STOCK CERTIFICATES
The Company shall not be required to issue or deliver a certificate for
shares of Stock purchased upon the exercise of any Option granted hereunder or
any portion thereof, prior to fulfillment of all of the following conditions:
5
<PAGE>
(a) The execution of all then applicable stockholders' agreements and
agreement to all then applicable transfer restrictions;
(b) The obtaining of any approval or other clearance from any federal or
state governmental agency which the Company upon the advice of
counsel shall determine to be necessary or advisable; and
(c) The lapse of such reasonable period of time following the exercise of
the Option as may be appropriate for reasons of administrative
convenience.
ARTICLE VIII
TERMINATION, AMENDMENT AND MODIFICATION OF PLAN
The Board may at any time terminate the Plan and may at any time and from
time to time and in any respect amend or modify the Plan; provided, however,
that if the Plan is approved by the stockholders of the Company, the Board may
not thereafter, without further stockholder approval, amend the Plan to:
(a) Increase the total number of shares of Stock subject to the Plan;
(b) Materially change or modify the class of employees that may
participate in the Plan; or
(c) Otherwise materially increase the benefits accruing to participants
under the Plan.
No termination, amendment or modification of the Plan shall adversely
affect any Option previously granted hereunder without the written consent of
the Optionee or his guardian, legal representative or legatee.
ARTICLE IX
MISCELLANEOUS
9.1 PLAN BINDING ON SUCCESSORS. The Plan shall be binding upon the
successors and assigns of the Company.
9.2 SINGULAR, PLURAL; GENDER. Whenever used herein, nouns in the singular
shall include the plural, and the masculine pronoun shall include the feminine
gender.
9.3 HEADINGS, ETC., NO PART OF PLAN. Headings of articles and sections
hereof are inserted for convenience and reference; they constitute no part of
the Plan.
6
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OCWEN
FINANCIAL CORPORATION'S CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND
STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS FROM ITS FILING ON FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998.
</LEGEND>
<CIK> 0000873860
<NAME> OCWEN FINANCIAL CORP.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 68,016
<INT-BEARING-DEPOSITS> 23,024
<FED-FUNDS-SOLD> 96,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 838,446
<INVESTMENTS-CARRYING> 13,256
<INVESTMENTS-MARKET> 13,256
<LOANS> 1,134,582
<ALLOWANCE> 27,819
<TOTAL-ASSETS> 3,479,491
<DEPOSITS> 1,767,602
<SHORT-TERM> 680,942
<LIABILITIES-OTHER> 130,488
<LONG-TERM> 298,023
0
0
<COMMON> 672
<OTHER-SE> 491,764
<TOTAL-LIABILITIES-AND-EQUITY> 3,479,491
<INTEREST-LOAN> 32,721
<INTEREST-INVEST> 13,660
<INTEREST-OTHER> 1,709
<INTEREST-TOTAL> 48,090
<INTEREST-DEPOSIT> 24,685
<INTEREST-EXPENSE> 43,396
<INTEREST-INCOME-NET> 4,694
<LOAN-LOSSES> 2,608
<SECURITIES-GAINS> (3,365)
<EXPENSE-OTHER> 37,975
<INCOME-PRETAX> (10,498)
<INCOME-PRE-EXTRAORDINARY> (7,243)
<EXTRAORDINARY> 2,145
<CHANGES> 0
<NET-INCOME> (5,098)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
<YIELD-ACTUAL> 9.17
<LOANS-NON> 587,543
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,935
<CHARGE-OFFS> (1,894)
<RECOVERIES> 170
<ALLOWANCE-CLOSE> 27,819
<ALLOWANCE-DOMESTIC> 27,819
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> INCLUDES LOANS AVAILABLE FOR SALE OF $36,843, LOAN PORTFOLIO OF $156,119,
DISCOUNT LOAN PORTFOLIO OF $842,148 AND MATCH FUNDED LOANS OF $99,472.
<F2> INCLUDES ALLOWANCE FOR LOAN LOSSES ON LOAN PORTFOLIO OF $7,104, ON THE
DISCOUNT LOAN PORTFOLIO OF $20,189 AND ON MATCH FUNDED LOANS OF $526.
<F3> INCLUDES SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE OF $680,454, ON
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT OF $174,059 AND ON BONDS -
MATCH FUNDED AGREEMENTS OF $130,429.
<F4> INCLUDES INTEREST INCOME ON LOANS AVAILABLE FOR SALE OF $807, LOAN
PORTFOLIO OF $3,968, AND DISCOUNT LOANS OF $25,099 AND ON MATCH FUNDED
LOANS AND SECURITIES OF $2,847.
<F5> INCLUDES NON-INTEREST EXPENSE OF $32,521, DISTRIBUTIONS ON COMPANY
OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUST HOLDING
SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY OF $3,194, AND EQUITY
IN LOSSES OF INVESTMENT IN UNCONSOLIDATED ENTITIES OF $2,260.
</FN>
</TABLE>
