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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: ___________________to________________
Commission File No. 0-21341
OCWEN FINANCIAL CORPORATION
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(Exact name of Registrant as specified in its charter)
FLORIDA 65-0039856
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1675 PALM BEACH LAKES BOULEVARD
WEST PALM BEACH, FLORIDA 33401
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(Address of principal executive office) (Zip Code)
(561) 682-8000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE (NYSE)
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12 (g) of the Act: Not applicable.
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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the Common Stock, $.01 par value, held by
nonaffiliates of the registrant, computed by reference to the closing price as
reported on the NYSE as of the close of business on March 09, 2000: $232,380,138
(for purposes of this calculation affiliates include only directors and
executive officers of the registrant).
Number of shares of Common Stock, $.01 par value, outstanding as of March 9,
2000: 67,733,475 shares
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to
Shareholders for fiscal year ended December 31, 1999 are incorporated by
reference into Part I, Items 1 and 3, and Part II, Items 5-8, and portions of
the Company's definitive Proxy Statement with respect to the Company's Annual
Meeting of Shareholders to be held on May 16, 2000, and as filed with the
Commission on or about March 30, 2000, are incorporated by reference into Part
III, Items 10-13.
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OCWEN FINANCIAL CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business............................................................ 5
General............................................................. 5
Segments............................................................ 5
Discount Loans.................................................... 5
Domestic Residential Mortgage Loan Servicing...................... 6
Investments in Low-Income Housing Tax Credit Interests............ 7
Commercial Real Estate Lending.................................... 7
UK Operations..................................................... 9
OTX............................................................... 10
Domestic Subprime Single Family Residential Lending............... 10
Investment Securities............................................. 11
OAC............................................................... 11
Unsecured Collections............................................. 12
Corporate Items and Other......................................... 12
Sources of Funds.................................................... 12
Risk Factors........................................................ 13
Competition......................................................... 13
Employees........................................................... 13
Regulation.......................................................... 14
The Company....................................................... 14
The Bank.......................................................... 15
Federal Taxation.................................................... 20
State Taxation...................................................... 21
Item 2. Properties.......................................................... 22
Item 3. Legal Proceedings................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................. 23
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters................................................. 23
Item 6. Selected Consolidated Financial Data................................ 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 23
Item 7A.Quantitative and Qualitative Disclosures About
Market Risk......................................................... 23
Item 8. Financial Statements and Supplementary Data......................... 23
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OCWEN FINANCIAL CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
(CONTINUED)
PAGE
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................... 24
PART III
Item 10. Directors and Executive Officers of Registrant...................... 24
Item 11. Executive Compensation.............................................. 24
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................... 23
Item 13. Certain Relationships and Related Transactions...................... 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K....................................................... 25
Signatures............................................................ 27
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 REGISTRATION STATEMENTS ON FORMS
S-1 AND S-3 AND PERIODIC REPORTS ON FORMS 10-Q, 8-K AND 10-K AND EXHIBIT 99.1,
RISK FACTORS (filed herewith), 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 PUBLICLY RELEASE THE RESULT OF ANY
REVISIONS THAT MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF SUCH STATEMENTS.
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PART I
ITEM 1. BUSINESS
GENERAL
Ocwen Financial Corporation ("OCN" or the "Company") is a specialty
financial services company whose primary business activities 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 Company is a Florida corporation which was organized in February 1988
in connection with its acquisition of Ocwen Federal Bank FSB (the "Bank"). The
Company is a registered savings and loan holding company subject to regulation
by the Office of Thrift Supervision (the "OTS"). The Bank is a wholly owned
subsidiary of the Company and is subject to regulation by the OTS, as its
chartering authority, and by the Federal Deposit Insurance Corporation ("FDIC"),
as a result of its membership in the Savings Association Insurance Fund
("SAIF"), which insures the Bank's deposits to the maximum extent permitted by
law. The Bank is also subject to certain regulation by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") and currently is a member
of the Federal Home Loan Bank ("FHLB") of New York, one of the 12 regional banks
which comprise the FHLB System.
SEGMENTS
The Company's business segments consisted of the following: (i) single
family residential and commercial real estate discount loan acquisition and
resolution activities; (ii) servicing of domestic residential mortgage loans for
others; (iii) investments in low-income housing tax credit interests; (iv)
commercial real estate lending; (v) United Kingdom ("UK") operations; (vi)
technology (which is conducted through Ocwen Technology Xchange ("OTX") and its
subsidiaries); (vii) domestic subprime single family residential lending; (viii)
investment securities; (ix) the operations of Ocwen Asset Investment Corp., a
Florida corporation (and together with its predecessor by merger, a Virginia
corporation, "OAC"); (x) unsecured collections; and (xi) corporate items and
other.
During 1999, segment activity reflects growth in the servicing segment, an
exit from the direct subprime originations business, both in the US and the UK,
the cessation of commercial and multi-family loan origination activity and the
acquisition of OAC.
DISCOUNT LOANS
Certain mortgage loans, for which the borrower is not current as to
principal and interest payments or for which there is a reason to believe the
borrower will be unable to continue to make scheduled principal and interest
payments, are acquired at a discount. Discount loans generally have collateral
coverage which is sufficiently in excess of the purchase price of the loan, such
that successful resolutions can produce total returns which are in excess of an
equivalent investment in performing mortgage loans.
The Company began its discount loan operations in 1991 and initially
focused on the acquisition of single family residential loans. In 1994 the
Company expanded this business to include the acquisition and resolution of
discount multi-family residential and commercial real estate loans (together,
unless the context otherwise requires, "commercial real estate loans"). Prior to
entering the discount loan business, management of the Company had substantial
loan resolution experience through former subsidiaries of the Company which had
been engaged in the business of providing private mortgage insurance for
residential loans. This experience assisted the Company in developing the
procedures, facilities and systems to evaluate, acquire and resolve such loans.
ACQUISITION OF DISCOUNT LOANS. Discount real estate loans generally are
acquired in pools, although discount commercial real estate loans may be
acquired individually. These pools generally are acquired in auctions or other
competitive bid circumstances. The Company obtains a substantial amount of
discount loans from various private sector sellers, such as banks, savings
institutions, mortgage companies, subprime lenders and insurance companies. In
addition, governmental agencies, including the Department of Housing and Urban
Development ("HUD"), are potential sources of discount loans.
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The Company generally acquires discount loans solely for its own portfolio.
From time to time, however, the Company and one or more co-investors may submit
a joint bid to acquire a pool of discount loans in order to enhance the
prospects of submitting a successful bid. If successful, the Company and the
co-investors generally allocate ownership of the acquired loans in an agreed
upon manner, although in certain instances the Company and the co-investor may
continue to have a joint interest in the acquired loans. In addition, from time
to time the Company and a co-investor may acquire discount loans through a joint
venture.
Prior to making an offer to purchase a portfolio of discount loans, the
Company conducts an investigation and evaluation of the loans in the portfolio.
Evaluations of potential discount loan acquisitions are conducted primarily by
the Company's employees who specialize in the analysis of nonperforming loans,
often with further specialization based on geographic or collateral-specific
factors. The Company's employees regularly use third parties, such as brokers,
who are familiar with a property's type and location, to assist them in
conducting an evaluation of the value of collateral property, and depending on
the circumstances, particularly in the case of commercial real estate loans, may
use subcontractors, such as local counsel and engineering and environmental
experts, to assist in the evaluation and verification of information and the
gathering of other information not previously made available by a potential
seller.
The Company determines the purchase offer by using a proprietary modeling
system and loan information database which focuses on the anticipated recovery
amount and the timing and cost of the resolution of the loans. The amount
offered by the Company generally is at a discount from both the stated value of
the loan and the value of the underlying collateral which the Company estimates
is sufficient to generate an acceptable return on its investment.
RESOLUTION OF DISCOUNT LOANS. After a discount loan is acquired, the Company
utilizes its information technology software systems to resolve the loan as
expeditiously as possible in accordance with specified procedures. The various
resolution alternatives generally include the following: (i) the borrower brings
the loan current in accordance with original or modified terms; (ii) the
borrower repays the loan or a negotiated amount of the loan; (iii) the borrower
agrees to deed the property to the Company in lieu of foreclosure, in which case
it is classified as real estate owned and held for sale by the Company; or (iv)
the Company forecloses on the loan and the property is acquired at the
foreclosure sale either by a third party or by the Company, in which case it is
classified as real estate owned and held for sale by the Company. In addition,
in the case of single family residential loans, assistance is provided to
borrowers in the form of forbearance agreements under which the borrower either
makes a monthly payment less than or equal to the original monthly payment or
makes a monthly payment more than the contractual monthly payment to make up for
arrearages.
In appropriate cases, the Company works with borrowers to resolve the loan
in advance of foreclosure. One method is through forbearance agreements, which
generally allow the borrower to pay the contractual monthly payment plus a
portion of the arrearage each month, and other means. Although this strategy may
result in an initial reduction in the yield on a discounted loan, the Company
believes that it is advantageous because it (i) generally results in a higher
resolution value than foreclosure; (ii) reduces the amount of real estate owned
acquired by foreclosure or by deed-in-lieu thereof and related risks, costs and
expenses; (iii) enhances the ability of the Company to sell the loan in the
secondary market, either on a whole loan basis or through securitizations (in
which case the Company may continue to earn fee income from servicing such
loans); and (iv) permits the borrower to retain ownership of the home and, thus,
enhances relations between the Company and the borrower.
The general goal of the Company's asset resolution process is to maximize,
in a timely manner, cash recovery on each loan in the discount loan portfolio.
The Company generally anticipates a longer period (approximately 12 to 30
months) to resolve discount commercial real estate loans than to resolve
discount single family residential loans because of their complexity and the
wide variety of issues that may occur in connection with the resolution of such
loans.
The Credit Committee of the Board of Directors of the Bank actively monitors
the asset resolution process to identify discount loans which have exceeded
their expected foreclosure period and real estate owned which has been held
longer than anticipated. Plans of action are developed for each of these assets
to remedy the cause for delay and are reviewed by the Credit Committee.
SALE OF DISCOUNT LOANS. From time to time the Company sells performing
discount loans either on a whole loan basis or indirectly through the
securitization of such loans and sale of the mortgage-related securities backed
by them. During the third quarter of 1999, the Company made a strategic decision
to structure future securitizations as financing transactions, which will
preclude the use of gain-on-sale accounting. There were no securitizations of
loans executed by the Company during the second half of 1999.
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Additional financial information regarding this segment appears under the
captions "Segment Profitability" on page 21 and "Note 29: Business Segment
Reporting" on pages 113 to 114 of the Company's 2000 Annual Report to
Shareholders (the "Annual Report to Shareholders") and is incorporated herein by
reference.
DOMESTIC RESIDENTIAL MORTGAGE LOAN SERVICING
During 1996, the Company developed a program to provide loan servicing and
various other asset management and resolution services to third party owners of
nonperforming assets, underperforming assets and subprime assets such as Class
B, C and D single family residential mortgage loans. Servicing contracts entered
into by the Company provide for the payment to the Company of specified fees and
in some cases may include terms which allow the Company to participate in the
profits resulting from the successful resolution of the assets being serviced.
Servicing fees, generally expressed as a percent of the unpaid principal
balance, are collected from the borrowers' payments. During any period in which
the borrower is not making payments, the Company is required under certain
servicing agreements to advance its own funds to meet contractual principal and
interest remittance requirements for certain investors, maintain property taxes
and insurance, and process foreclosures. The Company generally recovers such
advances from borrowers for reinstated and performing loans and from investors
for foreclosed loans.
The Bank has been approved as a loan servicer by HUD, Federal Home Loan
Mortgage Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA"). The Bank is rated a Tier 1 servicer and as a preferred servicer for
high-risk mortgages by FHLMC, the highest rating categories. The Bank is one of
only six special servicers of commercial mortgage loans to have received a
"Strong" rating from Standard & Poor's. The Bank is recognized and/or designated
by four rating agencies (Standard & Poor's, Duff and Phelps, IBC Fitch
Investors, and Moody's) as a "Special Servicer" for both commercial and
residential mortgage loans and is the only special servicer with this
designation for all mortgage categories.
The Company developed the concept of residential special servicing in 1997
and, in 1998, began entering into special servicing arrangements wherein the
Company acted as a special servicer for third parties, typically as part of a
securitization. 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.
In connection with the securitization and sale of loans, the Company
generally retains the rights to service such loans for investors. The Company
also acquires mortgage servicing rights which are recorded at cost.
During 1999, the Company opened a 125,000 square foot national servicing
center in Orlando, Florida. The service center has capacity to house 900
employees per shift handling customer contact on up to one million loans.
In December 1999, OCN announced a joint venture with independent Italian
loan servicer, FBS SpA, to service mortgage loans in Italy. The new joint
venture gives OCN 50% ownership in a newly formed company, Ocwen FBS SpA.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS
The Company invests in low-income housing tax credit interests primarily
through limited partnerships for the purpose of obtaining Federal income tax
credits pursuant to Section 42 of the Internal Revenue Code of 1986, as amended
(the "Code"), which provides a tax credit to investors in qualified low-income
rental housing that is constructed, rehabilitated or acquired after December 31,
1986. To be eligible for housing tax credits, a property generally must first be
allocated an amount of tax credits by the tax credit allocating agency, which in
most cases also serves as the housing finance agency, of the state in which the
property is located. If the property is to be constructed or rehabilitated, it
must be completed and placed in service within a specified time, generally
within two years after the year in which the tax credit allocation is received.
A specified portion of the apartment units in a qualifying project may be rented
only to qualified tenants for a period of 15 years, or a portion of any
previously claimed tax credits will be subject to recapture, as discussed below.
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The Company's investments in low-income housing tax credit interests are
made by the Company indirectly through its subsidiaries, which may be a general
partner and/or a limited partner in the partnership. Low-income housing tax
credit partnerships in which the Company, through a subsidiary, acts as a
general partner are presented on a consolidated basis.
The affordable housing projects owned by the low-income housing tax credit
partnerships in which the Company has invested are located throughout the United
States.
The ownership of low-income housing tax credit interests produces two
types of tax benefits. The primary tax benefit flows from the low-income housing
tax credits under the Code which are generated by the ownership and operation of
the real property in the manner required to obtain such tax credits. These
credits may be used to offset Federal income tax on a dollar for dollar basis
but may not offset the alternative minimum tax; tax credits thus may reduce the
overall Federal income tax to an effective rate of 20%. In addition, the
operation of the rental properties produces losses for financial statement and
tax purposes in the early years and sometimes throughout the anticipated
ownership period. These tax losses may be used to offset taxable income from
other operations and thereby reduce income tax which would otherwise be paid on
such taxable income.
Tax credits may be claimed over a ten-year period on a straight-line basis
once the underlying multi-family residential properties are placed in service.
Tax credits claimed reduce the tax payments computed based upon taxable income
to not less than the alternative minimum tax computed for that year or any year
not more than three years before or 15 years after the year the tax credit is
earned. The Taxpayer Relief Act of 1997 changed the tax credit carryback period
from 3 years to 1 year and the carry forward period from 15 years to 20 years
for credits that become available for use in years beginning after December 31,
1997. Tax credits are realized even if units in the project do not continue to
be occupied once the units in the project have been initially rented to
qualifying tenants, and tax credits are not dependent on a project's operating
income or appreciation. Tax credits can be claimed over a ten-year period and
generally can be lost or recaptured only if non-qualifying tenants are placed in
units, ownership of the project is transferred or the project is destroyed and
not rebuilt during a 15-year compliance period for the project. The Company has
established specific investment criteria for investment in multi-family
residential projects which have been allocated tax credits, which require, among
other things, a third party developer of the project and/or the seller of the
interest therein to provide a guarantee against loss or recapture of tax credits
and to maintain appropriate insurance to fund rebuilding in case of destruction
of the project. Notwithstanding the Company's efforts, there can be no assurance
that the multi-family residential projects owned by the low-income housing tax
credit partnerships in which it has invested will satisfy applicable criteria
during the 15-year compliance period and that there will not be loss or
recapture of the tax credits associated therewith.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
COMMERCIAL REAL ESTATE LENDING
The Company's investment in multi-familiy residential and commercial real
estate loans declined significantly during 1999, reflecting the Company's
decision to cease the origination of such loans. The Company's lending
activities have historically included the acquisition of loans secured by
commercial real estate, particularly loans secured by hotels and office
buildings, which the Company began originating in late 1994 and late 1995,
respectively. Commercial real estate loans have also been made to finance the
purchase and refinance of commercial properties, the refurbishment of distressed
properties and the construction of hotels. Additionally, the Company has
originated loans for the construction of multi-family residences, as well as
bridge loans to finance the acquisition and rehabilitation of distressed
multi-family residential properties.
Multi-family residential and commercial real estate loans are secured by a
first priority lien on the real property, all improvements thereon and, in the
case of hotel loans, all fixtures and equipment used in connection therewith, as
well as a first priority assignment of all revenue and gross receipts generated
in connection with the property. The liability of a borrower on multi-family
residential and commercial real estate loans generally is limited to the
borrower's interest in the property, except with respect to certain specified
circumstances.
In addition to stated interest, certain of the the large multi-family
residential and commercial real estate loans originated by the Company include
provisions pursuant to which the borrower agrees to pay the Company as
additional interest on the loan an amount based on specified percentages
(generally between 10-38%) of the net cash flow from the property during the
term of
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the loan and/or the net proceeds from the sale or refinancing of the property
upon maturity of the loan. Participating interests have also been obtained in
the form of additional fees which must be paid by the borrower in connection
with a prepayment of the loan, generally after an initial lock-out period during
which prepayments are prohibited. The fees which could be payable by a borrower
during specified periods of the loan consist of either fixed exit fees or yield
maintenance payments, which are required to be paid over a specified number of
years after the prepayment and are intended to increase the yield to the Company
on the proceeds from the loan payoff to a level which is comparable to the yield
on the prepaid loan.
Construction loans generally have terms of three to four years and
interest rates which float on a monthly basis in accordance with designated
reference rates. Payments during the term of the loan may be made to the Company
monthly on an interest-only basis. The loan amount may include an interest
reserve which is maintained by the Company and utilized to pay interest on the
loan during a portion of its term.
Construction loans are secured by a first priority lien on the real
property, all improvements thereon and all fixtures and equipment used in
connection therewith, as well as a first priority assignment of all revenues and
gross receipts generated in connection with the property. Construction loans are
made without pre-leasing requirements or any requirement of a commitment by
another lender to "take-out" the construction loan by making a permanent loan
secured by the property upon completion of construction. Disbursements on a
construction loan are subject to a retainage percentage of 10% and are made only
after evidence that available funds have been utilized by the borrower,
available funds are sufficient to pay for all construction costs through the
date of the construction advance and funds remain in the construction budget and
from sources other than the loan to complete construction of the project.
The Company generally has required the general contractor selected by the
borrower, which along with the general construction contract is subject to the
Company's review and approval, to provide payment and performance bonds issued
by a surety approved by the Company in an amount at least equal to the costs
which are estimated to be necessary to complete construction of the project in
accordance with the construction contract. Moreover, the Company generally
conducts site inspections of projects under construction at least bi-monthly and
of completed projects at least semi-annually.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
UK OPERATIONS
The Company entered the UK subprime residential mortgage market in 1998
through the acquisition of 36.07% of the total outstanding common stock of
Norland Capital Group plc, doing business as Kensington Mortgage Company
("Kensington"), on February 25, 1998 for $45.9 million. The Company's investment
at December 31, 1999 represented 35.84% of Kensington's total outstanding common
stock. Kensington is an originator of subprime residential mortgages in the UK.
On April 24, 1998, the Company, through its then wholly-owned subsidiary
Ocwen UK plc ("Ocwen UK"), acquired substantially all of the assets, and certain
liabilities, of the UK operations of Cityscape Financial Corp. ("Cityscape UK").
As consummated, the Company acquired Cityscape UK's mortgage loan portfolio and
its residential subprime mortgage loan origination and servicing businesses. On
October 1, 1999, the Company sold all the shares of Ocwen UK Limited, formerly
known as Ocwen UK, to Malvern House Acquisition Limited for the pound sterling
equivalent of $122.1 million in cash. As a result of the transaction, the
Company recorded a pretax gain on sale of $50.4 million.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
OTX
OTX, which was formed in 1998, designs software solutions for mortgage and
real estate transactions, provides business-to-business e-commerce solutions via
the Internet for the mortgage and real estate industries, and also provides
implementation, integration and consulting services related to its software and
internet products. OTX's principal products are its REALTransSM
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system, REAL-e(TM) software and REALSynergy(TM) software.
The REALTrans system is a web-based mortgage loan processing application
and vendor management system that facilitates the electronic ordering, tracking
and fulfillment of mortgage and real estate products and services. It automates
the mortgage process, eliminating duplicate manual data entry, reducing errors
and speeding delivery time. It also provides a task-based workflow management
system, allowing users to track the progress of all tasks and vendor requests
required to fulfill an order from any location, at any time.
The REAL-e software is a Windows-based, residential loan-servicing
platform that manages the total servicing life cycle of a loan. The REAL-e
software was developed through years of experience in the loan servicing
industry. It provides powerful workflow management capability, leading to
increased effectiveness and lower operational costs, and it integrates with the
Internet, call center telephony and data warehouse technology. It can be
implemented in its entirety or as a series of modules, including Loan Servicing,
Collections, Loss Mitigation, Default Loan Management, REO Management,
Construction Loan Servicing and Single Family Bond Series Tracking.
In June 1999, OTX acquired the assets of Synergy Software, LLC, a
developer of commercial and multifamily mortgage servicing systems. The
REALSynergy software is an advanced, Windows-based full-service commercial and
multi-family loan servicing software. It handles virtually any loan structure,
including complex remittance requirements, monitors multiple properties for each
loan, tracks building and site information reports, details extensive appraisal
summaries, and includes dynamic, easy-to-use contact management, call tracking
and task management capabilities.
The losses incurred by OTX in 1999 and 1998 reflect OCN's continuing
efforts to develop OTX and its suite of technology-based solutions.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
DOMESTIC SUBPRIME SINGLE FAMILY RESIDENTIAL LENDING
In August 1999, the Company closed its domestic subprime origination
business and reassigned or terminated employees who were involved in loan
origination and related management and support functions. Since late 1994, the
Company's lending activities have included the origination and purchase of
domestic single family residential loans to borrowers who because of prior
credit problems, the absence of a credit history or other factors are unable or
unwilling to qualify as borrowers for a single family residential loan under
guidelines of the FNMA and the FHLMC ("conforming loans") and who have
substantial equity in the properties which secure the loans.
Through 1996, the Company acquired subprime single family residential
loans primarily through a correspondent relationship with Admiral Home Loan
("Admiral") and, to a lesser extent, correspondent relationships with three
other financial services companies. Correspondent institutions originated loans
based on guidelines provided by the Company and promptly sold the loans to the
Company on a servicing-released basis.
The Company, through Ocwen Financial Services, Inc. ("OFS"), acquired
substantially all of the assets of Admiral in a transaction which closed on May
1, 1997. In connection with the Company's acquisition of assets from Admiral,
the Bank transferred its retail and wholesale subprime single family residential
lending operations to OFS.
The terms of the loan products offered by the Company directly or through
its correspondents emphasized real estate loans which generally were
underwritten with significant reliance on a borrower's level of equity in the
property securing the loan.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
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INVESTMENT SECURITIES
Investment securities includes the results of the securities portfolio,
whether available for sale or investment, other than subprime residuals and
subordinate interests related to the Company's securitization activities (which
have been included in the related business activity). The investment policy of
the Company, which is established by the Investment Committee and approved by
the Board of Directors, is designed primarily to provide a portfolio of
diversified instruments while seeking to optimize net interest income within
acceptable limits of interest rate risk, credit risk and liquidity.
On July 27, 1998, the Company sold its entire portfolio of AAA-rated
agency interest-only securities ("IOs") for $137.5 million, which represented
book value. As a result of an increase in prepayment speeds due to declining
interest rates, the Company recorded impairment charges of $86.1 million in 1998
prior to the sale resulting from the Company's decision to discontinue this
investment activity and write down the book value of the IOs. The AAA-rated
agency IOs consisted of IOs, which are classes of mortgage-related securities
that are entitled to payments of interest but no (or only nominal) principal,
and inverse IOs, which bear interest at a floating rate that varies inversely
with (and often at a multiple of) changes in a specified index.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
OAC
On October 7, 1999, Ocwen Acquisition Company ("Acquisition Sub"), a
Virginia corporation and an indirect wholly-owned subsidiary of OCN, merged (the
"Merger") with and into OAC, a Virginia corporation, in accordance with the
Agreement of Merger (the "Merger Agreement") dated as of July 25, 1999 among
OAC, OCN, and Acquisition Sub. In accordance with the Merger Agreement, OAC
shareholders (except for OCN or its subsidiaries) received 0.71 shares of OCN
stock for each outstanding share of OAC common stock. A total of 12,371,750
shares of OCN stock at a value of $96.8 million were issued to OAC shareholders.
The Merger, which resulted in OCN acquiring the remaining interest in OAC,
reflects an aggregate purchase price of $101.3 million, including direct costs
of the acquisition. The Merger was accounted for as a purchase, and the purchase
price has been allocated to OAC's assets and liabilities based on their fair
market values. The resulting $60.0 million excess of net assets acquired over
the purchase price is being amortized on a straight-line basis over a period of
five years. Prior to the Merger, the Company, through IMI, owned 1,540,000 or
8.12% of the outstanding common stock of OAC and 1,808,733 units or 8.71% of the
outstanding partnership units of Ocwen Partnership L.P. ("OPLP"). OPLP is the
operating partnership subsidiary of OAC.
On October 20, 1999, OAC merged into Small Commercial Properties
Corporation I ("SCP"), a Florida corporation and an indirect wholly-owned
subsidiary of OCN. Immediately thereafter, SCP changed its name to Ocwen Asset
Investment Corp. As a result of this merger, OAC ceased to qualify as a real
estate investment trust ("REIT") under the Code.
OAC is a real estate investment company which has invested in several
categories of real estate and real estate related assets, including (i)
subordinate interests in commercial and residential mortgage-backed securities;
(ii) distressed commercial and multi-family real property, including properties
acquired by a mortgage lender at foreclosure (or deed in lieu of foreclosure);
(iii) commercial, multi-family and single-family residential mortgage loans,
including construction and rehabilitation loans and mezzanine loans; (iv)
interest-only and inverse interest-only mortgage-related securities supported by
residential and commercial mortgage loans; and (v) discount loans. OAC also has
acquired real property or mortgage loans secured by such real property and other
real property interests that: (i) may be environmentally distressed; or (ii) are
located outside the United States.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
UNSECURED COLLECTIONS
In 1998, the Company began acquiring charged-off unsecured credit card
receivables at a discount. Collections of unsecured credit card receivables are
accounted for under the cost recovery method, whereby revenue is recognized only
to the
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extent that collections have exceeded original cost.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
CORPORATE ITEMS AND OTHER
Corporate items and other consists primarily of individually insignificant
business activities, amounts not allocated to the operating segments,
distributions on the Company's 10-7/8% Capital Trust Securities, transfer
pricing mismatches and other general corporate expenses.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
SOURCES OF FUNDS
GENERAL. Deposits, FHLB advances, reverse repurchase agreements, lines of
credit, and maturities and payments of principal and interest on loans and
securities and proceeds from the sales and securitizations thereof currently are
the principal sources of funds for use in the Company's investment and lending
activities and for other general business purposes. Management of the Company
closely monitors rates and terms of competing sources of funds on a regular
basis and generally utilizes the sources which are the most cost effective.
DEPOSITS. The primary source of deposits for the Company is brokered
certificates of deposit obtained primarily through national investment banking
firms which, pursuant to agreements with the Company, solicit funds from their
customers for deposit with the Company ("brokered deposits"). In addition,
during 1995, the Company commenced a program to obtain certificates of deposit
from customers of regional and local investment banking firms which are made
aware of the Company's products by the Company's direct solicitation and
marketing efforts. The Company also solicits certificates of deposit from
institutional investors and high net worth individuals identified by the
Company. The Company's brokered deposits are reported net of unamortized
deferred fees, which have been paid to investment banking firms.
The Company believes that the effective cost of brokered and other
wholesale deposits is more attractive to the Company than deposits obtained on a
retail basis from branch offices after the general and administrative expense
associated with the maintenance of branch offices is taken into account.
Moreover, brokered and other wholesale deposits generally give the Company more
flexibility than retail sources of funds in structuring the maturities of its
deposits and in matching liabilities with comparably maturing assets.
Although management of the Company believes that brokered and other
wholesale deposits are advantageous in certain respects, such funding sources,
when compared to retail deposits attracted through a branch network, are
generally more sensitive to changes in interest rates and volatility in the
capital markets and are more likely to be compared by the investor to competing
investments. In addition, such funding sources may be more sensitive to
significant changes in the financial condition of the Company. There are also
various regulatory limitations on the ability of all but well-capitalized
insured financial institutions to obtain brokered deposits. See "Regulation -
The Bank - Brokered Deposits." These limitations currently are not applicable to
the Company because the Bank is a well-capitalized financial institution under
applicable laws and regulations. See "Regulation - The Bank -Regulatory Capital
Requirements." There can be no assurances, however, that the Company will not
become subject to such limitations in the future.
As a result of the Company's reliance on brokered and other wholesale
deposits, significant changes in the prevailing interest rate environment, in
the availability of alternative investments for individual and institutional
investors or in the Company's financial condition, among other factors, could
affect the Company's liquidity and results of operations much more significantly
than might be the case with an institution that obtained a greater portion of
its funds from retail or core deposits attracted through a branch network.
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In addition to brokered and other wholesale deposits, the Company obtains
deposits from its office located in New Jersey. These deposits include
non-interest bearing checking accounts, NOW and money market checking accounts,
savings accounts and certificates of deposit and are obtained through
advertising, walk-ins and other traditional means. At December 31, 1999, the
deposits which were allocated to this office comprised approximately 5% of the
Company's total deposits.
BORROWINGS. Through the Bank, the Company can obtain advances from the
FHLB of New York upon the security of certain of its residential first mortgage
loans, mortgage-backed and mortgage-related securities and other assets,
including FHLB stock, provided certain standards related to the creditworthiness
of the Bank have been met. FHLB advances are available to member financial
institutions, such as the Bank, for investment and lending activities and other
general business purposes. FHLB advances are made pursuant to several different
credit programs, each of which has its own interest rate, which may be fixed or
adjustable, and range of maturities.
The Company also obtains funds pursuant to securities sold under reverse
repurchase agreements. Under these agreements, the Company sells securities
(generally mortgage-backed and mortgage-related securities) under an agreement
to repurchase such securities at a specified price at a later date. Reverse
repurchase agreements have short-term maturities (typically 90 days or less) and
are deemed to be financing transactions. All securities underlying reverse
repurchase agreements are reflected as assets in the Company's consolidated
financial statements and are held in safekeeping by broker-dealers.
The Company's borrowings also include lines of credit, notes, subordinated
debentures, bonds - match funded agreements and other interest-bearing
obligations.
OTHER. Additional information on the Company's sources of funds appears
under the captions "Liquidity, Commitments and Off-Balance Sheet Risks" on pages
60 to 61, "Deposits" on pages 54 to 55, "Note 16: Deposits" on page 96, "Note
17: Bonds-Match Funded Agreements" on pages 96 to 97, "Note 18: Obligations
Outstanding Under Lines of Credit" on page 97 and "Note 19: Notes, Debentures
and Other Interest-Bearing Obligations" on pages 98 to 99 of the Annual Report
to Shareholders and is incorporated herein by reference.
RISK FACTORS
Information related to risk factors which could directly or indirectly,
affect the Company's results of operations and financial condition set forth in
Exhibit 99.1 and are incorporated herein by reference.
COMPETITION
The information under the caption "Competition" set forth in Exhibit 99.1
is incorporated herein by reference.
SUBSIDIARIES
A list of the Company's significant subsidiaries is set forth in Exhibit
21.0 and is incorporated herein by reference.
EMPLOYEES
At December 31, 1999 the Company had 1,131 full time employees. The
employees are not represented by a collective bargaining agreement. Management
considers the Company's employee relations to be satisfactory.
REGULATION
Financial institutions and their holding companies are extensively
regulated under federal and state laws. As a result, the business, financial
condition and prospects of the Company can be materially affected not only by
management decisions and general economic conditions, but also by applicable
statutes and regulations and other regulatory pronouncements and policies
promulgated by regulatory agencies with jurisdiction over the Company and the
Bank, such as the OTS and the FDIC. The effect of such statutes, regulations and
other pronouncements and policies can be significant, cannot be predicted with a
high degree of certainty and can change over time. Moreover, such statutes,
regulations and other pronouncements and policies are intended to protect
depositors and the insurance funds administered by the FDIC and not stockholders
or holders of indebtedness which are not insured by the FDIC.
The enforcement powers available to Federal banking regulators are
substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief summaries
thereof as currently in effect. This discussion is not intended to constitute,
and does not purport
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to be, a complete statement of all legal restrictions and requirements
applicable to the Company and the Bank and all such descriptions are qualified
in their entirety by reference to applicable statutes, regulations and other
regulatory pronouncements.
THE COMPANY
GENERAL. The Company is a registered savings and loan holding company
under the Home Owner's Loan Act (the "HOLA"). As such, the Company is subject to
regulation, supervision and examination by the OTS.
ACTIVITIES RESTRICTION. There are generally no restrictions on the
activities of a savings and loan holding company, such as the Company, which
holds only one subsidiary savings institution. However, if the Director of the
OTS determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
institution, the Director may impose such restrictions as are deemed necessary
to address such risk, including limiting: (i) payment of dividends by the
savings institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, if the savings institution subsidiary of such a holding company fails
to meet the qualified thrift lender ("QTL") test set forth in OTS regulations,
then such unitary holding company shall become subject to the activities and
restrictions applicable to multiple savings and loan holding companies and,
unless the savings institution requalifies as a QTL within one year thereafter,
shall register as, and become subject to the restriction applicable to, a bank
holding company. See "The Bank-Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisition and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution generally shall commence or continue for a limited period of
time after becoming a multiple savings and loan holding company or subsidiary
thereof any business activity, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting as trustee under deeds of trust; (vi) those activities authorized by
regulation as of March 5, 1987 to be engaged in by multiple savings and loan
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. Those activities described in clause (vii) above also must be
approved by the Director of the OTS prior to being engaged in by a multiple
savings and loan holding company.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS: (i) control of any other savings institution or
savings and loan holding company or substantially all of the assets thereof; or
(ii) more than 5% of the voting shares of a savings institution or holding
company thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company, or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state only if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office located in the state of the institution to be acquired as of March
5, 1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered savings institutions located in the state where the
acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between the
Company or any of its non-bank subsidiaries and
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the Bank are subject to various restrictions, which are described below under
"The Bank-Affiliate Transactions."
THE BANK
GENERAL. The Bank is a federally-chartered savings bank organized under
the HOLA. As such, the Bank is subject to regulation, supervision and
examination by the OTS. The deposit accounts of the Bank are insured up to
applicable limits by the SAIF administered by the FDIC and, as a result, the
Bank also is subject to regulation, supervision and examination by the FDIC.
The business and affairs of the Bank are regulated in a variety of ways.
Regulations apply to, among other things, insurance of deposit accounts, capital
ratios, payment of dividends, liquidity requirements, the nature and amount of
the investments that the Bank may make, transactions with affiliates, community
and consumer lending laws, internal policies and controls, reporting by and
examination of the Bank and changes in control of the Bank.
INSURANCE OF ACCOUNTS. Pursuant to legislation enacted in September 1996,
a fee was required to be paid by all SAIF-insured institutions at the rate of
$0.657 per $100 of deposits held by such institutions at March 31, 1995. The
money collected recapitalized the SAIF reserve to the level of 1.25% of insured
deposits as required by law. In 1996, the Bank recorded a pre-tax charge of $7.1
million for this assessment. The recapitalization of the SAIF has resulted in
lower deposit insurance premiums for most SAIF-insured financial institutions,
including the Bank.
Insured institutions also are required to share in the payment of interest
on the bonds issued by a specially created government entity, the Finance
Corporation ("FICO"), the proceeds of which were applied toward resolution of
the thrift industry crisis in the 1980s. Beginning on January 1, 1997, in
addition to the insurance premiums paid by SAIF-insured institutions to maintain
the SAIF reserve at its required level pursuant to the current risk
classification system, SAIF-insured institutions pay deposit insurance premiums
towards the payment of interest on the FICO bonds. The FICO assessment rate is
adjusted quarterly.
Under the current risk classification system, institutions are assigned to
one of three capital groups which are based solely on the level of an
institution's capital - "well capitalized," "adequately capitalized" and
"undercapitalized" - which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the FDIA,
as discussed below. These three groups are then divided into three subgroups,
which are based on supervisory evaluations by the institution's primary federal
regulator, resulting in nine assessment classifications. Assessment rates
currently range from 0 basis points for well capitalized, healthy institutions
to 27 basis points for undercapitalized institutions with substantial
supervisory concerns.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally-insured savings associations
are subject to three capital requirements of general applicability: a tangible
capital requirement, a core or leverage capital requirement and a risk-based
capital requirement. All savings associations currently are required to maintain
tangible capital of at least 1.5% of adjusted total assets (as defined in the
regulations), core capital equal to 3% of adjusted total assets and total
capital (a combination of core and supplementary capital) equal to 8% of
risk-weighted assets (as defined in the regulations). For purposes of the
regulation, tangible capital is core capital less all intangibles other than
qualifying purchased mortgage servicing rights. Core capital includes common
stockholders' equity, non-cumulative perpetual preferred stock and related
surplus, minority interests in the equity accounts of fully consolidated
subsidiaries and certain nonwithdrawable accounts and pledged deposits. Core
capital generally is reduced by the amount of a savings association's intangible
assets, other than qualifying mortgage servicing rights.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, including subordinated debt (such as the Bank's
Debentures) which meets specified requirements, and general
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valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. In determining the required amount of risk-based capital,
total assets, including certain off-balance sheet items, are multiplied by a
risk weight based on the risks inherent in the type of assets. The risk weights
assigned by the OTS for principal categories of assets currently range from 0%
to 100%, depending on the type of asset.
OTS policy imposes a limitation on the amount of net deferred tax assets
that may be included in regulatory capital. (Net deferred tax assets represent
deferred tax assets, reduced by any valuation allowances, in excess of deferred
tax liabilities.) Application of the limit depends on the possible sources of
taxable income available to an institution to realize deferred tax assets.
Deferred tax assets that can be realized from the following generally are not
limited: taxes paid in prior carryback years and future reversals of existing
taxable temporary differences. To the extent that the realization of deferred
tax assets depends on an institution's future taxable income (exclusive of
reversing temporary differences and carryforwards), or its tax-planning
strategies, such deferred tax assets are limited for regulatory capital purposes
to the lesser of the amount that can be realized within one year of the
quarter-end report date or 10% of core capital.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest rate risk
will be subject to a deduction of its interest rate risk component from total
capital for purposes of determining whether it has met the risk-based capital
requirement. As a result, such an institution will be required to maintain
additional capital in order to comply with the risk-based capital requirement.
Although the final rule was originally scheduled to be effective as of January
1994, the OTS has indicated that it will delay invoking its interest rate risk
rule until appeal procedures are implemented and evaluated. The OTS has not yet
established an effective date for the capital deduction. Management of the
Company does not believe that the adoption of an interest rate risk component to
the risk-based capital requirement will adversely affect the Bank if it becomes
effective in its current form.
Effective April 1, 1999, the OTS minimum core capital ratio provides that
only those institutions with Uniform Financial Institution Rating System
("UFIRS") rating of "1" are subject to a 3% minimum core capital ratio. All
other institutions are subject to a 4% minimum core capital ratio. The 3%
minimum core capital ratio currently applies to all federal savings
associations.
CLASSIFIED ASSETS. OTS regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured associations, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as a loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified as a loss, the
insured institution must either establish specific allowances for loan losses in
the amount of 100% of the portion of the asset classified as a loss or charge
off such amount. In this regard, the Company establishes required reserves and
charges off loss assets as soon as administratively practicable. General loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses do not
qualify as regulatory capital.
In 1996, based upon discussions with the OTS and as a result of an OTS
bulletin issued on December 13, 1996 entitled "Guidance on the Classification
and Regulatory Reporting of Certain Delinquent Loans and Other Credit Impaired
Assets," the Company has classified all discount loans that are 90 or more days
contractually past due, not otherwise classified, as special mention and all
real estate owned, not otherwise classified, as special mention. The Company
also modified its policy for classifying nonperforming discount loans and real
estate owned related to its discount loan portfolio ("nonperforming discount
assets") to take into account both the holding period of such assets from the
date of acquisition and the ratio of book value to market value of such assets.
All nonperforming discount assets which are held 15 months or more after the
date of acquisition are classified substandard; nonperforming discount assets
held 12 months to less than 15 months from the date of acquisition are
classified as substandard if a ratio of book value to market value is 80% or
more; and nonperforming discount assets held less than
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12 months from the date of acquisition are classified as substandard if they
have a ratio of book value to market value of more than 85%. In addition,
nonperforming discount assets which are performing for a period of time
subsequent to acquisition by the Company are classified as substandard at the
time such loans become nonperforming. The Company also modified its classified
assets policy to classify all real estate owned which is not generating a cash
flow and which has been held for more than 15 months and three years as
substandard and doubtful, respectively. The Company's past experience indicates
that classified discount assets do not necessarily correlate to probability or
severity of loss.
Excluding assets which have been classified loss and fully reserved by the
Bank, the Bank's classified assets at December 31, 1999 under the above policy
consisted of $217.4 million of assets classified as substandard and $7.8 million
of assets classified as doubtful. In addition, at the same date, $479.4 million
of assets were designated as special mention.
Substandard assets at December 31, 1999 under the above policy consisted
primarily of $118.6 million of loans and real estate owned related to the
Company's discount single family residential loan program and $58.0 million of
loans and real estate owned related to the Company's discount commercial real
estate loan program. Special mention assets at December 31, 1999 under the
policy consisted primarily of $384.1 million and $77.1 million of loans and real
estate owned related to the Company's discount single family residential and
discount commercial real estate loan programs, respectively.
PROMPT CORRECTIVE ACTION. Federal law provides the Federal banking
regulators with broad power to take "prompt corrective action" to resolve the
problems of undercapitalized institutions. The extent of the regulators' powers
depends on whether the institution in question is "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Under regulations adopted by the Federal
banking regulators, an institution shall be deemed to be: (i) "well capitalized"
if it has a total risk-based capital ratio of 10.0% or more, has a Tier 1
risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of
5.0% or more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is
less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based
capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is
less than 3.0% and; (v) "critically undercapitalized" if it has a ratio of
tangible equity to adjusted total assets that is equal to or less than 2.0%. The
regulations also permit the appropriate Federal banking regulator to downgrade
an institution to the next lower category (provided that a significantly
undercapitalized institution may not be downgraded to critically
undercapitalized) if the regulator determines: (i) after notice and opportunity
for hearing or response, that the institution is in an unsafe or unsound
condition or (ii) that the institution has received (and not corrected) a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent exam. At December 31, 1999,
the Bank was a "well capitalized" institution under the prompt corrective action
regulations of the OTS.
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers, many of which are mandatory in certain
circumstances, include: prohibition on capital distributions; prohibition on
payment of management fees to controlling persons; requiring the submission of a
capital restoration plan; placing limits on asset growth; limiting acquisitions,
branching or new lines of business; requiring the institution to issue
additional capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rates that
the institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be dismissed;
prohibiting the institution from accepting deposits from correspondent banks;
requiring the institution to divest certain subsidiaries; prohibiting the
payment of principal or interest on subordinated debt; and, ultimately,
appointing a receiver for the institution.
QUALIFIED THRIFT LENDER TEST. All savings associations are required to
meet the QTL test set forth in the HOLA to avoid certain restrictions on their
operations. Under the QTL test provisions, a savings institution must maintain
at least 65% of its portfolio assets in qualified thrift investments. In
general, qualified thrift investments include loans, securities and other
investments that are related to housing, small business and credit card lending,
and to a more limited extent, consumer lending and community service purposes.
Portfolio assets are defined as an institution's total assets less goodwill and
other intangible assets, the institution's business property and a limited
amount of the institution's liquid assets. A savings association that does not
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meet the QTL test set forth in the HOLA and implementing regulations must either
convert to a bank charter or comply with the following restrictions on its
operations: (i) the association may not engage in any new activity or make any
new investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the association
shall be restricted to those of a national bank; (iii) the association shall not
be eligible to obtain any advances from its FHLB; and (iv) payment of dividends
by the association shall be subject to the rules regarding payment of dividends
by a national bank. Upon the expiration of three years from the date the
association ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations). The
Bank met the QTL test throughout 1999, and its qualified thrift investments
comprised 68.83% of its portfolio assets at December 31, 1999.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. Prior to amendments which became
effective April 1, 1999 (see below), the OTS regulation governing capital
distributions by savings associations, which included cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association as a capital distribution, created three tiers of
associations for capital distribution purposes. These three tiers were based on
regulatory capital, with the top two tiers providing a safe harbor for specified
levels of capital distributions from associations so long as such associations
notified the OTS and received no objection to the distribution from the OTS.
Associations that did not qualify for the safe harbor provided for the top two
tiers of associations were required to obtain prior OTS approval before making
any capital distributions.
Tier 1 associations could make the highest amount of capital
distributions, and were defined as savings associations that, before and after
the proposed distribution, met or exceeded their fully phased-in regulatory
capital requirements. Tier 1 associations were permitted to make capital
distributions during any calendar year equal to the greater of: (i) 100% of net
income for the calendar year-to-date plus 50% of its "surplus capital ratio" at
the beginning of the calendar year; and (ii) 75% of its net income over the most
recent four-quarter period. The "surplus capital ratio" is defined to mean the
percentage by which the association's ratio of total capital to assets exceeds
the ratio of its fully phased-in capital requirement to assets, and "fully
phased-in capital requirement" is defined to mean an association's capital
requirement under the statutory and regulatory standards applicable on December
31, 1994, as modified to reflect any applicable individual minimum capital
requirement imposed upon the association.
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 an 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.
LOAN-TO-ONE BORROWER. Under applicable laws and regulations, the amount of
loans and extensions of credit which may be extended by a savings institution
such as the Bank to any one borrower, including related entities, generally may
not exceed the greater of $500,000 or 15% of the unimpaired capital and
unimpaired surplus of the institution. Loans in an amount equal to an additional
10% of unimpaired capital and unimpaired surplus also may be made to a borrower
if the loans are fully secured by readily marketable securities. An
institution's "unimpaired capital and unimpaired surplus" includes, among other
things, the amount of its core capital and supplementary capital included in its
total capital under OTS regulations.
At December 31, 1999, the Bank's unimpaired capital and surplus amounted
to $332.8 million, resulting in a general loans-to-one borrower limitation of
$49.9 million under applicable laws and regulations.
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BROKERED DEPOSITS. Under applicable laws and regulations, an insured
depository institution may be restricted in obtaining, directly or indirectly,
funds by or through any "deposit broker," as defined, for deposit into one or
more deposit accounts at the institution. The term "deposit broker" generally
includes any person engaged in the business of placing deposits, or facilitating
the placement of deposits, of third parties with insured depository institutions
or the business of placing deposits with insured depository institutions for the
purpose of selling interests in those deposits to third parties. In addition,
the term "deposit broker" includes any insured depository institution, and any
employee of any insured depository institution, which engages, directly or
indirectly, in the solicitation of deposits by offering rates of interest (with
respect to such deposits) which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
having the same type of charter in such depository institution's normal market
area. As a result of the definition of "deposit broker," all of the Bank's
brokered deposits, as well as possibly its deposits obtained through customers
of regional and local investment banking firms and the deposits obtained from
the Bank's direct solicitation efforts of institutional investors and high net
worth individuals, are potentially subject to the restrictions described below.
Under FDIC regulations, well-capitalized institutions are not subject to the
brokered deposit limitations, while adequately capitalized institutions are able
to accept, renew or roll over brokered deposits only: (i) with a waiver from the
FDIC; and (ii) subject to the limitation that they do not pay an effective yield
on any such deposit which exceeds by more than (a) 75 basis points, the
effective yield paid on deposits of comparable size and maturity in such
institution's normal market area for deposits accepted in its normal market area
or (b) 120% for retail deposits and 130% for wholesale deposits, respectively,
of the current yield on comparable maturity U.S. Treasury obligations for
deposits accepted outside the institution's normal market area. Undercapitalized
institutions are not permitted to accept brokered deposits and may not solicit
deposits by offering an effective yield that exceeds by more than 75 basis
points the prevailing effective yields on insured deposits of comparable
maturity in the institution's normal market area or in the market area in which
such deposits are being solicited. At December 31, 1999, the Bank was a
well-capitalized institution which was not subject to restrictions on brokered
deposits. See "Sources of Funds - Deposits."
LIQUIDITY REQUIREMENTS. All savings associations are required to maintain
an average daily balance of liquid assets, which include specified short-term
assets and certain long-term assets, equal to a certain percentage of the sum of
its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings associations. In November 1997, the OTS amended its liquidity
regulations to, among other things, provide that a savings association shall
maintain liquid assets of not less than 4% of the amount of its liquidity base
at the end of the preceding calendar quarter as well as to provide that each
savings association must maintain sufficient liquidity to ensure its safe and
sound operation. Prior to November 1997, the required liquid asset ratio was 5%.
Historically, the Bank has operated in compliance with these requirements.
AFFILIATE TRANSACTIONS. Under federal law and regulation, transactions
between a savings association and its affiliates are subject to quantitative and
qualitative restrictions. Affiliates of a savings association include, among
other entities, companies that control, are controlled by or are under common
control with the savings association. As a result, the Company, OAC and the
Company's non-bank subsidiaries are affiliates of the Bank.
Savings associations are restricted in their ability to engage in "covered
transactions" with their affiliates. In addition, covered transactions between a
savings association and an affiliate, as well as certain other transactions with
or benefiting an affiliate, must be on terms and conditions at least as
favorable to the savings association as those prevailing at the time for
comparable transactions with non-affiliated companies. Savings associations are
required to make and retain detailed records of transactions with affiliates.
Notwithstanding the foregoing, a savings association is not permitted to
make a loan or extension of credit to any affiliate unless the affiliate is
engaged only in activities the Federal Reserve Board has determined to be
permissible for bank holding companies. Savings associations also are prohibited
from purchasing or investing in securities issued by an affiliate, other than
shares of a subsidiary.
Savings associations are also subject to various limitations and reporting
requirements on loans to insiders. These limitations require, among other
things, that all loans or extensions of credit to insiders (generally executive
officers, directors or 10% stockholders of the institution) or their "related
interests" be made on substantially the same terms (including interest rates and
collateral) as, and follow credit underwriting procedures that are not less
stringent than, those prevailing for comparable transactions with the general
public and not involve more than the normal risk of repayment or present other
unfavorable features.
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COMMUNITY INVESTMENT AND CONSUMER PROTECTIONS LAWS. In connection with its
lending activities, the Bank is subject to a variety of federal laws designed to
protect borrowers and promote lending to various sectors of the economy and
population. Included among these are the Federal Home Mortgage Disclosure Act,
Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit
Opportunity Act, Fair Credit Reporting Act and the Community Reinvestment Act.
SAFETY AND SOUNDNESS. Other regulations include: (i) real estate lending
standards for insured institutions, which provide guidelines concerning
loan-to-value ratios for various types of real estate loans; (ii) risk-based
capital rules to account for interest rate risk, concentration of credit risk
and the risks posed by "non-traditional activities;" (iii) rules requiring
depository institutions to develop and implement internal procedures to evaluate
and control credit and settlement exposure to their correspondent banks; and
(iv) rules addressing various "safety and soundness" issues, including
operations and managerial standards, standards for asset quality, earnings and
stock valuations, and compensation standards for the officers, directors,
employees and principal stockholders of the insured institution.
FEDERAL TAXATION
GENERAL. The Company and all of its domestic subsidiaries currently file,
and expect to continue to file, a consolidated Federal income tax return based
on a calendar year. Ocwen UK, a foreign subsidiary previously owned by the
Company, was not included in the consolidated federal income tax return, but
filed its own tax return in the UK. Consolidated returns have the effect of
eliminating inter-company transactions, including dividends, from the
computation of taxable income.
ALTERNATIVE MINIMUM TAX. In addition to the regular corporate income tax,
corporations, including qualifying savings institutions, are subject to an
alternative minimum tax. The 20% tax is computed on Alternative Minimum Taxable
Income ("AMTI") and applies if it exceeds the regular tax liability. AMTI is
equal to regular taxable income with certain adjustments. For taxable years
beginning after 1989, AMTI includes an adjustment for 75% of the excess of
"adjusted current earnings" over regular taxable income. Net operating loss
carrybacks and carryforwards are permitted to offset only 90% of AMTI.
Alternative minimum tax paid can be credited against regular tax due in later
years.
TAX RESIDUALS. From time to time, the Company acquires Real Estate
Mortgage Investment Conduit ("REMIC") residuals or retains residual securities
in REMICs which were formed by the Company in connection with the securitization
and sale of loans. Although a tax residual may have little or no future economic
cash flows from the REMIC from which it has been issued, the tax residual does
bear the income tax liability or benefit resulting from the difference between
the interest rate paid on the securities by the REMIC and the interest rate
received on the mortgage loans held by the REMIC. This generally results in
taxable income for the Company in the first several years of the REMIC and equal
amounts of tax deductions thereafter. The Company receives cash payments in
connection with the acquisition of tax residuals to compensate the Company for
the time value of money associated with the tax payments related to these
securities and the costs of modeling, recording, monitoring and reporting the
securities. The Company defers all fees received and recognizes such fees in
interest income on a level yield basis over the expected life of the deferred
tax asset related to tax residuals. The Company also adjusts the recognition in
interest income of fees deferred based upon the changes in the actual prepayment
rates of the underlying mortgages held by the REMIC and periodic reassessments
of the expected life of the deferred tax asset related to tax residuals. At
December 31, 1999, the Company's gross deferred tax assets included $2.4 million
which was attributable to the Company's tax residuals and related deferred
income.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. For a discussion
of the tax effects of investments in low-income housing tax credit interests,
see "Segments-Investment in Low-Income Housing Tax Credit Interests."
EXAMINATIONS. The most recent examination by the IRS of the Company's
Federal income tax return was of the tax return filed for 1996. The statute of
limitations has run with respect to 1995 and all prior tax years. Thus, the
Federal income tax returns for the years 1996 through 1998 are open for
examination. Management of the Company does not anticipate any material
adjustments as a result of any examination, although there can be no assurances
in this regard.
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STATE TAXATION
The Company's income is subject to tax by the States of Florida and
California, which have statutory tax rates of 5.5% and 10.84%, respectively, and
is determined based on certain apportionment factors. The Company is taxed in
New Jersey on income, net of expenses, earned in New Jersey at a statutory rate
of 3.0%. No state return of the Company has been examined, and no notification
has been received by the Company that any state intends to examine any of the
Company's tax returns.
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ITEM 2. PROPERTIES
The following table sets forth information relating to the Company's
facilities at December 31, 1999.
Net Book Value of
Property or
Leasehold
Location Owned/Leased Improvements
-------------------------------------- ------------ -----------------
(Dollars in Thousands)
EXECUTIVE OFFICES:
1675 Palm Beach Lakes Boulevard
West Palm Beach, FL................ Leased $ 5,376
MAIN OFFICE:
2400 Lemoine Ave
Fort Lee, NJ....................... Leased $ 15
SERVICING CENTER:
12650 Ingenuity Drive
Orlando, FL........................ Owned $23,021
OTX OFFICES:
Main office:
1675 Palm Beach Lakes Boulevard
West Palm Beach, FL............... Leased $ 45
DTS Communications, Inc:
5050 Avenida Encinas, Suite 200.
Carlsbad, CA...................... Leased $ 123
Amos, Inc.:
10 Research Parkway
Wallingford, CT................... Leased $ 104
Synergy Software, LLC:
109 Westpark Drive.
Brentwood, TN..................... Leased $ 9
OAC does not maintain an office. It relies on the facilities provided by
the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various pending legal proceedings. Management is
of the opinion that the resolution of these claims will not have a material
adverse effect on the results of operations or financial condition of the
Company. See "Note 30: Commitments and Contingencies" on page 115 of the
Company's Annual Report to Shareholders which is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 7, 1999 a special meeting of shareholders of Ocwen Financial
Corporation was held to vote on a proposal to acquire OAC, which was approved.
The results of the vote were 48,558,971 votes for, 23,483 votes against and 8
votes abstaining. Because more than 50% of the shares entitled to vote on the
proposal were so voted, broker nonvotes could not have elected to vote and thus
were not recorded.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information required by this Item appears under the caption "Shareholder
Information" on page 119 of the Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information required by this Item appears under the caption "Selected
Consolidated Financial Information" on pages 18 to 20 of the Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information required by this Item appears under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 21 to 63 of the Annual Report to Shareholders and is incorporated herein
by reference. In addition, please also note the information below.
RECENT DEVELOPMENTS
On January 4, 2000 the Company repurchased in the open market $20.0
million of its 11.5% Redeemable Notes for a $3.2 million pre tax gain. The Notes
are due in 2005 and had an outstanding balance of $140.5 million at December 31,
1999.
On January 18, 2000 the Company acquired 44 commercial discount loans for
a cost of $167.6 million. The portfolio includes both performing and
non-performing loans.
On February 3, 2000 the Company sold a commercial mortgage-backed security
for net proceeds of $40.9 million, resulting in a pre tax gain of $2.8 million.
For the period from January 1, 2000 through March 22, 2000, the Company
repurchased 1.4 million shares of its common stock at an average price of $6.48
per share. To date, the Company has repurchased 6.0 million shares, the maximum
amount authorized under its stock repurchase program, at an average price of
$6.61 per share.
On March 24, 2000 the Company announced that it had retained Grubb & Ellis
to exclusively market and sell its portfolio of office buildings located in San
Francisco. This portfolio consists of four properties which total approximately
900,000 square feet.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item appears under the captions "Asset and
Liability Management" on pages 55 to 60, "Note 1: Summary of Significant
Accounting Policies" on pages 72 to 78 and "Note 22: Derivative Financial
Instruments" on pages 101 to 104 of the Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item appears on pages 65 to 118 in the Annual
Report to Shareholders and is incorporated herein by reference.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's definitive Proxy Statement with
respect to the Company's Annual Meeting of Shareholders to be held on May 16,
2000, and as filed with the Commission on or about March 30, 2000 (the
"Company's 2000 Proxy Statement") under the captions "Election of Directors -
Nominees for Director," "Executive Officers Who Are Not Directors," and
"Security Ownership of Certain Beneficial Owners - Section 16(a) Beneficial
Ownership Reporting Compliance" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's 2000 Proxy Statement under the
captions "Executive Compensation," "Board of Directors Compensation" and
"Performance Graph" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's 2000 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners - Beneficial Ownership
of Common Stock" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Company's 2000 Proxy Statement under the
caption "Certain Relationships and Related Transactions" is incorporated herein
by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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 1991 Non-Qualified Stock Option
Plan, as amended (7)
10.2 Ocwen Financial Corporation 1996 Stock Plan for Directors,
as amended (8)
10.3 Ocwen Financial Corporation 1998 Annual Incentive Plan (8)
10.4 Ocwen Financial Corporation Long-Term Incentive Plan (8)
10.5 Loan Facility Agreement dated April 23, 1999 among Ocwen
Limited, National Westminster Bank plc and Ocwen Financial
Corporation (9)
10.6 Agreement of Merger dated as of July 25, 1999 among Ocwen
Financial Corporation, Ocwen Asset Investment Corp. and
Ocwen Acquisition Company (10)
10.7 Loan Agreement, dated as of April 7, 1998, between OAIC Bush Street,
LLC and Salomon Brothers Realty Corp. (11)
10.8 Loan Agreement, dated as of April 24, 1998, between OAC and Greenwich
Financial Products Inc. (12)
10.9 Amended and Restated Loan Agreement, dated as of June 10, 1998, by
and among, inter alia, OAIC California Partnership, L.P., OAIC
California partnership II, L.P., Salomon Brothers Realty Corp. and
LaSalle National Bank (12)
10.10 Compensation and Indemnification Agreement, dated as of May 6, 1999,
between OAC and the independent committee of the Board of
Directors (13)
10.11 Second Amendment to Guarantee of Payment, dated as of July 9, 1999,
made by and between Salomon Brothers Realty Corp. and Ocwen
Partnership, L.P. (13)
10.12 Indemnity agreement, dated August 24, 1999, among OCN, and OAC's
directors (13)
11.1 Computation of earnings per share (14)
12.1 Ratio of earnings to fixed charges (filed herewith)
13.1 Excerpts from the Annual Report to Shareholders for the
year ended December 31, 1999 (filed herewith)
21.0 Subsidiaries (filed herewith)
23.0 Consent of PricewaterhouseCoopers LLP (filed herewith)
27.1 Financial Data Schedule for the year ended December 31,
1999 (filed herewith)
99.1 Risk factors (filed herewith)
(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.
(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 .
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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 10Q for the
quarter 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 "Note 21: Basic and Diluted Earnings per
Share" on pages 100 to 101 of the Annual Report to Shareholders.
FINANCIAL STATEMENTS AND SCHEDULES. The following Consolidated Financial
Statements of Ocwen Financial Corporation and Report of PricewaterhouseCoopers
LLP, Independent Certified Public Accountants, are incorporated herein by
reference from pages 65 to 118 of the Annual Report to Shareholders:
Report of Independent Certified Public Accountants
Consolidated Statements of Financial Condition at December 31, 1999
and 1998
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1999
Consolidated Statements of Changes in Shareholders' Equity for each of the
three years in the period ended December 31, 1999
Consolidated statements of Comprehensive Income for each of the three years
in the period ended December 31, 1999
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1999
Notes to Consolidated Financial Statements
Financial statement schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or notes thereto.
(b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 1999
(1) A Form 8-K was filed by the Company on October 1, 1999 which contained a
news release announcing the sale of Ocwen UK, its estimated 1999 third
quarter results and certain other information.
(2) A Form 8-K was filed by the Company on October 7, 1999 which contained a
news release announcing its acquisition of OAC and information regarding
its stock repurchase program.
(3) A Form 8-K was filed on October 15, 1999 which contained the pro forma
financial information required as a result of the sale of Ocwen UK.
(4) A Form 8-K was filed by the Company on November 12, 1999 which contained
a news release announcing the Company's financial results for the three
and nine months ended September 30, 1999, and certain other information.
25
<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/ WILLIAM C. ERBEY
------------------------------------
William C. Erbey
Chairman of the Board and
Chief Executive Officer
(duly authorized representative)
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ WILLIAM C. ERBEY Date: March 30, 2000
- --------------------------------------------------
William C. Erbey, Chairman of the
Board and Chief Executive Officer
(principal executive officer)
/s/ BARRY N. WISH Date: March 30, 2000
- --------------------------------------------------
Barry N. Wish, Director
/s/ W. C. MARTIN Date: March 30, 2000
- --------------------------------------------------
W.C. Martin, Director
/s/ HOWARD H. SIMON Date: March 30, 2000
- --------------------------------------------------
Howard H. Simon, Director
/s/ HON. THOMAS F. LEWIS Date: March 30, 2000
- --------------------------------------------------
Hon. Thomas F. Lewis, Director
/s/ MARK S. ZEIDMAN Date: March 30, 2000
- --------------------------------------------------
Mark S. Zeidman, Senior Vice President and
Chief Financial Officer
(principal financial officer)
/s/ ROBERT J. LEIST, JR. Date: March 30, 2000
- --------------------------------------------------
Robert J. Leist, Jr., Vice President and Chief
Accounting Officer (principal accounting
officer)
<TABLE>
<CAPTION>
Exhibit 12.1 OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Earnings:
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing operations
before income taxes (1) and
extraordinary gain $ 23,973 $ (32,805) $ 99,538 $ 61,301 $ 37,701
Add:
Fixed charges (2) 173,167 203,315 167,165 117,455 84,626
--------- --------- --------- --------- ---------
Earnings for computation purposes $ 197,140 $ 170,510 $ 266,703 $ 178,756 $ 122,327
Ratio of earnings to fixed charges:
Including interest on deposits (3) 1.13 0.83 1.58 1.52 1.45
Excluding interest on deposits (3) 1.33 0.62 3.39 3.68 3.95
</TABLE>
(1) Earnings represents pre-tax income from continuing operations before
extraordinary gain, adjusted for losses and undistributed income of equity
investees.
(2) Fixed charges represent total interest expensed and capitalized, including
and excluding interest on deposits, amortization of capitalized debt
expenses, as well as the interest component of rental expense.
(3) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes and extraordinary
gains, adjusted for losses and undistributed income of equity investees
plus fixed charges by (y) fixed charges.
FINANCIAL TABLE OF CONTENTS
SELECTED CONSOLIDATED FINANCIAL INFORMATION ................................ 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................ 21
REPORT OF MANAGEMENT ....................................................... 64
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ......................... 65
CONSOLIDATED FINANCIAL STATEMENTS .......................................... 66
SHAREHOLDER INFORMATION ................................................... 119
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables present selected consolidated financial
information of Ocwen Financial Corporation and its subsidiaries ("OCN" or the
"Company") at the dates and for the periods indicated. The historical operations
and balance sheet data at and for the years ended December 31, 1999, 1998, 1997,
1996, and 1995, have been derived from financial statements audited by
PricewaterhouseCoopers LLP, independent certified public accountants. The
selected consolidated financial information should be read in conjunction with,
and is qualified in its entirety by reference to, the information contained in
the Consolidated Financial Statements and related notes set forth elsewhere
herein.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------
1999 (1) 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Interest income ................................................. $ 253,224 $ 307,694 $ 272,531 $ 193,894 $ 137,275
Interest expense ................................................ 155,542 184,893 156,289 116,160 84,060
--------- --------- --------- --------- ---------
Net interest income before provision for loan losses ......... 97,682 122,801 116,242 77,734 53,215
Provision for loan losses (2) ................................... 6,710 18,509 32,218 22,450 1,082
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses .......... 90,972 104,292 84,024 55,284 52,133
--------- --------- --------- --------- ---------
Servicing fees and other charges ................................ 75,437 59,180 25,962 4,682 2,870
Gain on interest-earning assets, net (3) ........................ 44,298 129,988 82,212 21,682 6,916
Impairment charges on securities available for sale ............. (58,777) (129,714) -- -- --
Amortization of excess of net assets acquired over purchase price
3,201 -- -- -- --
Other income (4) ................................................ 81,560 53,729 15,775 10,939 21,147
--------- --------- --------- --------- ---------
Total non-interest income .................................... 145,719 113,183 123,949 37,303 30,933
--------- --------- --------- --------- ---------
Compensation and employee benefits .............................. 102,173 115,556 77,573 39,043 29,913
Technology and communication costs .............................. 19,647 17,560 9,492 4,907 4,680
Other operating expenses ........................................ 74,325 95,146 39,809 25,656 10,819
--------- --------- --------- --------- ---------
Total non-interest expense ................................... 196,145 228,262 126,874 69,606 45,412
--------- --------- --------- --------- ---------
Distributions on Company-obligated, mandatorily redeemable
securities of subsidiary trust holding solely
junior subordinated debentures
13,111 13,594 5,249 -- --
Equity in (losses) earnings of investment in
unconsolidated entities (5)
(12,616) (7,985) 23,688 38,320 --
Income tax (expense) benefit .................................... (2,608) 30,699 (21,309) (11,159) (4,515)
Minority interest in net loss of consolidated subsidiary ........ 638 467 703 -- --
--------- --------- --------- --------- ---------
Income (loss) from continuing operations ........................ 12,849 (1,200) 78,932 50,142 33,139
Extrordinary gain on repurchase of debt, net of taxes ........... 6,983 -- -- -- --
Discontinued operations (6) ..................................... -- -- -- -- (7,672)
--------- --------- --------- --------- ---------
Net income (loss) ............................................... $ 19,832 $ (1,200) $ 78,932 $ 50,142 $ 25,467
========= ========= ========= ========= =========
Income (loss) from continuing operations per share (7):
Basic ........................................................ $ 0.20 $ (0.02) $ 1.40 $ 0.99 $ 0.64
Diluted ...................................................... $ 0.20 $ (0.02) $ 1.39 $ 0.94 $ 0.60
Net income (loss) per share (7):
Basic ........................................................ $ 0.31 $ (0.02) $ 1.40 $ 0.99 $ 0.49
Diluted ...................................................... $ 0.31 $ (0.02) $ 1.39 $ 0.94 $ 0.46
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------------------------------------
1999 (1) 1998 1997 1996 1995
----------- ----------- ----------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets ................................................ $ 3,309,313 $ 3,327,108 $ 3,068,301 2,481,113 $ 1,977,763
Securities available for sale (8) ........................... 587,518 593,347 441,638 354,005 337,480
Loans available for sale (8) (9) ............................ 45,213 177,847 177,041 126,366 251,790
Loan portfolio, net (8) (9) ................................. 157,408 230,312 266,299 402,582 295,605
Match funded loans and securities, net (10) ................. 157,794 -- -- -- --
Discount loan portfolio (9) ................................. 913,229 1,026,511 1,434,176 1,060,953 669,771
Investments in low-income housing tax credit interests ...... 150,989 144,164 128,614 93,309 63,140
Investment in unconsolidated entities ....................... 37,118 86,893 38,684 68,011 110
Real estate owned, net (11) ................................. 167,506 201,551 167,265 103,704 166,556
Investments in real estate (12) ............................. 268,241 36,860 -- -- --
Excess of purchase price over net assets acquired, net others 13,207 12,706 15,560 -- --
Escrow advances on loans and loans serviced for ............. 162,548 108,078 51,061 27,551 21,204
Deposits .................................................... 1,842,286 2,194,816 1,985,996 1,919,927 1,501,726
Borrowings and other interest-bearing obligations (13) ...... 694,319 476,336 453,529 300,518 272,214
Company-obligated mandatory redeemable securities
of subsidiary trust holding solely junior subordinate
debentures of the Company
110,000 125,000 125,000 -- --
Stockholders' equity (14) ................................... 509,442 436,376 419,692 203,596 139,547
OTHER DATA:
Average assets (15) ......................................... $ 3,203,397 $ 3,592,316 $ 2,835,514 2,013,283 $ 1,521,368
Average equity .............................................. 462,216 427,512 290,030 161,332 121,291
Return on average assets (15):
Income (loss) from continuing operations ................. 0.40% (0.03)% 2.78% 2.49% 2.18%
Net income (loss) ........................................ 0.62 (0.03) 2.78 2.49 1.67
Return on average equity:
Income (loss) from continuing operations ................. 2.78 (0.28) 27.22 31.08 27.32
Net income (loss) ........................................ 4.29 (0.28) 27.22 31.08 21.00
Average equity to average assets ............................ 14.43 11.90 10.23 8.01 7.97
Net interest spread ......................................... 4.59 3.93 4.81 5.46 5.25
Net interest margin ......................................... 4.40 4.30 4.91 4.84 4.54
Efficiency ratio (16) ....................................... 84.99 100.12 48.08 45.39 54.00
Non-performing loans to total loans at end of
period (17) .............................................. 18.82 3.81 3.36 0.56 1.27
Allowance for loan losses to total loans (17) ............... 4.35 2.07 1.39 0.87 0.65
Bank regulatory capital ratios at end of period:
Tangible ................................................. 10.67 9.07 10.66 9.33 6.52
Core (Leverage) .......................................... 10.67 9.07 10.66 9.33 6.52
Risk-based ............................................... 19.12 17.26 14.83 12.85 11.80
Number of full-service offices at end of period ............. 1 1 1 1 1
</TABLE>
19
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL INFORMATION
(1) Financial data for 1999 reflects the sale of the Company's wholly-owned
UK subsidiary, Ocwen UK Limited, formerly known as Ocwen UK plc ("Ocwen
UK"), on September 30, 1999 for a gain of $50.4 million. Ocwen UK was
engaged in the subprime mortgage loan origination and servicing
business and began operations on April 24, 1998. Financial data for
1999 also reflects the Company's acquisition of Ocwen Asset Investment
Corp. ("OAC") on October 7, 1999 for a total purchase price of $101.3
million. Previously, the Company accounted for its investment in OAC
and its operating partnership subsidiary, Ocwen Partnership LP
("OPLP"), under the equity method. See Note 2 to the Consolidated
Financial Statements for additional information regarding these
transactions.
(2) The provision for loan losses in 1999, 1998, 1997 and 1996 consists
primarily of $5.4 million, $17.6 million, $31.9 million and $20.6
million, respectively, related to the Company's discount loan
portfolio. Beginning in the first quarter of 1996, the Company began
recording a provision for losses on discount loans.
(3) Includes $36.8 million, $109.6 million, $71.9 million, $15.2 million
and $1.6 million of net gains recognized in connection with the
securitization of loans during 1999, 1998, 1997, 1996 and 1995,
respectively. During the third quarter of 1999, the Company made a
decision to structure future securitizations as financing transactions,
thereby precluding the use of gain-on-sale accounting. The Company
executed no securitizations of loans during the second half of 1999.
(4) Other income for 1999 includes the $50.4 million gain on the sale of
Ocwen UK.
(5) Results for 1999 related primarily to the Company's 35.84% investment
in Norland Capital Group plc, doing business as Kensington Mortgage
Company ("Kensington"), and the Company's 16.83% combined equity
investment in OAC and OPLP, prior to the acquisition on October 7,
1999. Results for 1997 and 1996 related to the Company's investment in
BCBF, L.L.C. (the "LLC"), a 50% owned joint venture formed between the
Company and BlackRock Capital Finance ("BlackRock") to acquire loans
from the Department of Housing and Urban Development ("HUD") in April
1996. The LLC distributed all of its assets on December 12, 1997.
(6) In September 1995, the Company announced its decision to dispose of its
automated banking division, which was substantially complete at
December 31, 1995.
(7) All per share amounts have been adjusted retroactively to reflect the
10-for-1 stock split in July 1996 and the 2-for-1 stock split in
November 1997. In addition, all per share amounts have been adjusted
for the adoption of Statement of Financial Accounting Standards No.
128, "Earnings per Share." See Note 1 to the Consolidated Financial
Statements (which is incorporated herein by reference).
(8) Securities available for sale are carried at fair value. Loans
available for sale are carried at the lower of cost or market value.
(9) The discount loan portfolio consists of mortgage loans purchased at a
discount to the unpaid debt, most of which were non-performing or
subperforming at the date of acquisition. The loan portfolio, net and
loans available for sale consist of other loans which were originated
or purchased by the Company for investment or for potential sale,
respectively. Data related to discount loans does not include discount
loans held by the LLC.
(10) Match funded loans and securities, net is primarily comprised of
securitized loans and securities accounted for as financing
transactions. The match funded loans were acquired as a result of the
OAC acquisition. See Note 9 to the Consolidated Financial Statements
(which is incorporated herein by reference).
(11) Real estate owned consists of properties acquired by foreclosure or by
deed-in-lieu thereof and is primarily attributable to the Company's
discount loan acquisition and resolution business.
(12) Balance at December 31, 1999 includes eight properties with an
aggregate carrying value of $252.6 million that were acquired as a
result of the OAC acquisition. See Note 12 to the Consolidated
Financial Statements (which is incorporated herein by reference).
(13) Balance at December 31, 1999 includes $140.5 million of 11.5% notes and
$101.0 million of bonds-match funded agreements assumed as a result of
the OAC acquisition. See Notes 17 and 19 to the Consolidated Financial
Statements (which is incorporated herein by reference).
(14) Reflects the issuance of 12,371,750 shares of common stock in the
amount of $96.8 million in connection with the acquisition of OAC on
October 7, 1999. Also reflects the Company's repurchase of 4,611,700
shares of its common stock for an aggregate of $30.7 million and
17,630,120 shares of common stock for an aggregate of $42.0 million
during 1999 and 1995, respectively.
(15) Includes the Company's pro rata share of the average assets held by the
LLC during 1997 and 1996.
(16) 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 earnings of investment in unconsolidated entities.
(17) Non-performing loans and total loans do not include loans in the
Company's discount loan portfolio or loans available for sale.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the Company's consolidated financial
condition, results of operations and capital resources and liquidity should be
read in conjunction with the Selected Consolidated Financial Information,
Consolidated Financial Statements and the related notes, all included elsewhere
herein.
RESULTS OF OPERATIONS
GENERAL. The Company recorded net income of $19.8 million for 1999,
as compared to a net loss of $1.2 million for 1998 and net income of $78.9
million for 1997. Diluted earnings per share were $0.31 for 1999, as compared
with diluted loss per share of ($0.02) for 1998 and diluted earnings per share
of $1.39 for 1997. There were a number of key factors that contributed to annual
results for 1999 as compared to 1998, including: a pretax gain of $50.4 million
earned from the sale of Ocwen UK on September 30, 1999; continued growth in the
profitability of the domestic residential mortgage loan servicing business,
which reported a 59% increase in net income to $12.9 million in 1999 as compared
to $8.1 million in 1998; a reduction in the amount of impairment charges
recorded on the securities portfolio from $129.7 million in 1998 to $58.8
million in 1999; a reduction in reported gain on sale of interest earning assets
from $130.0 million in 1998 to $44.3 million in 1999, 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; and an increase in net losses incurred by Ocwen
Technology Xchange, Inc. ("OTX") from $9.6 million in 1998 to $19.2 million in
1999, reflecting the continuing investment in the development of the Company's
technology businesses.
SEGMENT PROFITABILITY. The following table presents the after tax
contribution by business segment to the Company's net income (loss) for the
years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Discount loans:
Single family residential loans ........................................ $(10,996) $ 15,444 $ 25,100
Commercial real estate loans ........................................... 14,747 37,001 28,398
-------- -------- --------
3,751 52,445 53,498
Domestic residential mortgage loan servicing ........................... 12,939 8,148 (954)
Investment in low-income housing tax credits ........................... 8,960 9,662 11,300
Commercial real estate lending ......................................... 5,630 13,549 11,545
UK operations .......................................................... 36,429 12,246 --
OTX .................................................................... (19,190) (9,619) (391)
Domestic subprime single family residential lending .................... (18,234) (21,951) 1,841
Investment securities .................................................. (3,874) (59,281) 2,894
OAC .................................................................... 365 (9,750) 153
Unsecured collections .................................................. (4,110) (1,036) 185
Corporate items and other .............................................. (2,834) 4,387 (1,139)
-------- -------- --------
$ 19,832 $ (1,200) $ 78,932
======== ======== ========
</TABLE>
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. Results for 1999 and 1998
include impairment charges of $27.3 million and $14.2 million,
respectively, on residential subordinate securities. Securitization
gains during 1999, 1998 and 1997 were $22.8 million, $48.1 million and
$51.1, respectively. See "Results of Operations - Non-Interest Income."
o COMMERCIAL REAL ESTATE DISCOUNT LOANS. Net income includes gains from
sales of loans of $4.2 million, $12.2 million and $3.5 million during
1999, 1998 and 1997, respectively. Net income also includes gains on
the repayment of loans, which is reported as interest income, of $16.4
million, $39.4 million and $43.3 million, respectively. Gains from the
sale and operation of commercial real estate owned amounted to $3.6
million, $23.5 million and $13.2 million during 1999, 1998 and 1997,
respectively.
o DOMESTIC RESIDENTIAL MORTGAGE LOAN SERVICING. The increase in net
income during 1999 and 1998 reflects an increase in servicing fees as a
result of an increase in loans serviced for others. Domestic
residential servicing fees amounted to $46.2 million, $39.9 million and
$22.1 million during 1999, 1998, and 1997, respectively. See "Results
of Operations - Non-Interest Income."
21
<PAGE>
o INVESTMENT IN LOW-INCOME HOUSING TAX CREDITS. Net income for 1999
includes $6.6 million of gains associated with the sale of tax credit
interests. This compares to gains of $7.4 million and $6.1 million in
1998 and 1997, respectively. Low-income housing tax credits and
benefits amounted to $18.2 million, $17.7 million, and $14.9 million
for 1999, 1998, and 1997, respectively. Net operating losses from tax
credit properties in service amounted to $6.3 million, $6.9 million,
and $4.9 million during 1999, 1998, and 1997, respectively. See
"Changes in Financial Condition - Investment in Low-Income Housing Tax
Credit Interests."
o COMMERCIAL REAL ESTATE LENDING. Net income includes $8.1 million, $12.4
million and $12.3 million of additional interest received on the payoff
of loans during 1999, 1998, and 1997, respectively. As of June 30,
1999, the Company ceased the origination of multi-family and commercial
real estate loans.
o UK OPERATIONS. On September 30, 1999, the Company sold all of the
shares of its wholly-owned subsidiary, Ocwen UK, to Malvern House
Acquisition Limited for the pound sterling equivalent of $122.1 million
in cash. Ocwen UK was originally formed to acquire substantially all of
the assets, and certain of the liabilities, of the United Kingdom
operations of Cityscape Financial Corp., and commenced operations on
April 24, 1998. As a result of the transaction, the Company recorded a
pretax gain on sale of $50.4 million. Ocwen UK securitization gains
during 1999 and 1998 totaled $10.2 million and $27.0 million,
respectively. UK operations also includes equity in (losses) earnings
of Kensington of $(9.2) million and $0.4 million for 1999 and 1998,
respectively.
o OTX. The increase in net losses incurred by OTX, which was formed in
1998, reflects the Company's continuing investment in the development
of its technology businesses. Losses for 1999 also included a $3.4
million charge reflecting the impact of a reduction in the estimated
useful life of the goodwill associated with the acquisitions previously
made by OTX. On June 2, 1999, OTX acquired substantially all of the
assets of Synergy Software, LLC ("Synergy"), a developer of commercial
and multi-family mortgage servicing systems. See Note 2 to the
Consolidated Financial Statements (which is incorporated herein by
reference).
o DOMESTIC SUBPRIME SINGLE FAMILY RESIDENTIAL LENDING. Net losses during
1999 and 1998 included $29.4 million and $31.0 million, respectively,
of impairment charges on subprime residual securities. The net loss for
1998 also included a charge of $10.1 million for the write-off of
goodwill at Ocwen Financial Services, Inc. ("OFS"). In August 1999, the
Company closed its domestic subprime origination business, which had
been conducted primarily through OFS, which itself was formed in 1997.
During 1999, 1998 and 1997, gains of $3.8 million, $34.5 million and
$18.8 million were recorded in connection with the securitization of
loans.
o INVESTMENT SECURITIES. The $59.3 million loss in 1998 included $86.1
million of pretax impairment charges related to the Company's
securities portfolio of AAA-rated agency interest-only securities
("IOs"). The Company discontinued this investment activity and sold
this portfolio of IO's in July of 1998. See "Changes in Financial
Condition - Securities Available for Sale."
o OAC. On October 7, 1999, the Company acquired OAC, a publicly-traded
real estate investment trust. Under the terms of the agreement, OAC
shareholders (except for OCN or its subsidiaries) received 0.71 shares
of OCN stock for each outstanding share of OAC common stock. Effective
with the merger, the Company's consolidated financial statements
include OAC and its subsidiaries. Previously, the Company accounted for
its investment in OAC under the equity method. At September 30, 1999,
the Company, through a wholly-owned subsidiary, owned 1,540,000 or
8.12% of the outstanding common stock of OAC and 1,808,733 units or
8.71% of the outstanding partnership units of OPLP. See "Changes in
Financial Condition - Investment in Unconsolidated Entities" and Note 2
to the Consolidated Financial Statements (which is incorporated herein
by reference).
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 29 to the Consolidated Financial Statements (which is
incorporated herein by reference) for additional information related to the
Company's operating segments.
NET INTEREST INCOME: 1999 VERSUS 1998 AND 1998 VERSUS 1997. The
operations of the Company are substantially dependent on its net interest
income, which is the difference between the interest income received from its
interest-earning assets and the interest expense paid on its interest-bearing
liabilities. Net interest income is determined by net interest spread (i.e., the
difference between the yield earned on its interest-earning assets and the rates
paid on its interest-bearing liabilities), the relative amount of
interest-earning assets and interest-bearing liabilities and the degree of
mismatch in the maturity and repricing characteristics of its interest-earning
assets and interest-bearing liabilities.
22
<PAGE>
The following table sets forth, for the periods indicated,
information regarding the total amount of income from interest-earning assets
and the resultant average yields, the interest expense associated with
interest-bearing liabilities, expressed in dollars and rates, and the net
interest spread and net interest margin. Information is based on average daily
balances during the indicated periods.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------- ----------------------------- ---------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------ ----------- -------- ---------- ---------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS: (Dollars in Thousands)
Federal funds sold and repurchase
agreements........................ $ 174,494 $ 8,942 5.12% $ 149,441 $ 7,930 5.31% $ 163,671 $ 8,975 5.48%
Securities available for sale (1) ... 593,399 62,698 10.57 590,367 40,320 6.83 299,558 28,545 9.53
Loans available for sale (2) ........ 234,272 25,724 10.98 520,859 56,791 10.90 171,837 18,368 10.69
Investment securities and other ..... 29,874 2,086 6.98 31,422 3,197 0.17 36,905 4,045 10.96
Loan portfolio (2)................... 181,194 28,683 15.83 266,519 38,609 14.49 410,863 54,701 13.31
Match funded loans and securities ... 30,483 3,237 10.62 -- -- -- -- -- --
Discount loan portfolio ............. 975,439 121,854 12.49 1,295,885 160,847 12.41 1,283,020 157,649 12.29
Securities held for trading ........ -- -- -- -- -- -- 3,295 248 7.53
------------ ----------- ---------- ---------- ---------- --------
Total interest earning assets .... 2,219,155 253,224 11.41 2,854,493 307,694 10.78 2,369,149 272,531 11.50
----------- ---------- --------
Non-interest earning cash ........... 96,781 20,928 14,843
Allowance for loan losses ........... (26,597) (25,655) (22,001)
Low-income housing tax credit
interests ......................... 166,600 130,391 96,096
Investment in unconsolidated
entities .......................... 76,146 82,779 34,777
Real estate owned, net .............. 191,694 178,223 131,007
Investment in real estate ........... 90,494 36,922 44,722
Other assets......................... 389,124 314,235 166,921
------------ ---------- ----------
Total assets...................... $ 3,203,397 $3,592,316 $2,835,514
============ ========== ==========
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits .... $ 37,483 1,313 3.50% $ 36,139 1,434 3.97% $ 31,719 1,220 3.85%
Savings deposits..................... 1,588 38 2.39 1,652 38 2.30 2,121 49 2.31
Certificates of deposit ............. 1,590,553 97,019 6.10 1,844,977 115,112 6.24 1,964,351 120,801 6.15
------------ ----------- ---------- ---------- ---------- --------
Total interest-bearing deposits .. 1,629,624 98,370 6.04 1,882,768 116,584 6.19 1,998,191 122,070 6.11
Securities sold under agreements to 6.93
repurchase........................ 107,622 7,456 104,980 6,514 6.20 16,717 1,000 5.98
Bonds-match funded agreements ....... 28,904 2,101 7.27 -- -- -- -- -- --
Obligations outstanding under
lines of credit ................... 256,300 16,318 6.37 481,212 34,587 7.19 84,272 5,578 6.62
Notes, debentures and other ......... 257,424 31,297 12.16 230,059 27,208 11.83 237,715 27,641 11.63
------------ ----------- ---------- ---------- ---------- --------
Total interest-bearing
liabilities .................... 2,279,874 155,542 6.82 2,699,019 184,893 6.85 2,336,895 156,289 6.69
----------- ---------- --------
Non-interest bearing deposits ....... 26,316 19,483 23,224
Escrow deposits...................... 228,335 174,237 78,986
Other liabilities.................... 84,559 147,065 57,992
------------ ---------- ----------
Total liabilities................. 2,619,084 3,039,804 2,497,097
Capital securities................... 122,097 125,000 48,387
Stockholders' equity................. 462,216 427,512 290,030
------------ ---------- ----------
Total liabilities and
stockholders' equity ........... $ 3,203,397 $3,592,316 $2,835,514
============ ========== ==========
Net interest income.................. $ 97,682 $ 122,801 $116,242
=========== ========== ========
Net interest spread.................. 4.59% 3.93% 4.81%
Net interest margin.................. 4.40% 4.30% 4.91%
Ratio of interest-earning assets
to interest-bearing liabilities .. 97% 106% 101%
</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.
23
<PAGE>
The following table describes the extent to which changes in
interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
expense during the periods indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (change in volume multiplied by prior
rate), (ii) changes in rate (change in rate multiplied by prior volume) and
(iii) total change in rate and volume. Changes attributable to both volume and
rate have been allocated proportionately to the change due to volume and the
change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
-------------------------------- --------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
-------------------------------- --------------------------------
Rate Volume Total Rate Volume Total
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and repurchase agreements ........ $ (366) $ 1,283 $ 917 $ (283) $ (762) $ (1,045)
Securities available for sale ....................... 22,170 208 22,378 (9,859) 21,634 11,775
Loans available for sale ............................ 399 (31,466) (31,067) 375 38,048 38,423
Loan portfolio ...................................... 3,323 (13,249) (9,926) 4,479 (20,571) (16,092)
Discount loan portfolio ............................. 1,031 (40,024) (38,993) 1,609 1,589 3,198
Match funded loans and securities ................... 3,237 -- 3,237
Investment securities and other ..................... (865) (151) (1,016) (276) (572) (848)
Securities held for trading ......................... -- -- -- (124) (124) (248)
-------- -------- -------- -------- -------- --------
Total interest-earning assets .................... 28,929 (83,399) (54,470) (4,079) 39,242 35,163
-------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits .................... (173) 52 (121) 40 174 214
Savings deposits .................................... 2 (2) -- -- (11) (11)
Certificates of deposit ............................. (2,524) (15,569) (18,093) 1,738 (7,427) (5,689)
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits .................. (2,695) (15,519) (18,214) 1,778 (7,264) (5,486)
Securities sold under agreements to repurchase ...... 775 167 942 39 5,475 5,514
Obligations outstanding under lines of credit........ (3,587) (14,682) (18,269) 519 28,490 29,009
Bonds-match funded agreements ....................... 2,101 -- 2,101 -- -- --
Notes, debentures and other interest-
bearing obligations .............................. 779 3,310 4,089 467 (900) (433)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities ............ (2,627) (26,724) (29,351) 2,803 25,801 28,604
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest
income ........................................... $ 31,556 $(56,675) $(25,119) $ (6,882) $ 13,441 $ 6,559
======== ======== ======== ======== ======== ========
</TABLE>
1999 VERSUS 1998:
The Company's net interest income before provision for loan losses
of $97.7 million decreased $25.1 million or 20% during 1999 as compared to the
prior year. The decrease was due to a decrease in average interest-earning
assets, offset by a decrease in average interest-bearing liabilities and an
increase in the net interest spread. Average interest-earning assets decreased
by $635.3 million or 22% during 1999 and reduced interest income by $83.4
million. Average interest-bearing liabilities decreased $419.1 million or 16%
and reduced interest expense by $26.7 million. The impact of these volume
changes resulted in a $56.7 million decrease in net interest income. The net
interest spread increased 66 basis points during 1999 as a result of a 63
basis-point increase in the weighted average rate on interest-earning assets and
a 3 basis-point decrease in the weighted average rate on interest-bearing
liabilities. The impact of these rate changes resulted in a $31.6 million
increase in net interest income.
24
<PAGE>
<TABLE>
<CAPTION>
Average Balance Increase Average Yield Increase
------------------------- (Decrease) ---------------- (Decrease)
For the Year Ended December 31, 1999 1998 $ 1999 1998 Basis Points
- ---------------------------------------------- ----------- ----------- ----------- ------- ------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and repurchase agreements.. $ 174,494 $ 149,441 $ 25,053 5.12% 5.31% (19)
Securities available for sale ................ 593,399 590,367 3,032 10.57 6.83 374
Loans available for sale (1) ................. 234,272 520,859 (286,587) 10.98 10.90 8
Investment securities and other .............. 29,874 31,422 (1,548) 6.98 10.17 (319)
Loan portfolio ............................... 181,194 266,519 (85,325) 15.83 14.49 134
Match funded loans and securities ............ 30,483 -- 30,483 10.62 -- 1,062
Discount loan portfolio ...................... 975,439 1,295,885 (320,446) 12.49 12.41 8
----------- ----------- -----------
$ 2,219,155 $ 2,854,493 $ (635,338) 11.41% 10.78% 63
=========== =========== ===========
</TABLE>
(1) Includes an average balance of $132.1 million and $147.1 million
with an average yield earned of 12.28% and 11.81% for 1999 and 1998,
respectively, related to Ocwen UK.
Interest income on securities available for sale increased $22.4
million or 56% during 1999 as compared to 1998 primarily as a result of a 374
basis-point increase in the weighted average yield earned. As indicated in the
table below, the increase in the weighted average yield during 1999 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 Year Ended December 31, 1999 1998 1999 1998
- --------------------------------------------------------- ---------------------- ------------------- ------- -------
Amount Percent Amount Percent
----------- -------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
CMOs (AAA-rated)......................................... $ 366,343 61% $ 291,669 49% 5.71% 5.51%
Subordinates and residuals (1) ......................... 227,056 39 180,673 31 18.40 13.96
IOs (AAA-rated agency)................................... -- -- 113,347 19 -- (0.87)
Other.................................................... -- -- 4,678 1 -- 0.53
----------- -------- ---------- -------
$ 593,399 100% $ 590,367 100% 10.57% 6.83%
=========== ======== ========== =======
</TABLE>
(1) Includes an average balance of $60.7 million and $42.3 million with
an average yield earned of 24.45% and 14.23% for 1999 and 1998,
respectively, related to Ocwen UK.
During 1998, the Company discontinued its investment in AAA-rated
agency IOs and sold its entire portfolio on July 27, 1998. 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, such as IOs. See "Changes in Financial Condition - Securities
Available for Sale."
Interest income on loans available for sale decreased $31.1 million
or 55% during 1999 as compared to 1998 primarily as a result of a $286.6 million
or 55% decrease in the average balance. The decrease in the average balance
reflects securitizations of foreign and domestic subprime loans and a decline in
originations due to the closure of the domestic subprime 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 $9.9 million or
26% in 1999 versus 1998 primarily due to an $85.3 million or 32% decrease in the
average balance, which was offset in part by a 134 basis-point increase in the
average yield. The decrease in the average balance was due to the repayment of
multi-family residential and commercial real estate loans. Interest income
includes $8.1 million and $12.4 million of additional interest received during
1999 and 1998, respectively, in connection with the repayment of such loans. As
of June 30, 1999, the Company ceased origination of multi-family and commercial
loans. See "Changes in Financial Condition - Loan Portfolio."
25
<PAGE>
Interest income on discount loans decreased by $39.0 million or 24%
during 1999 primarily as a result of a $320.4 million or 25% decrease in the
average balance. Securitizations, through June 30, 1999, as well as a decline in
acquisition volume, have contributed significantly to the 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 Year Ended December 31, 1999 1998 $ 1999 1998 Basis Points
- --------------------------------------------------- ----------- ----------- ----------- -------- ------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits .......................... $ 1,629,624 $ 1,882,768 $ (253,144) 6.04% 6.19% (15)
Securities sold under agreements to repurchase (1).. 107,622 104,980 2,642 6.93 6.20 73
Bonds-match funded agreements ...................... 28,904 -- 28,904 7.27 -- 727
Obligations outstanding under lines of credit (2)... 256,300 481,212 (224,912) 6.37 7.19 (82)
Notes, debentures and other ........................ 257,424 230,059 27,365 12.16 11.83 33
----------- ----------- -----------
$ 2,279,874 $ 2,699,019 $ (419,145) 6.82% 6.85% (3)
=========== =========== ===========
</TABLE>
(1) Includes an average balance of $22.9 million and $9.2 million with
an average yield of 7.64% and 5.16% for 1999 and 1998, respectively,
related to Ocwen UK.
(2) Includes an average balance of $130.4 million and $130.5 million
with an average yield of 6.16% and 9.06% for 1999 and 1998,
respectively, related to Ocwen UK.
Interest expense on obligations outstanding under lines of credit
decreased $18.3 million or 53% during 1999 as compared to 1998 due to a $224.9
million or 47% decrease in the average balance and an 82 basis-point decrease in
the weighted average interest rate. Lines of credit have been used primarily to
fund the acquisition and origination of subprime single family loans at OFS and
Ocwen UK. The decrease in the average balance is consistent with the decline in
the average balance of loans available for sale. The declines in the average
rates are primarily due to declines in the United Kingdom London Interbank
Offered Rate. See "Changes in Financial Condition - Obligations Outstanding
Under Lines of Credit."
Interest expense on interest-bearing deposits decreased $18.2
million or 16% during 1999 primarily due to a $253.1 million or 13% decrease in
the average balance. The decline in the average balance was primarily related to
certificates of deposit.
Interest expense on notes, debentures and other increased $4.1
million or 15% during 1999 primarily due to a $27.4 million increase in the
average balance and a 33 basis-point increase in the weighted average interest
rate. The increase in the average balance is primarily due to the acquisition of
$140.5 million of 11.5% notes as a result of the OAC acquisition in October,
offset in part by declines resulting from the Company's repurchases of debt
during 1999. See "Changes in Financial Condition - Notes, Debentures and Other."
1998 VERSUS 1997:
The Company's net interest income before provision for loan losses
of $122.8 million during 1998 increased $6.6 million or 6% as compared to 1997.
The increase was due to an increase in average interest-earning assets, offset
by an increase in average interest-bearing liabilities and a decline in the net
interest spread. Average interest-earning assets increased by $485.3 million or
20% during 1998 and increased interest income by $39.2 million. Average
interest-bearing liabilities increased $362.1 million or 16% and increased
interest expense by $25.8 million. The impact of these volume changes resulted
in a $13.4 million increase in net interest income. The net interest spread
decreased 83 basis points during 1998 as a result of a 72 basis-point decline in
the weighted average rate on interest-earning assets and a 15 basis-point
increase in the weighted average rate on interest-bearing liabilities. The
impact of these rate changes resulted in a $6.9 million decrease in net interest
income.
<TABLE>
<CAPTION>
Average Balance Increase Average Rate Increase
------------------------- (Decrease) ----------------- (Decrease)
For the Year Ended December 31, 1998 1997 $ 1998 1997 Basis Points
- --------------------------------------------------- ----------- ----------- ----------- -------- ------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and repurchase agreements ...... $ 149,441 $ 163,671 $ (14,230) 5.31% 5.48% (17)
Securities available for sale ..................... 590,367 299,558 290,809 6.83 9.53 (270)
Loans available for sale .......................... 520,859 171,837 349,022 10.90 10.69 21
Investment securities and other ................... 31,422 36,905 (5,483) 10.17 10.96 (79)
Loan portfolio..................................... 266,519 410,863 (144,344) 14.49 13.31 118
Discount loan portfolio ........................... 1,295,885 1,283,020 12,865 12.41 12.29 12
Securities held for trading ....................... -- 3,295 (3,295) -- 7.53 (753)
----------- ----------- -----------
$ 2,854,493 $ 2,369,149 $ 485,344 10.78% 11.50% (72)
=========== =========== ===========
</TABLE>
26
<PAGE>
Interest income on securities available for sale increased $11.8
million or 41% during 1998 as compared to 1997 as a result of a $290.8 million
or 97% increase in the average balance, offset by a 270 basis-point decline in
the weighted average yield earned. The increase in the average balance, as well
as the decline in the weighted average yield, due in large part to the Company's
increased investment in CMOs.
<TABLE>
<CAPTION>
Average Balance Average Yield
--------------------------------------------- ------------------
For the Year Ended December 31, 1998 1997 1998 1997
- ------------------------------- ---------------------- ------------------- ------- -------
Amount Percent Amount Percent
----------- -------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
CMOs (AAA-rated)......................................... $ 291,669 50% $ 66,337 22% 5.51% 5.50%
Subordinates and residuals............................... 185,351 31 77,239 26 13.96 18.70
IOs (AAA-rated agency)................................... 113,347 19 115,914 39 (0.87) 6.59
IOs (Non agency)......................................... -- -- 40,068 13 -- 7.03
----------- -------- ---------- -----
$ 590,367 100% $ 299,558 100% 6.83% 9.53%
=========== ======== ========== =====
</TABLE>
Interest income on loans available for sale increased $38.4 million
or 209% during 1998 as compared to 1997 primarily as a result of a $349.0
million or 203% increase in the average balance. The increase in the average
balance was due to significant growth in the Company's domestic purchases and
originations during this period, as well as those of Ocwen UK, which accounted
for the U.S. dollar equivalent of $147.1 million of the increase in the average
balance.
Interest income on the loan portfolio decreased by $16.1 million or
29% in 1998 versus 1997 primarily due to a $144.3 million or 35% decrease in the
average balance of the loan portfolio, which was offset in part by a 118
basis-point increase in the weighted average yield earned. The decrease in the
average balance was due to the repayment of multi-family residential and
commercial real estate loans. Interest income includes $12.4 million and $12.3
million of additional interest received during 1998 and 1997, respectively, in
connection with the repayment of such loans.
<TABLE>
<CAPTION>
Average Balance Increase Average Rate Increase
------------------------- (Decrease) ----------------- (Decrease)
For the Year Ended December 31, 1998 1997 $ 1998 1997 Basis Points
- ------------------------------- ----------- ----------- ----------- -------- ------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits.......................... $ 1,882,768 $ 1,998,191 $ (115,423) 6.19% 6.11% 8
Securities sold under agreements to repurchase..... 104,980 16,717 88,263 6.20 5.98 22
Obligations outstanding under lines of credit...... 481,212 84,272 396,940 7.19 6.62 57
Notes, debentures and other........................ 230,059 237,715 (7,656) 11.83 11.63 20
----------- ----------- -----------
$ 2,699,019 $ 2,336,895 $ 362,124 6.85% 6.69% 16
=========== =========== ===========
</TABLE>
Interest expense on interest-bearing deposits decreased $5.5 million
or 4% during 1998 primarily due to a $111.6 million or 6% decrease in the
average balance, largely certificates of deposit .
Interest expense on securities sold under agreements to repurchase
increased by $5.5 million or 551% during 1998 primarily as a result of an $88.3
million or 528% increase in the average balance. From time to time, the Company
utilizes such collateralized borrowings as an additional source of liquidity
depending on the cost and availability of alternative sources of funding.
Interest expense on obligations outstanding under lines of credit
increased $29.0 million or 520% during 1998 as compared to 1997 due to a $396.9
million or 471% increase in the average balance and a 57 basis-point increase in
the weighted average interest rate. The increase in the average balance is
primarily due to the Company's use of lines of credit at OFS and Ocwen UK to
fund the growth in subprime single family residential loans during this period.
Ocwen UK accounted for the US dollar equivalent of $130.5 million of the
increase in the average balance. See "Changes in Financial Condition -
Obligations Outstanding Under Lines of Credit."
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.
27
<PAGE>
The following table presents the provisions for loan losses by the
discount loan, loan portfolio and the match funded loans for the years
indicated.
1999 1998 1997
------- ------- -------
(Dollars in Thousands)
Provisions for loan losses:
Discount loan..................... $ 5,434 $17,618 $31,894
Loan portfolio.................... 1,636 891 324
Match funded loans ............... (360) -- --
------- ------- -------
$ 6,710 $18,509 $32,218
======= ======= =======
The decline in the provision for losses on the discount loan
portfolio during 1999 and 1998 reflects declines in the balance of the discount
loan portfolio. Despite declines in the loan portfolio balance, the provision
for loan portfolio losses have increased during 1999 and 1998 primarily as a
result of an increase in non-performing loans. The negative provision for loan
losses on match funded loans reflects a decline in the balance of the portfolio
from the acquisition date of OAC. See "Changes in Financial Condition - Loan
Portfolio, Net," "Match Funded Loans and Securities" and "Discount Loan
Portfolio."
Although management utilizes its best judgment in providing for
possible loan losses, there can be no assurance that the Company will not
increase or decrease its provisions for possible loan losses in subsequent
periods. Changing economic and business conditions, fluctuations in local
markets for real estate, future changes in non-performing asset trends, material
upward movements in market interest rates or other factors could affect the
Company's future provisions for loan losses. In addition, the Office of Thrift
Supervision ("OTS"), as an integral part of its examination process,
periodically reviews the adequacy of the Company's allowance for loan losses
and, as a result, may require the Company to recognize changes to such allowance
for losses based on its judgment about information available to it at the time
of examination. See "Changes in Financial Condition - Allowance for Loan
Losses."
NON-INTEREST INCOME. Non-interest income increased $32.5 million or
29% during 1999 and decreased $10.8 million or 9% during 1998. The following
table sets forth the principal components of the Company's non-interest income
during the years indicated.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Servicing fees and other charges............................................ $ 75,437 $ 59,180 $ 25,962
Gain on interest-earning assets, net........................................ 44,298 129,988 82,212
Impairment charges on securities available for sale ........................ (58,777) (129,714) --
Gain on real estate owned, net.............................................. (2,060) 14,033 7,277
Amorization of excess of net assets acquired over purchase price ........... 3,201 -- --
Other income................................................................ 83,620 39,696 8,498
----------- ----------- -----------
Total....................................................................... $ 145,719 $ 113,183 $ 123,949
=========== =========== ===========
</TABLE>
The increases in servicing fees and other charges reflects an
increase in loan servicing and related fees as a result of increases in the
average balance of loans serviced for others. During 1999, 1998 and 1997, the
average unpaid principal balance of loans serviced for others amounted to $11.67
billion, $8.06 billion, and $3.11 billion, respectively. The increases in the
average balance of loans serviced for others during those years was primarily
related to servicing retained in connection with securitizations (primarily
subprime loans) and acquisitions of servicing (including the acquisition of
Cityscape UK's servicing business by Ocwen UK in 1998), net of repayments.
Acquisitions of servicing during 1999 includes a contract with Southern Pacific
Funding Corporation entered into in August to service 17,660 subprime
residential mortgage loans with an unpaid principal balance of $1.3 billion.
Servicing fees for 1999 and 1998 included $12.2 million and $1.4 million,
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. See Note 13 to the Consolidated Financial Statement (which is
incorporated herein by reference).
28
<PAGE>
The following table sets forth the Company's loans serviced for
others at the dates indicated.
<TABLE>
<CAPTION>
Discount Loans Subprime Loans(1) Other Loans Total
------------------------ ------------------------ ----------------------- -----------------------
Amount No. of Loans Amount No. of Loans Amount No. of Loans Amount No. of Loans
----------- ------------ ---------- ------------ --------- ------------ --------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999:
Loans securitized ................ $ 1,046,340 16,928 $ 1,100,800 10,878 $ -- -- $ 2,147,140 27,806
Loans serviced for third parties.. 967,993 16,342 7,074,426 87,923 915,724 599 8,958,143 104,864
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 2,014,333 33,270 $ 8,175,226 98,801 $ 915,724 599 $11,105,283 132,670
=========== =========== =========== =========== =========== =========== =========== ===========
DECEMBER 31, 1998:
Loans securitized ................ $ 1,015,988 16,840 $ 1,809,533 31,607 $ -- -- $ 2,825,521 48,447
Loans serviced for third parties.. 1,573,285 20,835 5,327,441 83,085 866,219 1,091 7,766,945 105,011
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 2,589,273 37,675 $ 7,136,974 114,692 $ 866,219 1,091 $10,592,466 153,458
=========== =========== =========== =========== =========== =========== =========== ===========
DECEMBER 31, 1997:
Loans securitized ................ $ 624,591 11,148 $ 555,914 4,976 $ -- -- $ 1,180,505 16,124
Loans serviced for third parties.. 1,682,764 23,181 2,352,352 29,911 294,198 1,092 4,329,314 54,184
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 2,307,355 34,329 $ 2,908,266 34,887 $ 294,198 1,092 $ 5,509,819 70,308
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
(1) Includes 37,955 loans with an unpaid principal balance of $857.2
million ((pound)504.4 million) which were serviced by Ocwen UK at
December 31, 1998.
Net gains on interest-earning assets in 1999 of $44.3 million were
primarily comprised of $36.8 million of net gains recognized in connection with
the securitization of single family subprime loans and discount loans, as
presented in the table below, $4.2 million of gains on sales of commercial
discount loans and $3.7 million of gains on sales of commercial securities
available for sale.
Net gains on interest-earning assets in 1998 of $130.0 million were
primarily comprised of $109.6 million of net gains recognized in connection with
the securitization of single family subprime loans and discount loans, as
presented in the table below, and $12.2 million of gains on sales of commercial
discount loans.
Net gains on interest-earning assets in 1997 of $82.2 million were
primarily comprised of $71.9 million of net gains recognized in connection with
the securitization of single family subprime loans, single family discount loans
and small commercial discount loans, as presented in the table below.
Additionally, the Company recorded a $2.6 million gain on the sale of
mortgage-related securities to OAC, $2.7 million of gains on sales of single
family subprime loans and $3.5 million of gains on sales of commercial discount
loans.
29
<PAGE>
The following table sets forth the Company's net gains recognized in
connection with the securitization of loans during 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Book Value of
Loans Securitized Securities
-------------------------------------------------------------------------- Retained
Types of Loans Principal No. of Loans Net Gain (Non-Cash Gain) Cash Gain
------------------------------------------- ----------- ------------ ----------- --------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
1999:
Single family discount..................... $ 227,303 3,137 $ 22,763 $ 4,040 $ 18,723
Single family subprime:
Domestic.............................. 235,572 2,192 3,834 12,091 --
Foreign (Ocwen UK).................... 295,157 8,983 10,207 34,452 --
----------- ----------- ----------- -------------- -----------
530,729 11,175 14,041 46,543 --
----------- ----------- ----------- -------------- -----------
$ 758,032 14,312 $ 36,804 $ 50,583 $ 18,723
=========== =========== =========== ============== ===========
1998:
Single family discount..................... $ 498,798 7,638 $ 48,085 $ 32,261 $ 15,824
Single family subprime:
Domestic.............................. 1,045,174 5,905 34,516 81,742 --
Foreign (Ocwen UK).................... 581,108 25,330 27,000 57,852 --
----------- ----------- ----------- -------------- -----------
1,626,282 31,235 61,516 139,594 --
----------- ----------- ----------- -------------- -----------
$ 2,125,080 38,873 $ 109,601 $ 171,855 $ 15,824
=========== =========== =========== ============== ===========
1997:
Single family discount..................... $ 418,795 6,295 $ 51,137 $ 20,635 $ 30,502
Single family subprime (domestic).......... 415,830 3,640 18,802 25,334 --
Commercial discount........................ 62,733 302 1,994 4,134 --
----------- ----------- ----------- -------------- -----------
$ 897,358 10,237 $ 71,933 $ 50,103 $ 30,502
=========== =========== =========== ============== ===========
</TABLE>
Gains on interest-earning assets (as well as other assets, such as
real estate owned, as discussed below) generally are dependent on various
factors which are not necessarily within the control of the Company, including
market and economic conditions. As a result, there can be no assurance that the
gains on interest-earning assets (and other assets) reported by the Company in
prior periods will be reported in future periods or that there will not be
substantial inter-period variations in the results from such activities. During
the third quarter of 1999, the Company made a strategic decision to structure
future securitizations as financing transactions which will preclude the use of
gain-on-sale accounting. There were no securitizations of loans executed by the
Company during the second half of 1999. See "Changes in Financial Condition -
Match Funded Loans and Securities."
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" and the "Securities
Available for Sale" section of Note 1 to the Consolidated Financial Statements
(which is incorporated herein by reference).
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 years indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Gains on sales................................ $ 36,265 $ 43,839 $ 30,651
Provision for losses in fair value............ (28,008) (18,626) (13,450)
Carrying costs, net........................... (10,317) (11,180) (9,924)
-------------- -------------- --------------
Income on real estate owned, net.............. $ (2,060) $ 14,033 $ 7,277
============== ============== ==============
</TABLE>
See "Changes in Financial Condition - Real Estate Owned" for
additional information regarding real estate owned.
Amortization of the excess of net assets acquired over purchase
price resulted from the Company's acquisition of OAC on October 7, 1999. The
acquisition resulted in an excess of net assets acquired over the purchase price
in the amount of $60.0 million, which is being amortized on a straight-line
basis over a period of five years. The unamortized balance of the excess of net
assets acquired over purchase price at December 31, 1999 was $56.8 million. See
Note 2 to the Consolidated Financial Statements (which is incorporated herein by
reference).
30
<PAGE>
Other income of $83.6 million for 1999 included the $50.4 million
gain on the sale of Ocwen UK. See Note 27 to the Consolidated Financial
Statements (which is incorporated herein by reference) for a disclosure of the
components of other income for 1999, 1998, and 1997.
NON-INTEREST EXPENSE. Non-interest expense decreased $32.1 million
or 14% during 1999 and increased $101.4 million or 80% during 1998. The increase
in non-interest expense during 1998 was due in part to the acquisition of Ocwen
UK and commencement of operations at OTX. Non-interest expense for 1998 included
$41.8 million and $11.3 million related to Ocwen UK and OTX, respectively. For
1999, total non-interest expense included $30.8 million and $22.1 million
related to Ocwen UK and OTX, respectively.
The following table sets forth the principal components of the
Company's non-interest expense during the years indicated.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Compensation and employee benefits.............................. $ 102,173 $ 115,556 $ 77,573
Occupancy and equipment......................................... 18,501 17,652 8,742
Technology and communication costs.............................. 19,647 17,560 9,492
Net operating loss on investment in real estate and certain
low-income housing tax credit interests...................... 7,368 8,621 4,792
Amortization of excess of purchase price over
net assets acquired.......................................... 4,448 11,614 557
Loan expenses................................................... 12,618 25,373 7,059
Other operating expenses........................................ 31,390 31,886 18,659
----------- ----------- -----------
Total........................................................ $ 196,145 $ 228,262 $ 126,874
=========== =========== ===========
</TABLE>
Compensation and employee benefits decreased during 1999 despite an
increase in the average number of employees from 1,512 during 1998 to 1,538
during 1999. The decrease in compensation and employee benefits during 1999
reflects a reduction in profit sharing expense in connection with the Company's
decision to grant options under its annual incentive plan at an exercise price
equal to fair market value. For the years 1997 and prior, options were granted
at exercise prices below fair market value, resulting in the recognition of
compensation expense. Also contributing to the decline in compensation and
employee benefits was a $5.0 million decrease in commissions incurred by OFS as
a result of the closing of the Company's domestic subprime lending operations,
and a decrease in recruiting related expenses as a result of an increase in
direct and local hiring. These declines were partially offset by an increase in
profit sharing expense in connection with the Company's implementation of a
long- term incentive plan in 1998. The increases in compensation and employee
benefits in 1998 reflects an increase in the average number of employees from
872 during 1997 to 1,512 during 1998. Compensation and employee benefit expense
for 1998 includes $12.4 million and $7.4 million related to Ocwen UK and OTX,
respectively.
The increase in occupancy and equipment costs during 1998 as
compared to 1997, was primarily due to a $3.5 million increase in rent expense
and a $2.2 million increase in general office operating expenses. Ocwen UK and
OTX accounted for $4.3 million of the $8.9 million increase in occupancy and
equipment expenses during 1998.
Technology and communication costs consists primarily of
depreciation expense on computer hardware and software, technology-related
consulting fees (primarily OTX) and telephone expense.
Net operating losses on investments in real estate and certain
low-income housing tax credits during 1999 is reported net of $1.7 million of
operating income from investments in real estate acquired as a result of the OAC
acquisition in October. See "Changes in Financial Condition - Investments in
Real Estate."
Goodwill amortization recognized during 1999 related entirely to
OTX, including a charge of $3.4 million reflecting the impact of a reduction in
the estimated useful life of the goodwill associated with the acquisitions made
by OTX. Of the $11.6 million of goodwill amortization recorded during 1998,
$10.3 million related to OFS, including the $10.1 million write-off of the
remaining unamortized balance which was deemed by the Company to be impaired.
The decline in loan expenses during 1999 primarily relates to Ocwen
UK and OFS and reflects the Company's exit from the subprime mortgage
origination business. Loan expenses of $15.2 million incurred by Ocwen UK
account for the majority of the total increase in loan expenses in 1998 of $18.3
million.
Other operating expenses are primarily comprised of professional
fees, marketing costs and travel costs. See Note 28 to the Consolidated
Financial Statements (which is incorporated herein by reference) for a
disclosure of the components of other operating expenses for 1999, 1998 and
1997.
31
<PAGE>
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 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 $13.1 million, $13.6 million
and $5.2 million of distributions to holders of the Capital Securities during
1999, 1998 and 1997, respectively. See Note 20 to the Consolidated Financial
Statements and "Changes in Financial Condition - Company-Obligated, Mandatorily
Redeemable Securities of Subsidiary Trust Holding Solely Junior Subordinated
Debentures of the Company."
EQUITY IN (LOSSES) EARNINGS OF INVESTMENTS IN UNCONSOLIDATED
ENTITIES. During 1998 and 1999, the Company recorded equity in (losses) earnings
of Kensington of $(9.2) million and $0.4 million, net of goodwill amortization.
At December 31, 1999 and 1998, the Company owned 35.84% and 36.07%,
respectively, of the total outstanding common stock of Kensington, a leading
originator of non-conforming residential mortgages in the U.K.
Prior to the acquisition of OAC on October 7, 1999 and during 1998,
the Company recorded equity in the losses of its investments in OAC and OPLP of
$(3.6) million and $(8.7) million, respectively. The Company began accounting
for its investments in OAC and OPLP on the equity method effective May 5, 1998,
upon the acquisition of 1,473,733 OPLP units, which increased its combined
ownership in OAC and OPLP to 16.83%. Equity in the losses of OAC relates
primarily to losses incurred by those entities in connection with impairment
charges recorded on subordinate and residual mortgage-backed securities.
Equity in earnings of investment in unconsolidated entities for 1997
resulted from the Company's 50% joint venture investment in the LLC. All of the
assets of the LLC were distributed at the end of 1997, and therefore the Company
recorded no income from this investment in 1998 or 1999.
See "Changes in Financial Condition - Investment in Unconsolidated
Entities," and Note 2 (the first five paragraphs) and Note 10 to the
Consolidated Financial Statements (which is incorporated herein by reference).
INCOME TAX EXPENSE (BENEFIT). Income tax expense (benefit) amounted
to $2.6 million, $(30.7) million, and $21.3 million during 1999, 1998 and 1997,
respectively. The Company's effective tax rate was 17.6%, (94.8)%, and 21.4%
during 1999, 1998 and 1997, respectively. The Company's effective tax rates
reflect tax credits resulting from the Company's investment in low-income
housing tax credit interests of $18.2 million, $17.7 million, and $14.9 million
during 1999, 1998 and 1997, respectively. The Company's effective rate in 1999
reflects the lack of foreign tax payments which would have generated foreign tax
credits to reduce the U.S. tax liability resulting from the sale of Ocwen UK.
The Company's effective rate in 1999 also includes a provision of $2.5 million
related to the deferred tax asset valuation allowance. See Note 23 to the
Consolidated Financial Statements (which is incormportated herein by reference)
and "Changes in Financial Condition - Investments in Low-Income Housing Tax
Credit Interests."
CHANGES IN FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE. At December 31, 1999, securities
available for sale amounted to $587.5 million as compared to $593.3 million at
December 31, 1998, a decrease of $5.8 million or 1%. 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 December 31,
1999, securities available for sale included an aggregate of $1.0 million of
unrealized gains ($6.9 million of gross gains and $5.9 million of gross losses),
as compared to $21.7 million of unrealized gains ($22.0 million of gross gains
and $0.3 million of gross losses) at December 31, 1998.
32
<PAGE>
The following table sets forth the fair value of the Company's securities
available for sale at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Mortgage-related securities: (Dollars in Thousands)
Single family residential:
Collateralized mortgage obligations (AAA-rated).. $ 392,387 $ 344,199 $ 160,451
BB-rated subordinates............................ 5,908 8,517 2,515
B-rated subordinates............................. 6,098 6,344 --
Unrated subordinates ............................ 17,287 40,595 39,219
AAA-rated subprime residuals .................... -- 6,931 --
BBB-rated subprime residuals .................... -- 17,593 --
Unrated subprime residuals ...................... 124,087 152,951 41,790
Interest only:
AAA-rated...................................... -- -- 13,863
FHLMC.......................................... -- -- 64,745
FNMA........................................... -- -- 59,715
GNMA........................................... -- -- 29,766
Futures contracts and swaps...................... -- -- (94)
---------- ---------- ----------
545,767 577,130 411,970
---------- ---------- ----------
Multi-family residential and commercial:
BB-rated subordinates............................ 38,234 8,813 8,512
Unrated subordinates............................. 3,503 7,331 6,795
Interest only:
AAA-rated...................................... -- 71 3,058
BB-rated....................................... -- 2 189
Unrated........................................ 14 -- --
Futures contracts................................ -- -- --
---------- ---------- ----------
41,751 16,217 18,554
---------- ---------- ----------
Marketable equity securities:
Common stocks.................................... -- -- 46,272
---------- ---------- ----------
Total....................................... $ 587,518 $ 593,347 $ 476,796
========== ========== ==========
</TABLE>
The decline in securities available for sale during 1999 was due
primarily to $553.1 million of maturities and principal repayments, $110.7
million of subprime residuals sold in connection with the sale of Ocwen UK,
$58.8 million of impairment charges on certain subordinates and residual
securities, $43.9 million of sales and $11.1 million of net premium
amortization, offset by $589.8 million of purchases, $133.0 million of
subordinate and residual securities acquired as a result of the acquisition of
OAC and $50.6 million of subordinates and residual securities acquired in
connection with the Company's securitization of loans.
At December 31, 1999, the fair value of the Company's investment in
subordinate and residual interests amounted to $195.1 million ($193.1 million
amortized cost) or 33 % of total securities available for sale and supported
senior classes of securities having an outstanding principal balance of $4.27
billion. During 1999, the Company recorded $58.8 million 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." Because of their
subordinate position, subordinated and residual classes of mortgage-related
securities provide protection to and involve more risk than the senior classes.
Specifically, when cash flow is impaired, debt service goes first to the holders
of senior classes. In addition, incoming cash flows may be held in a reserve
fund to meet any future repayments until the holders of senior classes have been
paid and, when appropriate, until a specified level of funds has been
contributed to the reserve fund. Further, residual interests exhibit
considerably more price volatility than mortgages or ordinary mortgage
pass-through securities, due in part to the uncertain cash flows that result
from changes in the prepayment rates of the underlying mortgages. Lastly,
subordinate and residual interests involve substantially more credit risk than
the senior classes of the mortgage-related securities to which such interests
relate and generally are not as liquid as the senior classes. See Note 5 to
Consolidated Financial Statements (which is incorporated herein by reference).
On July 27, 1998, the Company sold its entire portfolio of AAA-rated
agency IOs for $137.5 million, which represented book value. As a result of an
increase in prepayment speeds due to declining interest rates, the Company
recorded impairment charges of $86.1 million in 1998 prior to the sale resulting
from the Company's decision to discontinue this investment activity and write
down the book value of the IOs. The AAA-rated agency IOs consisted of IOs, which
are classes of mortgage-related securities that
33
<PAGE>
are entitled to payments of interest but no (or only nominal) principal, and
inverse IOs, which bear interest at a floating rate that varies inversely with
(and often at a multiple of) changes in a specified index.
Common stocks at December 31, 1997, were comprised primarily of the
Company's investment in OAC. At December 31, 1997, the Company, through a
wholly-owned subsidiary, owned 1,715,000 shares or 9.04% of the outstanding
common stock of OAC, having a market value of $35.2 million ($25.5 million book
value). As a result of a subsequent increase in ownership, the Company began
accounting for its investment in OAC under the equity method in 1998. See
"Investment in Unconsolidated Entities." The Company's other common stock
investment at December 31, 1997 had a market value of $11.1 million ($13.0
million book value), was sold during 1998 for a loss of $0.3 million.
Historically, the Company generally has retained subordinate and
residual securities, which are certificated, related to its securitization of
loans. Subordinate and residual interests in mortgage-related securities provide
credit support to the more senior classes of the mortgage-related securities.
Principal from the underlying mortgage loans generally is allocated first to the
senior classes, with the most senior class having a priority right to the cash
flow from the mortgage loans until its payment requirements are satisfied. To
the extent that there are defaults and unrecoverable losses on the underlying
mortgage loans, resulting in reduced cash flows, the most subordinate security
will be the first to bear this loss. Because subordinate and residual interests
generally have no credit support, to the extent there are realized losses on the
mortgage loans comprising the mortgage collateral for such securities, the
Company may not recover the full amount or, indeed, any of its initial
investment in such subordinate and residual interests. The Company generally
retains the most subordinate classes of the securities from the securitization
and therefore will be the first to bear any credit losses.
Historically, the Company has determined the present value of
anticipated cash flows at the time each securitization transaction closes,
utilizing valuation assumptions appropriate for each particular transaction. The
significant valuation assumptions have included the anticipated prepayment
speeds and the anticipated credit losses related to the underlying mortgages. In
order to determine the present value of this estimated excess cash flow, the
Company currently applies a discount rate of 18% to the projected cash flows on
the unrated classes of securities. The annual prepayment rate of the securitized
loans is a function of full and partial prepayments and defaults. The Company
makes assumptions as to the prepayment rates of the underlying loans, which the
Company believes are reasonable, in estimating fair values of the subordinate
securities and residual securities retained. During 1999, the Company utilized
proprietary prepayment curves (reaching an approximate range of annualized rates
of 10.0% - 45.0 %). In its estimates of annual loss rates, the Company utilizes
assumptions that it believes are reasonable. During 1999, the Company estimated
annual losses of between 0.60 % and 6.85 % 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 credit risk of mortgage related securities is affected by the
nature of the underlying mortgage loans. In this regard, the risk of loss on
securities backed by commercial and multi-family loans and single family
residential loans made to borrowers who, because of prior credit problems, the
absence of a credit history or other factors, are unable or unwilling to qualify
as borrowers under guidelines established by the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA") for
purchases of loans by such agencies generally involve more risk than securities
backed by single family residential loans which conform to the requirements
established by FHLMC and FNMA for their purchase by such agencies.
The Company adjusts its securities portfolio to market value at the
end of each month generally based upon the lower of dealer quotations or
internal values, subject to an internal review process. For those securities
which do not have an available market quotation, the Company will request market
values and underlying assumptions from the various securities dealers that
underwrote, are currently financing the securities, or have had prior experience
with the type of security to be valued.
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 Company's subordinate securities
and residual securities in subsequent periods.
34
<PAGE>
It is intended that any securities retained by Ocwen Federal Bank
FSB (the "Bank") resulting from the securitization of assets held by it directly
will be distributed to the Company as a dividend, subject to the Bank's ability
to declare such dividends under applicable limitations. During 1999, subordinate
securities with a fair value of $27.7 million were distributed to the Company in
the form of dividend. At December 31, 1999, the Bank held no subordinate
securities.
Under a regulatory bulletin issued by the OTS, a federally-chartered
savings institution such as the Bank generally may invest in "high risk"
mortgage securities only to reduce its overall interest rate risk and after it
has adopted various policies and procedures, although under specified
circumstances such securities also may be acquired for trading purposes. A "high
risk" mortgage security for this purpose generally is any mortgage-related
security which meets one of three tests which are intended to measure the
average life or price volatility of the security in relation to a benchmark
fixed rate, 30-year mortgage-backed pass-through security. At December 31, 1999,
the Bank held no mortgage-related securities which are classified as "high-risk"
mortgage securities by the OTS.
The following tables detail the Company's securities available for
sale portfolio at December 31, 1999, and its estimates of expected yields on
such securities, taking into consideration expected prepayment and loss rates
together with other factors.
<TABLE>
<CAPTION>
ANTICIPATED
SUBORDI- YIELD TO PROSPECTIVE
CLASS SIZE NATION/OC MATURITY AT YIELD TO
ISSUE RATING ----------------- INTEREST LEVEL AT: ----------------- MATURITY AT:
SECURITIZATION (ISSUER) SECURITY DATE RATING AGENCIES ISSUANCE 12/31/99 PERCENTAGE 12/31/99 PURCHASE 12/31/99 12/31/99
- ----------------------- -------- ----- ------ -------- -------- -------- ---------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SINGLE-FAMILY RESIDENTIAL
Subordinates: (Dollars in Thousands)
BCF 1996 R1(5) ........ B3 Oct-96 UR (a),(b) $ 70,773 $ 42,455 50.00% None 15.70% 10.96% 33.95%
BCF 1997 R1(5) ........ B4 Mar-97 UR (b),(c) 21,784 7,508 49.71 None 13.46 (38.03) 12.73
BCF 1997 R2 (5) ....... B4 Jun-97 Ba2,BB (b),(c) 6,358 5,748 73.54 7.65% 9.58 9.13 41.08
B5 B2,B 6,264 5,664 73.54 3.93 10.74 (9.53) 126.54
B6 UR 13,883 5,999 73.54 None 15.98 3.81 N/A
BCF 1997 R3 (5) ....... B4 Dec-97 UR (b),(d) 69,582 37,163 50.24 None 15.84 (40.09) 19.87
ORMBS 1998 R1 (6) ..... B4 Mar-98 UR (b),(d) 101,774 73,828 50.34 None 20.50 (37.93) 7.16
ORMBS 1998 R2 (6) ..... B4A Jun-98 Ba2 (b) 1,056 976 100.00 6.24 13.22 7.59 59.33
B4F Ba2 937 888 100.00 7.55 19.23 3.62 35.05
B5A B2 880 844 100.00 4.58 23.78 2.76 101.86
B5F B2 937 888 100.00 5.36 11.78 2.13 46.87
B6A UR 3,696 2,326 100.00 None 16.72 20.81 335.21
B6F UR 3,345 2,164 100.00 None 19.50 6.60 149.65
ORMBS 1998 R3 (6) ..... B4 Sep-98 Ba2,BB (b),(d) 11,765 486 85.87 10.61 11.71 (36.33) 0.29
B5 B2,B 9,151 8,933 85.87 6.74 16.54 (31.65) 77.18
B6 UR 26,145 15,550 85.87 None 18.00 (21.75) 281.69
ORMBS 1999 RI (6) .... B5A Mar-99 B2,B (b),(d) 1,630 1,551 100.00 5.72 17.73 28.05 19.52
B5F B2,B 1,843 1,698 100.00 5.50 17.74 28.10 23.62
B6A UR 3,586 3,165 100.00 None 18.00 54.86 44.43
B6F UR 4,299 3,866 100.00 None 18.00 67.99 75.48
ORMBS 1999 R2 (6) ..... B4 Jun-99 BB (a),(c),(d) 10,530 10,359 100.00 10.12 13.45 23.19 18.27
B5 B 4,680 4,604 100.00 5.96 18.45 51.72 55.26
B6 UR 7,020 6,580 100.00 None 18.00 122.07 188.99
CSFB 1996-1R
(ITT 94-P1) (7) ....... 4B2 Oct-96 UR (b),(c) 1,046 162 100.00 None N/A N/A N/A
Subprime residuals:
SBMS 1996 3 (1) ....... R Jun-96 UR (a),(b) 130,062 32,516 100.00 16.10 OC 15.52 2.01 20.97
MLM1 1996 1 (2) ....... R Sep-96 UR (a),(b) 81,142 19,646 100.00 24.49 OC 15.16 3.07 22.97
MS 1997 1 (3).......... X1 Jun-97 UR (a),(b) 17,727 11,211 100.00 5.14 OC 21.47 17.91 24.41
X2 87,118 24,106 100.00 13.53 OC 20.38 2.21 17.15
1997 OFS 2 (4)......... X Sep-97 UR (a),(b) 102,201 38,582 100.00 8.85 OC 19.65 4.17 18.00
1997 OFS 3 (4)......... X Dec-97 UR (a),(b) 208,784 99,063 100.00 9.17 OC 19.59 8.50 10.67
1998 OFS 1 (4)......... X Mar-98 UR (b),(d) 161,400 91,000 100.00 3.04 OC 18.00 5.65 3.25
1998 OFS 2 (4)......... X Jun-98 UR (a),(b) 382,715 191,982 100.00 6.99 OC 19.46 1.18 14.12
1998 OFS 3 (4)......... X Sep-98 UR (a),(d) 261,649 192,656 100.00 4.21 OC 18.00 7.97 9.02
1998 OFS 4 (4)......... X Dec-98 UR (a),(b),(c) 349,000 298,920 100.00 3.59 OC 18.00 6.61 21.92
1999 OFS 1 (4) ........ X Jun-99 UR (a),(b) 148,628 141,591 100.00 3.95 OC 18.00 16.58 17.32
SASCO 1998-2(11) ...... X Jan-98 UR S&P, Fitch 600,052 284,235 100.00 1.85 OC 16.00 1.26 17.62
SASCO 1998-3(11) ...... X Mar-98 UR S&P, Fitch 769,671 405,880 100.00 3.32 OC 17.04 3.29 17.48
MLMI 1998-FF 1(2) ..... X Jun-98 UR S&P, Fitch 198,155 109,319 100.00 2.72 OC 18.57 10.12 18.60
PANAM 1997-1(12) ...... X Dec-97 UR S&P, 113,544 52,615 100.00 8.48 OC 22.45 3.39 18.38
Moody's
Prepay Pen. UR 100.00 25.69 13.58 (7.25)
LHELT 1998-2 (13) ..... X Jun-98 UR Moody's, Fitch 209,225 128,873 100.00 6.11 OC 18.55 17.17 38.78
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
ANTICIPATED
SUBORDI- YIELD TO PROSPECTIVE
CLASS SIZE NATION/OC MATURITY AT YIELD TO
ISSUE RATING ----------------- INTEREST LEVEL AT: ----------------- MATURITY AT:
SECURITIZATION (ISSUER) SECURITY DATE RATING AGENCIES ISSUANCE 12/31/99 PERCENTAGE 12/31/99 PURCHASE 12/31/99 12/31/99
- ----------------------- -------- ----- ------ -------- -------- -------- ---------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EQUICON 1994-2 (14) ...B Fix, B-2 Oct-94 UR S&P, Moody's, 78,846 19,051 100.00 6.15 OC 18.00 103.64 29.46
Fitch
QS Fix, QS-2 UR
B Var., B-2 UR 32,306 4,024 100.00 25.73 OC 18.00 34.01 26.78
EQUICON 1995-1 (14) ...B Fix, B-2 May-95 UR S&P, Moody's, 70,024 13,899 100.00 12.42 OC 18.00 28.26 122.84
Fitch
B Var., B-2 UR 40,519 5,833 100.00 14.76 OC 18.00 98.06 0.00
EQUICON 1995-2 (14) ...B Fix, B-2 Oct-95 UR S&P, 79,288 19,589 100.00 14.22 OC 18.00 33.28 116.83
Moody's
B Var., B-2 UR 39,667 5,674 100.00 15.65 OC 18.00 83.76 81.90
</TABLE>
<TABLE>
<CAPTION>
CLASS SIZE
ISSUE RATING ----------------------
SECURITIZATION (ISSUER) SECURITY DATE RATING AGENCIES ISSUANCE 12/31/99
- ----------------------- -------- ----- ------ -------- -------- --------
(Dollars in Thousands)
SINGLE-FAMILY RESIDENTIAL
<S> <C> <C> <C> <C> <C>
ACCESS 1996-1 (15).. B Fix, B-2 Feb-96 UR S&P, Moody's $ 120,015 $ 31,984
B Var., B-2 UR 55,362 9,190
ACCESS 1996-2 (15).. B-I, B-1 May-96 UR S&P, Moody's 142,259 41,243
BI-S, BI-S-1 UR
B-II, B-1 UR 68,345 10,792
BII-S, BII-S-1 UR
ACCESS 1996-3 (15).. B-I, B-1 Aug-96 UR S&P, Moody's 107,712 31,768
BI-S, BI-S-1 UR
B-II, B-1 UR 99,885 16,411
BII-S, BII-S-1 UR
ACCESS 1996-4 (15).. B, B-1 Nov-96 UR S&P, Moody's 239,778 57,446
B-S, B-S-1 UR
ACCESS 1997-1 (15).. B, B-1 Feb-97 UR S&P, Moody's 276,442 84,271
B-S, B-S-1 UR
ACCESS 1997-2 (15).. B, B-1 May-97 UR S&P, Moody's 185,197 57,774
B-S, B-S-1 UR
ACCESS 1997-3 (15).. B, B-1 Oct-97 UR S&P, Moody's 199,884 67,973
B-S, B-S-1 UR
OCWEN 98-OAC 1 (16). N/A Nov-98 UR S&P, Moody's 182,178 112,600
CMR1 (17)........... Deferred Comp Apr-96 UR S&P, Duff 47,802(9) 19,180(19)
CMR2 (17)........... Deferred Comp Nov-96 UR S&P, Duff, 106,692(18) 41,120(19)
Fitch
CMR3 (17)........... Deferred Comp Nov-96 UR S&P, Duff, 195,610(18) 79,196(19)
Fitch
CMR4 (17)........... Deferred Comp Feb-97 UR S&P, Duff, 108,630(18) 49,803(19)
Fitch
CMR6 (17)........... Deferred Comp May-97 UR S&P, Duff, 91,442(18) 41,745(19)
Fitch
MULTI-FAMILY RESIDENTIAL
Subordinates:
SBMS 1997-HUD1 (20). B5 Apr-97 B2, Moody's, 9,785 9,271
n.a. DCR
B6 Apr-97 UR 16,998 4,185
ORMBS 1998-R1 (21).. B4 Mar-98 UR Moody's, 101,774 73,828
DCR
GECMS 1994-12 (22).. B4 Mar-94 UR Moody's, 2,069 1,395
Fitch, S&P
FNMA 1995 M2 (3).... M Jun-95 UR (c) 100,275 --
</TABLE>
36
<PAGE>
ANTICIPATED
SUBORDI- YIELD TO PROSPECTIVE
NATION/OC MATURITY AT YIELD TO
INTEREST LEVEL AT: ----------------- MATURITY AT:
SECURITIZATION (ISSUER) PERCENTAGE 12/31/99 PURCHASE 12/31/99 12/31/99
- ----------------------- ---------- ----------- -------- -------- ------------
SINGLE-FAMILY RESIDENTIAL
(Dollars in Thousands)
ACCESS 1996-1 (15).. 100.00% 7.07% OC 18.00% 29.67% 132.43%
100.00 18.79 OC 18.00 30.75 69.90
ACCESS 1996-2 (15).. 100.00 12.95 OC 18.00 18.05 37.59
100.00 17.43 OC 18.00 14.88 38.60
ACCESS 1996-3 (15).. 100.00 16.21 OC 18.00 13.70 68.42
100.00 23.92 OC 18.00 13.11 47.43
ACCESS 1996-4 (15).. 100.00 22.73 OC 18.00 10.77 20.45
ACCESS 1997-1 (15).. 100.00 23.99 OC 18.00 10.71 25.52
ACCESS 1997-2 (15).. 100.00 16.89 OC 18.00 4.68 18.74
ACCESS 1997-3 (15).. 100.00 11.68 OC 18.00 11.92 31.71
OCWEN 98-OAC 1 (16). 100.00 16.70 OC N/A N/A N/A
CMR1 (17)........... 100.00 10.70 RF 19.80 19.89 21.68
CMR2 (17)........... 100.00 11.42 RF 18.00 25.39 27.76
CMR3 (17)........... 100.00 15.44 RF 18.00 32.68 35.77
CMR4 (17)........... 100.00 7.73 RF 18.00 25.72 28.65
CMR6 (17)........... 100.00 8.11 RF 18.00 24.67 28.15
MULTI-FAMILY RESIDENTIAL
Subordinates:
SBMS 1997-HUD1 (20). 100.00 2.17 16.87 5.00 18.39
100.00 None 22.86 (10.06) (1.90)
ORMBS 1998-R1 (21).. 100.00 None 13.75 (29.33) 8.76
GECMS 1994-12 (22).. 100.00 None 19.37 21.08 62.98
FNMA 1995 M2 (3).... 100.00 N/A 0.00 (18.50) N/A
36(a)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ISSUERS:
(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
(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
</TABLE>
<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) 12/31/99 AT 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 ISSUANCE 12/31/99
----------------------- --------- ----------- ----------- ----------- ----------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SINGLE-FAMILY RESIDENTIAL (Dollars in Thousands)
Subordinates:
BCF 1996 R1 (5) ........... 10.31% 96.45% 12.14% 13.93% $ 24,817 98%Fixed, 2% ARM $505,513 $287,582
BCF 1997 R1 (5) ........... 10.06 110.61 21.21 13.76 13,518 97%Fixed, 3% ARM 177,823 112,303
BCF 1997 R2 (5) ........... 8.03 84.79 25.84 13.96 6,934 25%Fixed, 75% ARM 251,790 152,507
BCF 1997 R3 (5) ........... 9.61 111.57 20.53 12.05 29,990 98%Fixed, 2% ARM 579,851 424,492
ORMBS 1998 R1 (6) ......... 8.92 119.42 23.45 9.58 23,347 98%Fixed, 2% ARM 565,411 470,738
ORMBS 1998 R2 (6) ......... 8.93 88.54 26.32 14.96 2,218 45%Fixed, 55% ARM 123,917 91,224
ORMBS 1998 R3 (6) ......... 8.95 126.34 35.86 9.37 10,335 99%Fixed, 1% ARM 261,452 230,726
ORMBS 1999 R1 (6) ......... 9.02 86.62 23.38 14.15 315 56%Fixed, 44% ARM 147,101 125,597
ORMBS 1999 R2 (6) ......... 9.38 116.16 22.06 7.67 351 100%Fixed 117,004 110,475
CSFB 1996 1R
(ITT 94-P1) (7) ........... 7.26 N/A 2.66 N/A 156 100%1-Year CMT 32,487 5,274
Subprime residuals:
SBMS 1996 3 (1) ........... 11.07 68.68 17.19 32.29 3,123 59%Fixed, 41% ARM 130,062 32,516
MLM1 1996 1 (2) ........... 11.33 75.21 22.05 34.98 1,825 35%Fixed, 65% ARM 81,142 19,646
MS 1997 1 (3).............. 10.54 74.80 17.81 34.90 1,521 32%Fixed, 68% ARM 17,727 11,211
11.59 74.06 17.81 34.75 1,521 32%Fixed, 68% ARM 87,118 24,106
1997 OFS 2 (4) ............ 10.99 78.58 19.20 34.75 1,790 21%Fixed, 79% ARM 102,201 38,582
1997 OFS 3 (4) ............ 10.85 78.64 20.07 30.70 2,639 19%Fixed, 81% ARM 208,784 99,063
1998 OFS 1 (4) ............ 10.39 78.76 20.20 27.55 2,674 15%Fixed, 85% ARM 161,400 91,000
1998 OFS 2 (4) ............ 10.94 75.06 16.77 36.38 4,341 41%Fixed, 59% ARM 382,715 191,982
1998 OFS 3 (4) ............ 10.35 79.11 22.13 21.25 1,479 30%Fixed, 70% ARM 261,649 192,565
1998 OFS 4 (4) ............ 10.48 76.47 24.24 13.17 1,135 42%Fixed, 58% ARM 349,000 298,920
1999 OFS 1 (4) ............ 9.88 75.44 12.34 8.61 -- 64%Fixed, 36% ARM 146,628 141,591
SASCO 1998-2(11) .......... 11.10 73.74 17.81 31.84 4,969 31%Fixed, 69% ARM 600,052 284,235
SASCO 1998-3(11) .......... 10.20 75.67 11.81 30.19 4,116 11%Fixed, 89% ARM 769,671 405,880
MLMI 1998-FF 1(2) ......... 9.39 77.63 10.94 30.85 200 100% ARM 198,155 109,319
PANAM 1997-1(12) .......... 10.93 81.93 21.45 31.95 2,828 100% ARM 113,544 52,615
LHELT 1998-2 (13) ......... 10.08 75.81 12.08 25.87 593 43% Fixed, 57% ARM 209,225 128,873
EQUICON 1994-2 (14) ....... 9.95 71.91 20.67 32.87 1,228 100% Fixed 78,846 19,051
10.97 81.97 100% ARM 32,306 4,024
EQUICON 1995-1 (14) ....... 12.00 70.36 33.41 31.39 2,621 100% Fixed 70,024 13,899
11.73 75.54 100% ARM 40,519 5,833
EQUICON 1995-2 (14) ....... 10.79 75.01 33.54 35.24 2,420 100% Fixed 79,288 19,589
11.42 73.25 100% ARM 39,667 5,674
ACCESS 1996-1 (15) ........ 10.82 75.05 29.93 33.70 3,137 100% Fixed 120,015 31,984
11.47 77.21 100% ARM 55,362 9,190
ACCESS 1996-2 (15) ........ 11.01 76.00 30.15 34.99 4,174 100% Fixed 142,259 41,243
11.63 78.09 100% ARM 68,345 10,792
ACCESS 1996-3 (15) ........ 11.43 78.12 38.15 37.86 3,283 100% Fixed 107,712 31,768
11.68 79.41 100% ARM 99,885 16,411
ACCESS 1996-4 (15) ........ 11.97 78.04 39.15 39.27 4,428 51%Fixed, 49% ARM 239,778 57,446
ACCESS 1997-1 (15) ........ 11.56 80.71 38.27 37.95 6,874 58%Fixed, 42% ARM 276,442 84,271
ACCESS 1997-2 (15) ........ 11.50 79.62 34.73 40.32 3,153 54%Fixed, 46% ARM 185,197 57,774
ACCESS 1997-3 (15) ........ 11.40 81.39 32.94 41.03 2,400 50%Fixed, 50% ARM 199,884 67,973
OCWEN 98 - OAC 1 (16) ..... 8.65 80.30 6.16 33.22 181 26% Fixed, 74% ARM 182,178 112,600
</TABLE>
37
<PAGE>
<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) 12/31/99 AT 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 ISSUANCE 12/31/99
----------------------- --------- ----------- ----------- ----------- ----------- --------------- -------- --------
<S> <C> <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 1,548 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(9) -- 12.59 -- 100% Multi-family 216,797 116,413
SBMS 1997-HUD1 (20) ....... 9.79 105.16 11.29 15.85 12,106 97%Fixed 326,147 192,444
ORMBS 1998-R1 (21) ........ 8.92 119.47 23.45 9.58 23,347 98%Fixed 565,411 224,138
GECMS 1994-12 (22) ....... 6.81 45.30 0.24 8.50 -- 100%Fixed 516,732 470,738
</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 December 31, 1999.
<TABLE>
<CAPTION>
DESCRIPTION CALIFORNIA FLORIDA TEXAS NEW YORK MARYLAND OTHER (1) TOTAL
----------- ---------- --------- --------- --------- --------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Single family residential....... $ 700,551 $ 310,405 $ 295,445 $ 206,948 $ 173,786 $2,063,916 $3,751,051
Multi-family and commercial..... 1,037 -- -- 62 -- 1,699 2,798
Other .......................... 48,217 23,137 4,685 27,003 9,763 114,844 227,649
--------- --------- --------- --------- --------- ---------- ----------
Total .......................... $ 749,805 $ 333,542 $ 300,130 $ 234,013 $ 183,549 $2,180,459 $3,981,498
========= ========= ========= ========= ========= ========== ==========
Percentage (2).................. 19% 8% 7% 6% 5% 55% 100%
========= ========= ========= ========= ========= ========== ==========
</TABLE>
(1) No other individual state makes up more than 8% of the total of
other.
(2) Based on a percentage of the total unpaid principal balance of the
underlying loans.
<TABLE>
<CAPTION>
ANTICIPATED
ORIGINAL ANTICIPATED WEIGHTED
ANTICIPATED YIELD TO AT AVERAGE PROSPECTIVE
AMORTIZED PERCENT YIELD TO MATURITY AT REMAINING YIELD AT
RATING/DESCRIPTION COST FAIR VALUE OWNED MATURITY 12/31/99 (1) COUPON LIFE (2) 12/31/99
- ------------------------------ ---------- ---------- ------- ----------- ------------- ------ ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SINGLE-FAMILY RESIDENTIAL:
BB-rated subordinates.... $ 4,697 $ 5,908 87.98% 13.15% (1.24)% 6.92% 3.06 22.77%
B-rated subordinates..... 5,380 6,908 95.50 16.84 7.87 7.49 2.66 42.69
Unrated subordinates..... 15,790 17,287 52.75 14.48 (11.38) 8.01 2.70 115.44
Unrated subprime 125,452 124,087 99.50 18.33 12.52 N/A 5.82 22.15
residuals....................
MULTI-FAMILY AND COMMERCIAL:
BB-rated subordinates.... 38,234 38,234 100.00 8.50 8.50 7.37 3.33 12.02
Unrated subordinates..... 3,503 3,503 100.00 22.15 14.36 0.00 3.16 10.75
Unrated interest only.... -- 14 N/A -- -- -- N/A N/A
--------- ---------
$ 193,056 $ 195,131
========= =========
</TABLE>
(1) Changes in the December 31, 1999 anticipated yield to maturity from
that originally anticipated are primarily the result of changes in
prepayment assumptions, loss assumptions and charges taken to reduce
the value of the securities.
(2) Equals the weighted average life based on the December 31, 1999 book
value.
38
<PAGE>
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 DECEMBER 31, 1999 - 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).
39
<PAGE>
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 $132.6 million or 75% during 1999. The decrease in 1999 reflects the closure
of the Company's domestic subprime origination business in August 1999 and the
sale of Ocwen UK on September 30, 1999.
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.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Single family residential loans...... $ 45,084 $ 177,578 $ 176,554 $ 111,980 $ 221,927
Multi-family residential loans....... -- -- -- 13,657 28,694
Consumer loans....................... 129 269 487 729 1,169
----------- ----------- ----------- ----------- -----------
$ 45,213 $ 177,847 $ 177,041 $ 126,366 $ 251,790
=========== =========== =========== =========== ===========
</TABLE>
ACTIVITY IN LOANS AVAILABLE FOR SALE. The following table sets forth
the activity in the Company's net loans available for sale during the periods
indicated:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............... $ 177,847 $ 177,041 $ 126,366 $ 251,790 $ 102,293
Purchases:
Single family residential (1)................ 47,129 795,053 278,081 284,598 230,077
Multi-family residential..................... -- -- -- 10,456 10,056
------------ ------------ ------------ ------------ ------------
47,129 795,053 278,081 295,054 240,133
------------ ------------ ------------ ------------ ------------
Originations:
Single family residential (2)............. 728,509 959,105 316,101 9,447 360
Multi-family residential.................. -- -- -- -- 24,810
------------ ------------ ------------ ------------ ------------
728,509 959,105 316,101 9,447 25,170
------------ ------------ ------------ ------------ ------------
Sales (3) (4)................................ (865,959) (1,658,773) (501,079) (395,999) (100,104)
Decrease (increase) in lower of cost or
market valuation allowance ................ 1,282 (4,064) (1,034) (2,455) (118)
Loans transferred (to)/from loan portfolio .. -- -- (13,674) 45 (4,353)
Principal repayments, net of
capitalized interest (30,314) (82,728) (22,151) (27,845) (11,231)
Transfer to real estate owned................ (13,281) (7,787) (5,569) (3,671) --
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in loans............. (132,634) 806 50,675 (125,424) 149,497
------------ ------------ ------------ ------------ ------------
Balance at end of period..................... $ 45,213 $ 177,847 $ 177,041 $ 126,366 $ 251,790
============ ============ ============ ============ ============
</TABLE>
(1) Includes $292.8 million purchased during 1998 from the U.S.
operations of Cityscape Financial Corp. and $421.3 million purchased
from the UK operations of Cityscape Financial Corp.
40
<PAGE>
(2) Includes $509.8 million and $254.3 million originated by Ocwen UK
during 1999 and 1998, respectively.
(3) Includes $297.5 million related to the sale of Ocwen UK on September
30, 1999.
(4) Includes securitizations of domestic and foreign subprime single
family residential loans. See "Results of Operations - Non-interest
Income."
The following table presents a summary of the Company's
non-performing loans in the loans available for sale portfolio at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Single family loans (1) ............. $15,319 $39,415 $ 13,509 $ 14,409 $ 7,833
Consumer loans ...................... 1 9 25 36 100
------- ------- ---------- ---------- ---------
$15,320 $39,424 $ 13,534 $ 14,445 $ 7,933
======= ======= ========== ========== =========
Non-performing loans as a percentage of:
Total loans available for sale ...... 33.88% 22.17% 7.64% 11.43% 3.15%
Total assets ........................ 0.46% 1.19% 0.44% 0.58% 0.58%
</TABLE>
(1) Includes $7.2 million related to Ocwen UK at December
31, 1998.
Non-performing loans available for sale consist primarily of
subprime single family residential loans, reflecting the higher risk associated
with such loans. See Note 6 to the Consolidated Financial Statements.
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. The Company's net loan portfolio decreased by $72.9 million or 32%
during 1999 reflecting the continuing payoff of multi-family and commercial
loans and the Company's decision effective June 30, 1999 to cease origination of
such loans. The decline was offset in part by the acquisition of loans,
primarily multi-family residential and commercial real estate, as a result of
the acquisition of OAC.
COMPOSITION OF LOAN PORTFOLIO The following table sets forth the
composition of the Company's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Single family residential loans......... $ 4,334 $ 30,361 $ 46,226 $ 73,186 $ 75,928
Multi-family residential loans:
Permanent........................... 23,430 53,311 38,105 31,252 41,306
Construction........................ 57,936 22,288 33,277 36,590 7,741
----------- ----------- ----------- ----------- -----------
Total multi-family residential... 81,366 75,599 71,382 67,842 49,047
----------- ----------- ----------- ----------- -----------
Commercial real estate:
Hotels:
Permanent........................ -- 29,735 64,040 173,947 125,791
Construction..................... 38,645 6,896 25,322 26,364 --
----------- ----------- ----------- ----------- -----------
38,645 36,631 89,362 200,311 125,791
Office buildings................... 64,745 93,068 68,759 128,782 61,262
Land............................... 2,238 2,266 2,858 2,332 24,904
Other.............................. -- 6,762 16,094 25,623 2,494
----------- ----------- ----------- ----------- -----------
Total commercial real estate..... 105,628 138,727 177,073 357,048 214,451
Commercial nonmortgage.................. -- -- -- 2,614 --
Consumer................................ 82 132 244 424 3,223
----------- ----------- ----------- ----------- -----------
Total loans........................ 191,410 244,819 294,925 501,114 342,649
Undisbursed loan proceeds............... (24,654) (7,099) (22,210) (89,840) (39,721)
Unamortized deferred fees............... (2,089) (2,480) (2,721) (5,169) (5,376)
Allowance for loan losses............... (7,259) (4,928) (3,695) (3,523) (1,947)
----------- ----------- ----------- ----------- ------------
Loans, net......................... $ 157,408 $ 230,312 $ 266,299 $ 402,582 $ 295,605
=========== =========== =========== =========== ===========
</TABLE>
41
<PAGE>
CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth
certain information at December 31, 1999 regarding the dollar amount of loans
maturing in the Company's loan portfolio based on scheduled contractual
amortization, as well as the dollar amount of loans which have fixed or
adjustable interest rates. Demand loans (loans having no stated schedule of
repayments and no stated maturity) and overdrafts are reported as due in one
year or less. Loan balances have not been reduced for (i) undisbursed loan
proceeds, unearned discounts and the allowance for loan losses or (ii)
non-performing loans.
<TABLE>
<CAPTION>
Maturing in
-------------------------------------------------------------------------------
After After Five
One Year Years
One Through Five Through Ten After Ten
Year or Less Years Years Years Total
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Single family residential loans......... $ 249 $ 50 $ 86 $ 3,949 $ 4,334
Multi-family residential loans.......... 81,360 6 -- -- 81,366
Commercial real estate and land loans... 105,628 -- -- -- 105,628
Consumer and other loans................ 20 62 -- -- 82
------------ ------------ ------------ ------------ ------------
Total................................ $ 187,257 $ 118 $ 86 $ 3,949 $ 191,410
============ ============ ============ ============ ============
Interest rate terms on amounts due:
Fixed................................ $ 83,072 $ 4 $ 86 $ 857 $ 84,019
Adjustable........................... 104,185 114 -- 3,092 107,391
------------ ------------ ------------ ------------ ------------
$ 187,257 $ 118 $ 86 $ 3,949 $ 191,410
============ ============ ============ ============ ============
</TABLE>
Scheduled contractual principal repayments may not reflect the
actual maturities of loans because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses. The average life of mortgage
loans, particularly fixed-rate loans, tends to increase when current mortgage
loan rates are substantially higher than rates on existing mortgage loans and,
conversely, to decrease when rates on existing mortgages are substantially
higher than current mortgage loan rates.
ACTIVITY IN THE LOAN PORTFOLIO. The following table sets forth the
activity in the Company's loan portfolio during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............ $ 244,819 $ 294,925 $ 501,114 $ 342,649 $ 61,194
Originations:
Single family residential loans........ -- -- 1,987 10,681 14,776
Multi-family residential loans......... 3,692 56,657 16,799 68,076 48,664
Commercial real estate loans........... 17,258 116,452 69,948 199,017 212,630
Commercial non-mortgage and
consumer loans....................... -- -- 1,140 3,366 207
------------ ------------ ------------ ------------ ------------
Total loans originated............... 20,950 173,109 89,874 281,140 276,277
------------ ------------ ------------ ------------ ------------
Purchases:
Single family residential loans........ 6,209 -- 78 305 29,833
Multi-family residential loans......... 45,285 -- -- -- 2,245
Commercial real estate loans........... 69,619 -- -- -- 1,966
------------ ------------ ------------ ------------ ------------
Total loans purchased (1)............ 121,113 -- 78 305 34,044
------------ ------------ ------------ ------------ ------------
Sales..................................... (53,197) -- (2,346) -- --
Loans transferred from available for sale. -- -- 13,782 45 4,353
Principal repayments...................... (137,824) (222,668) (306,916) (121,818) (33,168)
Transfer to real estate owned............. (4,451) (547) (661) (1,207) (51)
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in loans.......... (53,409) 50,106 206,189 (158,465) 281,455
------------ ------------ ------------ ------------ ------------
Balance at end of period.................. $ 191,410 $ 244,819 $ 294,925 $ 501,114 $ 342,649
============ ============ ============ ============ ============
</TABLE>
(1) Purchases during 1999 represent loans, including undisbursed loans,
acquired as a result of the acquisition of OAC.
42
<PAGE>
The following table sets forth certain information relating to the
Company's non-performing loans in its loan portfolio at the dates indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Single family residential loans................. $ 982 $ 1,169 $ 1,575 $ 2,123 $ 2,923
Multi-family residential loans (1).............. 11,037 7,392 7,583 106 731
Commercial real estate and other (2)............ 19,360 488 -- 55 202
--------- --------- --------- --------- ---------
Total........................................ $ 31,379 $ 9,049 $ 9,158 $ 2,284 $ 3,856
========= ========= ========= ========= =========
Non-performing loans as a percentage of:
Total loans (3)................................. 18.82% 3.81% 3.36% 0.56% 1.27%
Total assets.................................... 0.95% 0.27% 0.30% 0.09% 0.20%
Allowance for loan losses as a percentage of:
Total loans(3)............................... 4.35% 2.07% 1.39% 0.87% 0.65%(3)
Non-performing loans......................... 23.13% 54.46% 40.35% 154.25% 50.49%
</TABLE>
(1) Non-performing multi-family residential loans at December 31, 1999
were primarily attributable to 14 loans with an aggregate balance of
$11.0 million, all of which management believes are well
collateralized.
(2) Non-performing commercial real estate loans at December 31, 1999
were primarily attributable to 13 loans with an aggregate balance of
$19.4 million, all of which management believes are well
collateralized.
(3) Total loans is net of undisbursed loan proceeds.
For further information on the Company's loan portfolio, see Note 7
to the Consolidated Financial Statements (which is incorporated herein for
reference).
MATCH FUNDED LOANS AND SECURITIES. At December 31, 1999, the Company
held $105.1 million of single family residential match funded loans acquired as
a result of the OAC acquisition. These loans were previously securitized and
transferred by OAC to a real estate mortgage investment conduit on November 13,
1998. The transfer did not qualify as a sale under SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Accordingly, the proceeds received from the transfer are reported as a liability
(bonds-match funded agreements).
The $105.1 million of match funded loans at December 31, 1999
includes $1.1 million of non-performing loans and is net of an allowance for
loan losses of $0.5 million.
Additionally, at December 31, 1999 the Company held $52.7 million of
match funded securities resulting from the Company's transfer of four unrated
residual securities to a trust on December 16, 1999 in exchange for non-recourse
notes. Upon the transfer, the Company received approximately $40.1 million of
proceeds. The transfer did not qualify as a sale under SFAS No. 125.
Accordingly, the amount of proceeds from the transfer are reported as a
liability (bonds-match funded agreements).
See "Bonds-Match Funded Agreements" and Note 9 to the Consolidated
Financial Statements, (which is hereby incorporated for reference).
The following tables detail the Company's match funded securities at
December 31, 1999, and its estimates of expected yields on such securities,
taking into consideration expected prepayment and loss rates together with other
factors.
<TABLE>
<CAPTION>
ISSUE RATING COLLATERAL BALANCE OVER COLLATERIZATION LEVEL AT PRODUCT TYPE AT
SECURITIZATION SECURITY DATE RATING AGENCIES ISSUANCE 12/31/99 12/31/99 12/31/99
- -------------- -------- ----- ------ -------- -------- -------- ----------------------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SASCO 1998-21 X Jan-98 NR S&P, Fitch $ 600,052 $ 284,235 31% Fixed, 69% ARM 1. 85% OC
SASCO 1998-31 X Mar-98 NR S&P, Fitch 769,671 405,880 11% Fixed, 89% ARM 3.32% OC
MLMI 1998-FF12 X Jun-98 NR S&P, Fitch 198,155 109,319 100% ARM 2.72% OC
LHELT 1998-23 X Jun-98 NR Moody's, Fitch 209,225 128,873 43% Fixed, 57% ARM 6.11% OC
OCWEN 98-OAC-14 N/A Nov-98 NR S&P, Moody's 182,178 112,600 26% Fixed, 74% ARM 16.70% OC
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED ACTUAL ACTUAL
AVERAGE AVERAGE TOTAL LIFE TO DATE LIFE TO DATE ANTICIPATED YIELD TO PROSPECTIVE YIELD
COUPON LTV AT: DELINQUENCY AT: CPR AT: LOSSES AT: MATURITY AT: MATURING AT
SECURITIZATION SECURITY AT: 12/31/99 12/31/99 12/31/99 12/31/99 12/31/99 PURCHASE 12/31/99 12/31/99
- -------------- -------- ------------ -------- --------------- -------- ------------ -------- --------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SASCO 1998-2 X 11.10% 73.74% 17.81% 31.84% $ 4,969 16.00% 1.26% 17.62%
SASCO 1998-3(1) X 10.20 75.67 11.81 30.19 4,116 17.04 3.29 17.48
MLMI 1998-FF1(2) X 9.39 77.63 10.94 30.85 200 18.57 10.12 18.60
LHELT 1998-2(3) X 10.08 75.81 12.08 25.87 593 18.55 17.17 38.78
OCWEN 98-OAC-1(4) N/A 8.65 80.30 6.16 33.22 181 N/A 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 12/31/99 (1) COUPON LIFE(2)
- ------------------ --------------- ------------ ------------- ----------- ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Match-funded securities......... $ 53,561 $ 52,693 100.00% 17.24% 6.07% 0.00% 8.89 years
=============== ============
</TABLE>
(1) Changes in the December 31, 1999 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 December 31, 1999
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
$113.3 million or 11% during 1999. Resolutions and repayments, loans transferred
to real estate owned and sales more than offset acquisitions during the year.
Substantially all of the Company's discount loan portfolio is secured by first
mortgage liens on real estate.
COMPOSITION OF THE DISCOUNT LOAN PORTFOLIO The following table sets
forth the composition of the Company's discount loan portfolio by type of loan
at the dates indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Single family residential loans.......... $ 597,719 $ 597,100 $ 900,817 $ 504,049 $ 376,501
Multi-family residential loans........... 191,971 244,172 191,302 341,796 176,259
Commercial real estate loans:
Office buildings.................... 97,784 154,063 363,681 202,084 169,300
Hotels.............................. 75,095 100,407 98,907 46,054 67,600
Retail properties................... 105,247 21,230 106,755 138,590 95,000
Other properties.................... 87,148 173,310 131,692 79,073 56,666
------------ ------------ ------------ ------------ ------------
365,274 449,010 701,035 465,801 388,566
Other loans.............................. 21,615 10,144 1,865 2,753 2,203
------------ ------------ ------------ ------------ -------------
Total discount loans.................. 1,176,579 1,300,426 1,795,019 1,314,399 943,529
============ ============ ============ ============ ============
Unaccreted discount:
Single family residential loans..... (147,630) (161,650) (170,743) (92,167) (105,255)
Multi-family residential loans...... (37,981) (20,795) (45,944) (71,817) (47,541)
Commercial real estate loans........ (57,604) (69,747) (120,457) (77,550) (120,367)
Other loans......................... (954) (321) (206) (374) (595)
------------- ------------- ------------- ------------- -------------
(244,169) (252,513) (337,350) (241,908) (273,758)
------------- ------------- ------------- ------------- -------------
932,410 1,047,913 1,457,669 1,072,491 669,771
Allowance for loan losses................ (19,181) (21,402) (23,493) (11,538) --
------------ ------------ ------------ ------------ ------------
Discount loans, net...................... $ 913,229 $ 1,026,511 $ 1,434,176 $ 1,060,953 $ 669,771
============ ============ ============ ============ ============
</TABLE>
44
<PAGE>
ACTIVITY IN THE DISCOUNT LOAN PORTFOLIO. The following table sets forth the
activity in the Company's net discount loan portfolio during the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
AMOUNT (Dollars in Thousands)
Balance at beginning of period.......... $ 1,026,511 $ 1,434,176 $ 1,060,953 $ 669,771 $ 529,460
Acquisitions(1)(2):
Single family residential loans........ 516,744 613,201 1,061,967 365,516 272,799
Multi - family residential loans........ 78,244 231,130 57,707 310,423 141,160
Commercial real estate loans............ 157,258 264,697 656,904 433,492 374,873
Other................................... 17,414 14,699 195 1,456 2,363
----------- ----------- ----------- ----------- -----------
769,660 1,123,727 1,776,773 1,110,887 791,195
----------- ----------- ----------- ----------- -----------
Resolutions and repayments(3)........... (372,442) (539,353) (484,869) (371,228) (300,161)
Loans transferred to real estate owned.. (203,043) (382,904) (292,412) (138,543) (281,344)
Sales (4)............................... (318,022) (696,063) (518,872) (230,246) (51,595)
Decrease (increase) in discount......... 8,344 84,837 (95,442) 31,850 (17,784)
Decrease (increase) in allowance........ 2,221 2,091 (11,955) (11,538) --
----------- ----------- ----------- ----------- -----------
Balance at end of period................ $ 913,229 $ 1,026,511 $ 1,434,176 $ 1,060,953 $ 669,771
=========== =========== =========== =========== ===========
Year Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NUMBER OF LOANS
Balance at beginning of period....... 8,100 12,980 5,460 4,543 3,894
Acquisitions(1)(2):
Single family residential loans..... 6,606 7,779 17,154 4,086 2,745
Multi - family residential loans..... 34 92 173 221 104
Commercial real estate loans......... 202 205 354 496 117
Other................................ 6 8 22 9 6
----------- ----------- ----------- ----------- -----------
6,848 8,084 17,703 4,812 2,972
----------- ----------- ----------- ----------- -----------
Resolutions and repayments(3)........ (1,241) (1,918) (1,978) (2,355) (960)
Loans transferred to real estate owned (2,367) (3,193) (1,596) (860) (984)
Sales (4)............................ (3,276) (7,853) (6,609) (680) (379)
Decrease (increase) in discount...... -- -- -- -- --
Decrease (increase) in allowance..... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at end of period............. 8,064 8,100 12,980 5,460 4,543
=========== =========== =========== =========== ===========
</TABLE>
(1) The decline in acquisitions during 1999 is primarily due to a
decline in the volume of non-performing loans brought to market, as
a result of the continued strength of the domestic economy.
(2) The 1996 data does not include the Company's pro rata share of the
$741.2 million of discount loans acquired by the LLC.
(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) Includes securitizations of performing single family discount loans.
See "Results of Operations - Non-interest Income."
45
<PAGE>
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>
December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PRINCIPAL AMOUNT (Dollars in Thousands)
Loans without Forbearance Agreements:
Current.............................. $ 509,845 $ 578,269 $ 670,115 $ 572,043 $ 351,630
Past due 31 days to 89 days.......... 23,438 35,555 21,098 19,458 86,838
Past due 90 days or more............. 448,312 509,838 638,319 506,113 385,112
Acquired and servicing not yet
transferred....................... 87,538 57,048 28,053 149,564 119,949
------------- ------------- ------------- ------------- -------------
Subtotal.......................... 1,069,133 1,180,710 1,357,585 1,247,178 943,529
------------- ------------- ------------- ------------- -------------
Loans with Forbearance Agreements:
Current............................. 2,958 1,180 3,140 7,554 --
Past due 31 days to 89 days.......... 8,904 4,046 1,688 2,703 --
Past due 90 days or more(1)(2)(3)(4). 95,584 114,490 432,606 56,964 --
------------- ------------- ------------- ------------- -------------
Subtotal.......................... 107,446 119,716 437,434 67,221 --
------------- ------------- ------------- ------------- -------------
Total.................................. $ 1,176,579 $ 1,300,426 $ 1,795,019 $ 1,314,399 $ 943,529
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
PERCENTAGE OF LOANS
Loans without Forbearance Agreements:
Current........................... 43.33% 44.47% 37.33% 43.52% 37.27%
Past due 31 days to 89 days....... 1.99 2.73 1.18 1.48 9.20
Past due 90 days or more.......... 38.10 39.21 35.56 38.51 40.82
Acquired and servicing not yet
transferred.................... 7.44 4.39 1.56 11.38 12.71
--------- --------- --------- --------- ----------
Subtotal....................... 90.86 90.80 75.63 94.89 100.00
--------- --------- --------- --------- ----------
Loans with Forbearance Agreements:
Current........................... 0.25 0.09 0.18 0.57 --
Past due 31 days to 89 days....... 0.76 0.31 0.09 0.21 --
Past due 90 days or more.......... 8.13 8.80 24.10 4.33 --
--------- --------- --------- --------- ----------
Subtotal....................... 9.14 9.20 24.37 5.11 --
--------- --------- --------- --------- ----------
Total............................... 100.00% 100.00% 100.00% 100.00% 100.00%
========= ========= ========= ========= ==========
</TABLE>
(1) Includes $73.2 million of loans which were less than 90 days past
due under the terms of the forbearance agreements at December 31,
1999, of which $52.0 million were current and $21.2 million were
past due 31 to 89 days.
(2) Includes $110.1 million of loans which were less than 90 days past
due under the terms of the forbearance agreements at December 31,
1998, of which $77.9 million were current and $32.2 million were
past due 31 to 89 days.
(3) Includes $316.3 million of loans which were less than 90 days past
due under the terms of the forbearance agreements at December 31,
1997, of which $184.5 million were current and $131.8 million were
past due 31 to 89 days.
(4) Includes $32.8 million of loans which were less than 90 days past
due under the terms of the forbearance agreements at December 31,
1996, of which $17.8 million were current and $15.0 million were
past due 31 to 89 days.
For further information on the Company's discount loan portfolio,
see Note 8 to the Consolidated Financial Statements (which is incorporated
herein by reference).
46
<PAGE>
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 loan and match funded loan
portfolio by loan category and the percentage of loans in each category to total
loans in the respective portfolios at the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
AMOUNT (Dollars in Thousands)
Loan portfolio:
Single family residential loans .. $ 87 $ 215 $ 512 $ 520 $ 346
Multi-family residential loans ... 1,722 2,714 2,163 673 683
Commercial real estate loans ..... 5,450 1,999 1,009 2,299 875
Other ............................ -- -- 11 31 43
--------- --------- --------- --------- --------
Total .......................... $ 7,259 $ 4,928 $ 3,695 $ 3,523 $ 1,947
========= ========= ========= ========= ========
Discount loan portfolio(1):
Single family residential loans .. $ 11,081 $ 10,307 $ 15,017 $ 3,528 $ --
Multi-family residential loans ... 1,681 2,457 2,616 3,124 --
Commercial real estate loans ..... 5,152 8,607 5,860 4,886 --
Other loans ...................... 1,267 31 -- -- --
--------- --------- --------- --------- --------
Total .......................... $ 19,181 $ 21,402 $ 23,493 $ 11,538 $ --
========= ========= ========= ========= ========
Match funded loans:
Single family residential loans .. $ 495 $ -- $ -- $ -- $ --
========= ========= ========= ========= ========
PERCENTAGE OF LOANS TO TOTAL LOANS
Loan portfolio:
Single family residential loans .. 2.3% 12.4% 15.7% 14.6% 22.2%
Multi-family residential loans ... 42.5 30.9 24.2 13.5 14.3
Commercial real estate loans ..... 55.2 56.7 60.0 71.3 62.6
Other ............................ -- -- 0.1 0.6 0.9
--------- --------- --------- --------- --------
Total .......................... 100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ========= ========= ========
Discount loan portfolio(1):
Single family residential loans .. 48.3% 41.6% 50.1% 38.4% --%
Multi-family residential loans ... 16.5 21.3 10.0 25.2 --
Commercial real estate loans ..... 33.0 36.2 39.8 36.2 --
Other loans ...................... 2.2 0.9 0.1 0.2 --%
--------- --------- --------- --------- --------
Total .......................... 100.0% 100.0% 100.0% 100.0% --%
========= ========= ========= ========= ========
Match funded loans:
Single family residential loans .. 100.0% --% --% --% --%
========= ========= ========= ========= ========
</TABLE>
(1) The Company did not maintain an allowance for loan losses on its
discount loan portfolio prior to 1996.
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.
47
<PAGE>
The following table sets forth an analysis of activity in the
allowance for loan losses relating to the Company's loan portfolio during the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................... $ 4,928 $ 3,695 $ 3,523 $ 1,947 $ 1,071
Provision for loan losses........................ 1,636 891 325 1,872 1,121
Charge-offs:
Single family residential loans............... (8) (212) (100) (261) (131)
Multi-family residential loans................ -- -- -- (7) --
Commercial real estate loans.................. -- -- -- -- (40)
Consumer loans................................ -- (7) (53) (28) (92)
-------- --------- -------- -------- --------
Total charge-offs........................... (8) (219) (153) (296) (263)
Recoveries:
Single family residential loans............... -- -- -- -- 3
Commercial real estate loans.................. -- 561 -- -- 15
-------- -------- -------- -------- --------
Total recoveries............................ -- 561 -- -- 18
-------- -------- -------- -------- --------
Net (charge-offs) recoveries................ (8) 342 (153) (296) (245)
-------- -------- -------- -------- --------
Acquired allowance (OAC acquisition)............. 703 -- -- -- --
-------- -------- -------- -------- --------
Balance at end of period......................... $ 7,259 $ 4,928 $ 3,695 $ 3,523 $ 1,947
======== ======== ======== ======== ========
Net (charge-offs) recoveries as a percentage of
average loan portfolio ....................... (0.004%) 0.13% (0.04%) (0.09%) (0.19%)
</TABLE>
The following table sets forth an analysis of activity in the
allowance for loan losses relating to the Company's discount loan portfolio
during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996
------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period...................... $ 21,402 $ 23,493 $ 11,538 $ --
Provision for loan losses........................... 5,434 17,618 31,894 20,578
Charge-offs:
Single family residential loans.................. (4,409) (14,574) (13,281) (7,009)
Multi-family residential loans................... (912) (2,648) (2,056) (704)
Commercial real estate loans..................... (2,687) (2,888) (5,012) (1,503)
Other loans...................................... (44) (20) -- --
------------ ------------ ------------ ------------
Total charge-offs............................. (8,052) (20,130) (20,349) (9,216)
------------ ------------ ------------ ------------
Recoveries:
Single family residential loans.................. 397 421 410 176
Multi-family residential loans................... -- -- -- --
Commercial real estate loans..................... -- -- -- --
Consumer loans................................... -- -- -- --
------------ ------------ ------------ ------------
Total recoveries.............................. 397 421 410 176
------------ ------------ ------------ ------------
Net charge-offs............................... (7,655) (19,709) (19,939) (9,040)
------------ ------------ ------------ ------------
Balance at end of period............................ $ 19,181 $ 21,402 $ 23,493 $ 11,538
============ ============ ============ ============
Net charge-offs as a percentage of average discount
loan portfolio................................... (0.83%) (1.53%) (1.55%) (1.34%)
</TABLE>
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. In 1993, the
Company commenced a program to invest in multi-family residential projects which
have been allocated low-income housing tax credits under Section 42 of the
Internal Revenue Code of 1986, as amended, by a state tax credit allocating
agency. At December 31, 1999, the Company had $151.0 million of investments in
low-income housing tax credit interests, as compared to $144.2 million at
December 31, 1998. The increase during 1999 represents the Company's continued
investment in existing low-income projects, as well as six new projects, offset
by the sale of its investment in nine projects which had a carrying value of
$41.7 million for gains of $6.6 million. See Note 14 to the Consolidated
Financial Statements (which is incorporated herein by reference).
48
<PAGE>
INVESTMENTS IN UNCONSOLIDATED ENTITIES. Investments in
unconsolidated entities decreased $49.8 million during 1999 primarily as a
result of the Company's acquisition of OAC on October 7, 1999. The Company's
investment in OAC stock amounted to $16.3 million, or 8.12% of the outstanding
common stock of OAC, at December 31, 1998. The Company's investment in OPLP
units amounted to $22.8 million, or 8.71% of the partnership units of OPLP, at
December 31, 1998. Prior to October 7, 1999, the Company accounted for these
investments under the equity method. During 1998, the Company recorded equity in
the losses of its investment in OAC and OPLP of $4.0 million and $4.7 million,
respectively.
Also contributing to the decline in investments in unconsolidated
entities during 1999 was a $10.4 million decrease in the Company's 35.84% equity
investment in Kensington. The decrease was primarily due to the Company's $9.2
million share of Kensington's losses recorded during 1999.
See Notes 2 (first five paragraphs) and 10 to the Consolidated
Financial Statements (which are incorporated herein by reference).
REAL ESTATE OWNED, NET. Real estate owned, net, decreased by $34.0
million or 17% during 1999 due primarily to a decline in foreclosures. 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>
December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Discount loan portfolio:
Single family residential. $ 72,193 $ 94,641 $ 76,409 $ 49,728 $ 75,144
Multi-family residential.. 2,601 20,130 16,741 14,046 59,932
Commercial real estate .. 85,233 82,591 71,339 36,264 31,218
-------- -------- -------- -------- --------
Total ............... 160,027 197,362 164,489 100,038 166,294
Loan portfolio .............. 2,183 227 357 592 262
Loans available for sale .... 5,296 3,962 2,419 3,074 --
-------- -------- -------- -------- --------
Total ............... $167,506 $201,551 $167,265 $103,704 $166,556
======== ======== ======== ======== ========
</TABLE>
The following tables set forth the activity in the real estate owned
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
AMOUNT (Dollars in Thousands)
Balance at beginning of period ....... $ 201,551 $ 167,265 $ 103,704 $ 166,556 $ 96,667
Properties acquired through
foreclosure or deed-in-lieu thereof:
Discount loans ..................... 203,043 382,904 292,412 138,543 281,344
Loans available for sale ........... 13,281 7,787 5,569 3,671 --
Loan portfolio ..................... 4,451 547 661 1,207 51
Less discount transferred .......... (63,664) (110,716) (93,021) (41,323) (96,221)
--------- --------- --------- --------- ---------
157,111 280,522 205,621 102,098 185,174
--------- --------- --------- --------- ---------
Acquired in connection with
acquisitions of discount loans ..... 47,808 19,949 38,486 2,529 24,617
Sales ................................ (237,108) (263,206) (179,693) (160,592) (139,233)
Change in valuation allowance ........ (1,856) (2,979) (853) (6,887) (669)
--------- --------- --------- --------- ---------
Balance at end of period ............. $ 167,506 $ 201,551 $ 167,265 $ 103,704 $ 166,556
========= ========= ========= ========= =========
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NUMBER OF PROPERTIES
Balance at beginning of period ....... 1,999 1,505 825 1,070 1,018
Properties acquired through
foreclosure or deed-in-lieu thereof:
Discount loans ..................... 2,367 3,193 1,596 860 969
Loans available for sale ........... 157 82 54 51 --
Loan portfolio ..................... 10 3 6 7 1
Less discount transferred .......... -- -- -- -- --
--------- --------- --------- --------- ---------
2,534 3,278 1,656 918 970
--------- --------- --------- --------- ---------
Acquired in connection with
acquisitions of discount loans ..... 931 303 545 12 311
Sales ................................ (3,792) (3,087) (1,521) (1,175) (1,229)
Change in valuation allowance ........ -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at end of period ............. 1,672 1,999 1,505 825 1,070
========= ========= ========= ========= =========
</TABLE>
The following table sets forth the amount of time that the Company
had held its real estate owned at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
One to two months............... $ 30,695 $ 38,444 $ 83,144 $ 17,695 $ 25,398
Three to four months............ 26,532 79,264 28,912 15,291 22,672
Five to six months.............. 11,263 27,115 20,929 14,348 25,742
Seven to 12 months.............. 28,606 26,122 23,621 13,004 76,782
Over 12 months.................. 70,410 30,606 10,659 43,366 15,962
------------ ------------ ------------ ------------ ------------
$ 167,506 $ 201,551 $ 167,265 $ 103,704 $ 166,556
============ ============ ============ ============ ============
</TABLE>
The Company actively manages its real estate owned. Sales of real
estate owned resulted in gains, net of the provision for loss, of $8.3 million,
$25.2 million and $17.2 million during 1999, 1998 and 1997, respectively, which
are included in determining the Company's income (loss) on real estate owned.
The increase in the amount of real estate owned which the Company has held in
excess of one year as of December 31, 1999 primarily reflects the anticipated
migration of a large retail property which is currently being repositioned for
sale. The average period during which the Company held the $237.1 million,
$263.2 million and $179.7 million of real estate owned which was sold during the
years ended December 31, 1999, 1998, and 1997, respectively, was 6 months, 6
months and 9 months, respectively.
Properties acquired through foreclosure or by deed-in-lieu thereof
are valued at the lower of amortized cost or fair value. Properties included in
the Company's real estate owned portfolio are periodically re-evaluated to
determine that they are being carried at the lower of cost or fair value less
estimated costs to sell. Holding and maintenance costs related to properties are
recorded as expenses in the period incurred. Deficiencies resulting from
valuation adjustments to real estate owned subsequent to acquisition are
recognized as a valuation allowance. Subsequent increases related to the
valuation of real estate owned are reflected as a reduction in the valuation
allowance, but not below zero. Increases and decreases in the valuation
allowance are charged or credited to income, respectively.
The following table sets forth the activity, in aggregate, in the
valuation allowances on real estate owned during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year..................... $ 15,325 $ 12,346 $ 11,493 $ 4,606 $ 3,937
Provisions for losses............................ 28,008 18,626 13,450 18,360 10,510
Charge-offs and sales............................ (26,152) (15,647) (12,597) (11,473) (9,841)
---------- ---------- ---------- ---------- ----------
Balance at end of year........................... $ 17,181 $ 15,325 $ 12,346 $ 11,493 $ 4,606
========== ========== ========== ========== ==========
Valuation allowance as a percentage of
total gross real estate owned (1)............. 9.30% 7.07% 6.87% 9.98% 2.69%
</TABLE>
(1) The increase at December 31, 1999 reflects a decline in the balance
of real estate owned and an increase in the amount of real estate
owned which the Company has held in excess of one year.
50
<PAGE>
Although the Company evaluates the potential for significant
environmental problems prior to acquiring or originating a loan, there is a risk
for any mortgage loan, particularly a multi-family residential and commercial
real estate loan, that hazardous substances or other environmentally restricted
substances could be discovered on the related real estate. In such event, the
Company might be required to remove such substances from the affected properties
or to engage in abatement procedures at its sole cost and expense. There can be
no assurance that the cost of such removal or abatement will not substantially
exceed the value of the affected properties or the loans secured by such
properties, that the Company would have adequate remedies against the prior
owners or other responsible parties or that the Company would be able to resell
the affected properties either prior to or following completion of any such
removal or abatement procedures. If such environmental problems are discovered
prior to foreclosure, the Company generally will not foreclose on the related
loan; however, the value of such property as collateral will generally be
substantially reduced, and as a result, the Company may suffer a loss upon
collection of the loan.
From time to time, the Company makes loans to finance the sale of
real estate owned. At December 31, 1999, such loans amounted to $1.8 million and
consisted of $1.6 million of multi-family residential loans and $0.2 million of
commercial loans. All of the Company's loans to finance the sale of real estate
owned were performing in accordance with their terms at December 31, 1999.
INVESTMENTS IN REAL ESTATE. At December 31, 1999, the Company's
investments in real estate was primarily comprised of eight properties with an
aggregate carrying value of $252.6 million which were acquired as a result of
the acquisition of OAC in October 1999. Four of the properties currently owned
by the Company with an aggregate carrying value of approximately $190.3 million
are located in San Francisco, California. Three of these properties are located
in the financial district of San Francisco, and one property is located in the
adjacent civic center district of San Francisco. The Company believes that the
office market in San Francisco, particularly the financial district, is
characterized by limited new supply and significant barriers to entry. Low
vacancy rates, coupled with lack of new construction, are leading to increased
rental rates. Government regulation of development in conjunction with local
construction costs and a lack of developable land provide significant barriers
to entry to this area. The Company believes that its investments in real estate
in San Francisco are well located and benefit from their proximity to the
majority of the city's office, retail and hotel accommodations.
The Company's earthquake insurance relating to its four properties
in San Francisco is in the aggregate amount of $50 million, which is the
probable maximum loss estimated to be sustained in the event the most powerful
earthquake recorded in California were to occur at the properties, as determined
by an independent structural engineer. In the event of such probable maximum
loss of $50 million, such damage would be insured, less a deductible of
approximately 5% of total value at risk. In the event of a more catastrophic
earthquake or damages in excess of $50 million, the Company would not be insured
for such losses.
The Company's net investment in the above eight properties at December 31,
1999 is comprised of the following:
<TABLE>
<CAPTION>
Date
Acquired Property Location Square Feet Property Type December 31, 1999
- -------- ----------------------- -------------------- ----------- ------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
04/08/98 225 Bush Street........ San Francisco, CA 570,637 Office Bldg. $ 127,640
09/23/97 450 Sansome Street..... San Francisco, CA 130,437 Office Bldg. 28,913
01/23/98 690 Market Street...... San Francisco, CA 124,692 Office Bldg. 21,381
09/03/97 10 U.N. Plaza.......... San Francisco, CA 71,636 Office Bldg. 12,349
07/22/98 841 Prudential Drive... Jacksonville, FL 550,000 Office Bldg. 32,366
11/10/97 Cortez Plaza........... Bradenton, FL 289,686 Shopping Ctr. 22,617
04/09/98 7075 Bayers Road....... Halifax, Nova Scotia 402,529 Shopping Ctr. 14,844
10/01/98 Holiday Village........ Havre, MT 223,355 Shopping Ctr. 1,505
-------------
261,615
Accumulated depreciation (9,011)
-------------
$ 252,604
=============
</TABLE>
Set forth below is a brief description of each of the above real
estate investments at December 31, 1999.
225 BUSH STREET. In April 1998, OAC acquired an existing 570,637
square foot, 22-story office building located at 225 Bush Street in the
financial district of San Francisco for $100.2 million. Bush Street was
originally constructed in 1923 and brought up to 1992 building code seismic
standards during 1992-94. Originally built as the world headquarters of Chevron
of USA, Inc. ("Chevron"), it was sold in 1994 as Chevron sought to relocate its
executive offices. OAC is projecting to make tenant improvements, leasing
commissions, and to upgrade mechanical, HVAC, electrical, fire, and life/safety
systems under the Americans with Disabilities Act of 1990 (the "ADA"), as well
as upgrades and improvements to the ground floor retail and annex entrance
lobby. Approximately $9.0 million of the capital budget will be spent for tenant
improvements and other upgrades to the premises as a result of a new 10-year
lease executed in August 1999 with XOOM.com for approximately 187,000 square
feet. As of December 31, 1999, the Bush street property was 95% leased.
51
<PAGE>
450 SANSOME STREET. In September 1997, OAC acquired a 130,437 square
foot, 16-story office building located at 450 Sansome Street in the financial
district of San Francisco. OAC purchased this property for $17.2 million. The
property was built in 1967 and upgraded in certain respects in 1989 and 1990.
The property was acquired from a lender who had taken title through foreclosure.
Average rent per square foot was approximately $18.00 at the date of
acquisition. OAC has to date renovated the entrance lobby, elevator cabs, life
safety systems, and certain building systems on four floors, completed
improvements required for compliance with the ADA, as well as paid tenant
improvements and leasing commissions. The building was fully leased as of
December 31, 1999 with average contract rents of $24.78 per square foot.
690 MARKET STREET. In January 1998, OAC acquired a 124,692 square
foot, 16-story, office building located at 690 Market Street in the financial
district of San Francisco. The property was purchased for $13.7 million. The
property was originally constructed in 1888 and has undergone numerous
renovations. At the date of acquisition existing rents averaged $14.06 per
square foot. Since the date of acquisition, OAC has executed new leases totaling
approximately 35,000 square feet, which increased building occupancy to 97% as
of December 31, 1999, and average rents have increased to approximately $24.60
per square foot. The Company is continuing to invest in structural upgrades, a
sprinkler system and ADA upgrades, deferred maintenance, tenant improvements and
leasing commissions from the date at acquisition through its ownership period.
10 UNITED NATIONS PLAZA. In September 1997, OAC acquired a 71,636
square foot, six-story, office building located at 10 United Nations Plaza in
the Civic Center district of San Francisco. OAC purchased this property, which
was built in 1982, for $9.1 million. At the date of acquisition, the property
was substantially leased and the average rent per square foot was $13.76. The
building was 64% leased as of December 31, 1999 at average rents of
approximately $24.19 per square foot. The remaining space is currently being
marketed. OAC has invested additional funds in this property to fund
improvements to enhance the appearance of the lobby and hallways, install ADA
upgrades, fund deferred maintenance and tenant improvements, and pay leasing
commissions.
PRUDENTIAL BUILDING. In July 1998, OAC purchased the Prudential
Building, a 550,000 square foot, 22-story office building located in the central
business district of Jacksonville, Florida for an aggregate purchase price of
$36.0 million, plus closing costs. The purchase price was funded with cash on
hand and advances from a line of credit. Simultaneously with this closing, OAC
also leased 98% of the building back to the Prudential Insurance Co. of America
and sold two adjacent parking areas to a neighboring hospital for approximately
$4.1 million. The Prudential lease has a term of four years with options to
vacate the premises during the term of the lease, as well as three subsequent
five-year extension options. On August 6, 1999, Prudential Healthcare was sold
to Aetna.
CORTEZ PLAZA. In November 1997, OAC purchased Cortez Plaza, a
289,686 square foot shopping center located in Bradenton, Florida, a suburb of
Tampa. OAC purchased this property, which was built in 1956 and renovated in
1988, for $18.4 million. In a separate transaction, the fee simple title to a
large portion of the shopping center that had been subject to a ground lease was
purchased simultaneously for $0.9 million, which resulted in a total investment
in this property of $19.3 million. By simultaneously acquiring fee simple title
to a ground lease that encumbered a large part of the shopping center's parking
lot, OAC believes that it immediately improved the value and marketability of
the project. As of December 31, 1999, the shopping center was 94.5% leased with
national and regional tenants, comprising 75% of the leaseable area. Below
market leases covering approximately 2.2% of the center expire during 2000.
BAYER'S ROAD SHOPPING CENTRE. In April 1998, OAC acquired the Bayers
Road Shopping Centre, which is located at 7075 Bayers Road in Halifax, Nova
Scotia. The property was acquired by foreclosure on the loans secured by the
property, which were acquired by OAC at a discount in September 1997. The
property contains 402,529 square feet of space, which consists primarily of
retail space but also includes some office space and storage space. The original
buildings were built in 1956 and were enclosed and expanded in several phases
between 1971 and 1987. The property was approximately 67% leased at December 31,
1999. OAC currently is implementing a renovation plan to establish the second
level as a community shopping center anchored value-oriented retailers, while
filling the lower level with service providers, discount retailers and
entertainment uses. The third level will remain office space. In August 1999,
OAC purchased for $1.9 million the neighboring IGA Store which will be destroyed
in order to increase visibility to the Shopping Centre.
HOLIDAY VILLAGE SHOPPING CENTRE. In October 1998, OAC acquired the
Holiday Village Shopping Centre, which is located at 1753 Highway 2 West in
Havre, Montana. The property was acquired by foreclosure on the loan secured by
the property, which was acquired by OAC at a discount in November 1997. The
property contains 223,355 square feet of retail space. The original building was
built in 1978. The property was approximately 47% leased at December 31, 1999.
OAC currently is developing a leasing plan to stabilize the property.
52
<PAGE>
The following table sets forth the cost of improvements for each
investment in real estate through December 31, 1999.
<TABLE>
<CAPTION>
Budgeted 1999
Cost of Actual Cost of Impairment Gross Book Rents due Total
Initial Cost Improvements Improvements Write down/ Fair Value Value at Accumulated and accrued Rental
Property to OAC for 1999 to Date Sales Adjustments 12/31/99 Depreciation at end Income
-------- ------------ ------------ -------------- ----------- ----------- ---------- ------------ ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
225 Bush Street ..... $ 101,632 $ 6,514 $ 9,962 $ -- $ 16,046 $127,640 $ 4,372 $ 894 $ 2,605
450 Sansome Street .. 17,205 3,988 4,010 -- 7,698 28,913 1,038 562 825
690 Market Street ... 13,707 5,014 3,433 -- 4,241 21,381 673 70 673
10 U.N. Plaza ....... 9,080 3,414 2,529 -- 740 12,349 576 104 252
841 Prudential Dr. .. 32,827 484 275 -- (736) 32,366 838 2,148 2,059
Cortez Plaza ........ 19,244 1,354 285 -- 3,088 22,617 886 235 731
7075 Bayers Road .... 15,219 12,755 5,444 (3,902) (1,917) 14,844 581 125 569
Holiday Village ..... 1,791 350 860 (1,601) 455 1,505 47 13 129
Park Center I ....... 1,534 -- -- (1,534) -- -- -- -- --
--------- -------- -------- -------- -------- -------- ------- -------- --------
Total............. $ 212,239 $ 33,873 $ 26,798 $ (7,037) $ 29,615 $261,615 $ 9,011 $ 4,151 $ 7,843
========= ======== ======== ======== ======== ======== ======= ======== ========
</TABLE>
The following table sets forth a summary schedule of the total lease
expirations for the Company's investments in real estate for leases in place as
of December 31, 1999, assuming that none of the tenants exercise renewal options
or termination rights, if any, at or prior to the scheduled expirations.
<TABLE>
<CAPTION>
Percentage of Average Base Percentage of
Aggregate Annualized Rent per Aggregate
Number of Square Footage Portfolio Base Rent of Square Foot of Portfolio
Year of Lease Leases of Expiring Leased Square Expiring Expiring Annualized Base
Expiration(1) Expiring Leases Feet Leases(2) Leases(3) Rent
------------- --------- -------------- ------------- ------------ -------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
2000(4) 47 173,653 10.22% $ 1,177 6.78 7.35%
2001 46 136,405 8.03% 1,625 11.92 10.14%
2002 52 604,393 35.57% 5,321 8.80 33.19%
2003 21 55,999 3.30% 1,045 18.66 6.52%
2004 24 119,827 7.05% 1,448 12.08 9.03%
2005 5 42,901 2.52% 365 8.50 2.27%
2006 10 118,123 6.95% 494 4.18 3.08%
2007 5 94,556 5.56% 778 8.23 4.86%
2008 6 137,027 8.06% 1,810 13.21 11.29%
2009 4 34,356 2.02% 625 18.18 3.90%
Thereafter (5) 7 182,116 10.72% 1,342 7.37 8.37%
-------- -------------- --------------- ---------
227 1,699,356 100.00% $ 16,030 100.00%
======== ============== =============== =========
</TABLE>
(1) Lease year runs from January 1 to December 31 for all years.
(2) Annualized base rent is calculated based on the amount of rent
scheduled from January 1 of the listed year to the lease expiration.
(3) Average base rent per square foot is calculated using the annualized
base rent divided by the square footage.
(4) In October 1999, tenant IGA exercised a termination option effective
April 30, 2000 at Bayers Road Shopping Center, which requires IGA to
pay termination fees following expiration of the lease agreement.
(5) On August 13, 1999, XOOM.com, a new tenant, executed a 10-year lease
at 225 Bush Street for approximately 187,000 square feet. However,
the table only includes space that was occupied on December 31,
1999. As of December 31, 1999, XOOM.com physically occupied 24,157
square feet. The remaining square footage is under construction with
occupancy scheduled during the first quarter of 2000.
The Company regularly engages in negotiations with existing tenants
to extend leases due to expire as well as to enter into new leases with other
interested parties. Square footage involved in such negotiations may vary from a
small sub-tenancy to substantially all the available space at any given
property.
53
<PAGE>
Noncancelable operating leases with tenants expire on various dates
through 2028. The future minimum rental income (base rent) to be received under
leases existing as of December 31, 1999, are as follows (Dollars in Thousands):
2000................................. $ 25,572
2001................................. 23,768
2002................................. 18,411
2003................................. 13,212
2004................................. 11,173
Thereafter........................... 41,526
----------
Total $ 133,662
==========
The Company's investments in real estate also included $15.6 million
and $32.9 million at December 31, 1999 and 1998, respectively, of property (land
and buildings) held for lease. The decline in the balance of $17.3 million
during 1999 was primarily due to the sale of four properties which resulted in
an aggregate gain of $1.5 million.
See Note 12 (which is incorporated herein by reference) to the
Consolidated Financial Statements for additional disclosures regarding the
Company's investments in real estate.
DEFERRED TAX ASSET. At December 31, 1999, the deferred tax asset,
net of deferred tax liabilities and valuation allowance, amounted to $136.9
million, an increase of $69.9 million from the $67.0 million net deferred tax
asset at December 31, 1998. See Note 23 to the Consolidated Financial Statements
(which is incorporated herein by reference) for a disclosure of the components
of gross deferred tax assets and liabilities, as well as valuation allowances.
DEPOSITS. Deposits decreased $352.5 million or 16% during 1999
primarily as a result of a $376.7 million decrease in certificates of deposit.
Brokered deposits obtained through national investment banking firms which
solicit deposits from their customers, amounted to $1.21 billion at December 31,
1999, as compared to $1.48 billion at December 31, 1998. Deposits obtained as a
result of the Company's direct solicitation and marketing efforts to regional
and local investment banking firms and institutional investors and high net
worth individuals amounted to $243.0 million at December 31, 1999, as compared
to $371.0 million at December 31, 1998. See Note 16 to the Consolidated
Financial Statements (which is incorporated herein by reference).
The following table sets forth information related to the Company's
deposits at the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- ---------------------------------- -------------------------------
Weighted % of Weighted % of Weighted % of
Average Total Average Total Average Total
Amount Rate Deposits Amount Rate Deposits Amount Rate Deposits
----------- -------- -------- ------------ -------- -------- ----------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing checking
accounts................... $ 280,273 --% 15% $ 251,429 --% 11% $ 133,546 --% 7%
NOW and money market
checking accounts.......... 30,343 3.95% 2 35,070 3.40% 2 27,624 4.73% 1
Savings accounts.............. 1,361 2.38% -- 1,326 2.30% -- 1,664 2.30% --
----------- ------ ------------ ------- ----------- -------
311,977 17 287,825 13 162,834 8
----------- ------------ -----------
Certificates of deposit(1).... 1,536,997 1,916,548 1,834,899
Unamortized deferred fees..... (6,688) (9,557) (11,737)
----------- ------------ -----------
Total certificates of deposit. 1,530,309 5.92% 83 1,906,991 5.78% 87 1,823,162 6.00% 92
----------- ------ ------------ ------- ----------- -------
Total deposits............. $ 1,842,286 100% $ 2,194,816 100% $ 1,985,996 100%
=========== ====== ============ ======= =========== =======
</TABLE>
(1) At December 31, 1999, 1998, and 1997, certificates of deposit issued
on an uninsured basis (greater than $100,000) amounted to $100.4
million, $100.5 million, and $133.7 million, respectively. Of the
$100.4 million of uninsured deposits at December 31, 1999, $57.5
million were from political subdivisions in New Jersey and secured
or collateralized as required under state law.
54
<PAGE>
The following table sets forth remaining maturities for the
Company's term deposits in amounts of $100,000 or more at December 31, 1999
(Dollars in Thousands):
Three months or less............................ $ 32,089
Over three months through six months............ 37,396
Over six months through twelve months........... 41,265
Thereafter...................................... 31,916
-------------
$ 142,666
=============
BONDS-MATCH FUNDED AGREEMENTS. At December 31, 1999, the Company
held $101.0 of bonds-match funded agreements which arose in connection with a
previous securitization of loans by OAC accounted for as a financing
transaction, and which were acquired as a result of the acquisition of OAC. In
addition, on December 16, 1999, the Company transferred four unrated residual
securities to a trust in exchange for non-recourse notes. Upon the transfer, the
Company received approximately $40.1 million of proceeds. The transfer did not
qualify as a sale under FAS 125. Accordingly, the amount of proceeds from the
transfers are reported as a liability. See Notes 9 and 17 to the Consolidated
Financial Statements (which are incorporated herein by reference).
NOTES, DEBENTURES AND OTHER INTEREST-BEARING OBLIGATIONS. Notes,
debentures and other interest-bearing obligations of $317.6 million at December
31, 1999, increased $92.6 million or 41% during 1999. The increase during 1999
is primarily due to the assumption of $140.5 million of 11.5% notes as a result
of the acquisition of OAC in October, offset in part by $54.2 million of debt
repurchases by the Company in the open market. The $54.2 million of repurchases
resulted in extraordinary gains of $2.9 million ($2.4 million after tax). See
Note 19 to the Consolidated Financial Statements (which is incorporated herein
by reference) for a disclosure of the Company's notes, debentures and other
interest-bearing obligations by maturity at December 31, 1999 and 1998.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations
outstanding under lines of credit increased $8.6 million or 5% during 1999 to
$187.9 million at December 31, 1999. The increase is primarily due to the
assumption of lines with an outstanding balance at December 31, 1999 of $159.2
million as a result of the OAC acquisition, offset by a reduction of $117.3
million resulting from the sale of Ocwen UK and a reduction of $30.8 million
resulting from the Company's closure of its domestic subprime origination
business at OFS. The OAC lines are primarily collateralized by investments in
real estate. The lines of credit outstanding at December 31, 1997 funded the
acquisition and origination of subprime single family residential loans at OFS
and Ocwen UK. See Note 18 to the Consolidated Financial Statements (which is
incorporated herein by reference).
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 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 $15.0 million of Capital
Securities in the open market, resulting in a $5.5 million extraordinary gain
($4.6 million net of tax). Intercompany transactions between OCT and the
Company, including the Junior Subordinated Debentures, are eliminated in the
consolidated financial statements of the Company.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $73.1 million
or 17 % during 1999. The increase in stockholders' equity during 1999 was
primarily due to the issuance of 12,371,750 shares of common stock in the amount
of $96.8 million in connection with the OAC acquisition and $19.8 million of net
income, offset by the repurchase of 4,611,700 shares of common stock in the
aggregate amount of $30.7 million and a $13.9 million decline in unrealized
gains on securities available for sale. See Consolidated Statements of Changes
in Stockholders' Equity in the Consolidated Financial Statements (which is
incorporated herein by reference).
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.
55
<PAGE>
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, Eurodollar and U.S.
Treasury interest rate futures contracts, foreign currency futures contracts and
foreign currency swap agreements.
INTEREST RATE RISK MANAGEMENT. Under interest rate swaps, the
parties exchange the difference between fixed-rate and floating-rate interest
payments on a specified principal amount (referred to as the "notional amount")
for a specified period without the exchange of the underlying principal amount.
Interest rate swaps are utilized by the Company to protect against the decrease
in value of a fixed-rate asset or the increase in borrowing cost from a
short-term, fixed-rate liability, such as reverse repurchase agreements, in an
increasing interest-rate environment. At December 31, 1999, the Company had
entered into interest rate swaps with an aggregate notional amount of $200.8
million.
The Company also enters into interest rate futures contracts, which
are commitments to either purchase or sell designated financial instruments at a
future date for a specified price and may be settled in cash or through
delivery. Eurodollar futures contracts have been sold by the Company to hedge
the repricing or maturity risk of certain short duration mortgage-related
securities, and U.S. Treasury futures contracts have been sold by the Company to
offset declines in the market value of its fixed-rate loans and certain
fixed-rate mortgage-backed and related securities available for sale in the
event of an increasing interest rate environment. At December 31, 1999, the
Company had entered into futures contracts with an aggregate notional amount of
$19.0 million. The Company had no futures contracts outstanding at December 31,
1998.
During 1999, 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. Swaption contracts are options to enter into an interest rate swap
agreement at a future date at a specific interest rate. A European put option
allows the Company to sell a specified quantity of an asset at a specified price
at a specific date. At December 31, 1999, the Company had entered into European
swaptions and put options with an aggregate notional amount of $20.9 million.
See Note 22 to the Consolidated Financial Statements. For additional
disclosures regarding the Company's interest rate derivative financial
instruments (which is incorporated herein by reference).
The Asset/Liability Committee's methods for evaluating interest rate
risk include an analysis of the Company's interest rate sensitivity "gap," which
is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities. A gap is considered
negative when the amount of interest-rate sensitive liabilities exceeds
interest-rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to affect net
interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market rates or conditions, changes in interest rates may affect net interest
income positively or negatively even if an institution were perfectly matched in
each maturity category.
The following table sets forth the estimated maturity or repricing
of the Company's interest-earning assets and interest-bearing liabilities at
December 31, 1999. The amounts of assets and liabilities shown within a
particular period were determined in accordance with the contractual terms of
the assets and liabilities, except (i) adjustable-rate loans, performing
discount loans, securities and FHLB advances are included in the period in which
they are first scheduled to adjust and not in the period in which they mature,
(ii) fixed-rate mortgage-related securities reflect estimated prepayments, which
were estimated based on analyses of broker estimates, the results of a
prepayment model utilized by the Company and empirical data, (iii)
non-performing discount loans reflect the estimated timing of resolutions which
result in repayment to the Company, (iv) 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 $280.3 million at
December 31, 1999, are excluded. Management believes that these assumptions
approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities in the table
could vary substantially if different assumptions were used or actual experience
differs from the historical experience on which the assumptions are based.
56
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------------------
More Than
Within Three Four to One Year to Three Years
Months Twelve Months Three Years and Over Total
------------ ------------- ----------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Interest-earning deposits ....................... $ 116,399 $ -- $ -- $ -- $ 116,399
Federal funds sold .............................. 112,000 -- -- -- 112,000
Securities available for sale ................... 173,526 190,103 101,623 122,266 587,518
Loans available for sale (1) .................... 1,784 24,491 9,622 9,316 45,213
Investment securities, net ...................... 10,965 -- -- -- 10,965
Loan portfolio, net (1) ......................... 97,697 30,860 18,267 10,584 157,408
Match funded loan and securities ................ 10,483 61,389 39,919 46,003 157,794
Discount loan portfolio, net .................... 85,274 430,679 235,932 161,344 913,229
----------- ----------- ----------- ----------- -----------
Total rate-sensitive assets .................... 608,128 737,522 405,363 349,513 2,100,526
----------- ----------- ----------- ----------- -----------
RATE-SENSITIVE LIABILITIES:
NOW and money market checking deposits .......... 28,630 197 421 1,095 30,343
Savings deposits ................................ 109 193 381 678 1,361
Certificates of deposit ......................... 176,883 583,711 634,745 134,970 1,530,309
----------- ----------- ----------- ----------- -----------
Total interest-bearing deposits ................. 205,622 584,101 635,547 136,743 1,562,013
Securities sold under agreements to repurchase .. 47,365 -- -- -- 47,365
Bond-match funded loan agreements ............... 106,097 10,971 24,447 -- 141,515
Obligations outstanding under lines of credit ... 187,866 -- -- -- 187,866
Notes, debentures and other ..................... 6,236 -- -- 311,337 317,573
----------- ----------- ----------- ----------- -----------
Total rate-sensitive liabilities ............... 553,186 595,072 659,994 448,080 2,256,332
----------- ----------- ----------- ----------- -----------
Interest rate sensitivity gap before off- balance
sheet financial instruments ..................... 54,492 142,450 (254,631) (98,567) (155,806)
FINANCIAL INSTRUMENTS:
Interest rate swaps ............................... 200,780 -- (100,780) (100,000) --
Swaption and put option contracts ................. 399 327 -- -- 726
Futures contracts ................................. 19,000 -- (12,000) (7,000) --
----------- ----------- ----------- ----------- -----------
Total rate-sensitive financial instruments ........ 220,179 327 (112,780) (107,000) 726
----------- ----------- ----------- ----------- -----------
Interest rate sensitivity gap before financial
instruments ..................................... $ 220,179 $ 142,777 $ (367,411) $ (205,567) $ (155,080)
=========== =========== =========== =========== ===========
Cumulative interest rate sensitivity gap .......... $ 275,121 $ 417,898 $ 50,487 $ (155,080)
=========== =========== =========== ===========
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets ....... 13.10% 19.89% 2.40% (7.38)%
</TABLE>
(1) Balances have not been reduced for non-performing loans.
Although the interest rate sensitivity gap analysis is a useful
measurement and contributes toward effective asset and liability management, it
is difficult to predict the effect of changing interest rates based solely on
that measure. The OTS has established specific minimum guidelines for thrift
institutions to observe in the area of interest rate risk as described in Thrift
Bulletin No. 13a, "Management of Interest Rate Risk, Investment Securities, and
Derivative Activities" ("TB 13a"). Under TB 13a, institutions are required to
establish and demonstrate quarterly compliance with board-approved limits on
interest rate risk that are defined in terms of net portfolio value ("NPV"),
which is defined as the net present value of an institution's existing assets,
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
57
<PAGE>
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
December 31, 1999:
Rate Shock Board Limits Current
(in basis points) (minimum NPV Ratios) NPV Ratios
----------------- -------------------- ----------
+300 5.00% 20.93%
+200 6.00% 20.66%
+100 7.00% 20.38%
0 8.00% 20.14%
-100 7.00% 19.90%
-200 6.00% 19.67%
-300 5.00% 19.53%
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. For example, under current market
conditions, a 100-basis-point decline in the market interest rate is estimated
to result in a 200-basis-point increase in the prepayment rate of a typical
subprime residential loan. Most commercial and multi-family loans are not
subject to prepayments as a result of prepayment penalties and contractual terms
which prohibit prepayments during specified periods. However, for those
commercial and multi-family loans where prepayments are not currently precluded
by contract, declines in interest rates are associated with steep increases in
prepayment speeds in computing cash flows. A risk premium is then calculated for
each asset, which, when added to the interest rate being modeled, results in a
matrix of discount rates that are applied to the cash flows computed by the
model. The base interest rate scenario assumes interest rates at December 31,
1999. Actual results could differ significantly from the OCN results estimated
in the following table:
Change in Interest Rates Estimated Changes in
(Rate Shock in basis points) Net Interest NPV
---------------------------- --------------------- ---
+300 22.34% 0.89%
+200 14.89% 0.54%
+100 7.45% 0.15%
0 0.00% 0.00%
-100 (7.45)% (0.17)%
-200 (14.89)% (0.30)%
-300 (22.34)% 0.09%
Management of the Company believes that the assumptions used by it
to evaluate the vulnerability of the Company's operations to changes in interest
rates approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities and the
estimated effects of changes in interest rates on the Company's net interest
income and NPV could vary substantially if different assumptions are used or
actual experience differs from the historical experience on which they are
based.
58
<PAGE>
The following table shows the Company's financial instruments that
are sensitive to changes in interest rates, categorized by expected maturity,
and the instruments' fair values at December 31, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date At December 31, 1999(1)
---------------------------------------------------------------------------------------
Total Fair
2000 2001 2002 2003 2004 Thereafter Balance Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-Sensitive Assets:
Interest-earning deposits ............. $ 116,399 $ -- $ -- $ -- $ -- $ -- $ 116,399 $ 116,399
Average interest rate ............... 3.34% -- -- -- -- -- 3.34% --
Federal funds sold .................... 112,000 -- -- -- -- -- 112,000 112,000
Average interest rate ............... 4.30% -- -- -- -- -- 4.30% --
Securities available for sale ......... 363,628 73,600 28,023 47,028 12,903 62,336 587,518 587,518
Average interest rate ............... 6.68% 7.70% 7.85% 8.84% 11.32% 13.50% 7.86%
Loans available for sale(2) ........... 26,275 6,079 3,543 1,897 1,161 6,258 45,213 45,213
Average interest rate ............... 10.78% 10.99% 11.16% 11.15% 11.03% 11.04% 10.90%
Investment securities, net ............ 10,965 -- -- -- -- -- 10,965 10,965
Average interest rate ............... -- -- -- -- -- -- --
Loan portfolio, net(2) ................ 128,557 11,843 6,424 3,458 2,007 5,119 157,408 157,184
Average interest rate ............... 9.74% 10.33% 10.26% 10.27% 10.31% 10.38% 9.85%
Discount loan portfolio, net(2) ....... 515,953 173,195 62,737 41,731 28,913 90,700 913,229 935,336
Average interest rate ............... 8.54% 8.31% 8.31% 8.21% 8.12% 8.32% 8.35%
Match funded loans and securities ..... 71,872 25,747 14,172 5,783 4,773 35,447 157,794 154,623
Average interest rate ............... 8.55% 7.62% 7.91% 7.17% 7.12% 6.67% 7.83%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets ....... $1,345,649 $ 290,464 $ 114,899 $ 99,897 $ 49,757 $ 199,860 $2,100,526 $2,119,238
========== ========== ========== ========== ========== ========== ========== ==========
Rate-Sensitive Liabilities:
NOW and money market checking deposits. $ 28,826 $ 227 $ 193 $ 164 $ 140 $ 793 $ 30,343 $ 30,043
Average interest rate ............... 4.13% 0.48% 0.48% 0.48% 0.48% 0.48% 3.95%
Savings deposits ...................... 302 212 169 136 108 434 1,361 1,297
Average interest rate ............... 2.38% 2.38% 2.38% 2.38% 2.38% 2.38% 2.38%
Certificates of deposit ............... 760,594 400,619 234,126 73,646 37,294 24,030 1,530,309 1,536,726
Average interest rate ............... 5.80% 5.97% 6.16% 5.79% 6.51% 5.86% 5.92%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits ... 789,722 401,058 234,488 73,946 37,542 25,257 1,562,013 1,568,066
Securities sold under agreements to
repurchase........................... 47,365 -- -- -- -- -- 47,365 47,365
Average interest rate ............... 8.28% -- -- -- -- -- 8.28%
Obligations outstanding under lines
of credit........................... 187,866 -- -- -- -- -- 187,866 187,866
Average interest rate ............... 7.52% -- -- -- -- -- 7.52%
Notes, debentures and other ........... 6,236 -- -- 103,850 -- 207,487 317,573 290,244
Average interest rate ............... 8.32% -- -- 11.88% -- 11.66% 11.67%
Bond funded loan agreements ........... 117,067 24,448 -- -- -- -- 141,515 141,557
Average Interest rate ............... 7.17% 9.50% -- -- -- -- 7.58%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total rate-sensitive liabilities .. $1,148,256 $ 425,506 $ 234,488 $ 177,796 $ 37,542 $ 232,744 $2,256,332 $2,235,098
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
(1) Expected maturities are contractual maturities adjusted for
prepayments of principal. The Company uses certain assumptions to
estimate fair values and expected maturities. For assets, expected
maturities are based upon contractual maturity, projected repayments
and prepayments of principal. The prepayment experience reflected
herein is based on the Company's historical experience. The
Company's average Constant Prepayment Rate ("CPR") is 11.49% and
11.78% on its fixed-rate and adjustable-rate portfolios,
respectively, for interest-earning assets (excluding investment
securities, which do not have prepayment features). The actual
maturities of these instruments could vary substantially if future
prepayments differ from the Company's historical experience.
(2) Balances have not been reduced for non-performing loans.
59
<PAGE>
The Company believes that the broad geographic distribution of its
discount loan portfolio, loan portfolio and loans available for sale reduces the
risks that would otherwise result from concentrating such loans in limited
geographic areas. See Notes 6,7 and 8 to the Consolidated Financial Statements
(which are incorporated herein by reference).
FOREIGN CURRENCY EXCHANGE RATE RISK MANAGEMENT. The Company uses
foreign currency derivatives to hedge its investment in Kensington, its net
investment in a foreign subsidiary which owns securities backed by residential
loans originated in the UK ("UK residuals") acquired as a result of the OAC
acquisition, and its net investment in a foreign subsidiary which owns a
shopping center located in Halifax, Nova Scotia ("the Nova Scotia shopping
center"), also acquired as a result of the OAC acquisition. The Company's
exposure to foreign currency exchange rates exists with the British Pound versus
the U.S. dollar and the Canadian Dollar ("C$") versus the U.S. dollar. It is the
Company's policy to periodically adjust the amount of foreign currency
derivative contracts it has entered into in response to changes in its recorded
investment in these foreign entities, as well as assets denominated in a foreign
currency.
The Company has entered into a foreign currency swap with a
AAA-rated counterparty and bought short foreign currency futures contracts to
hedge its equity investment in Kensington.
Prior to the sale of Ocwen UK on September 30, 1999, the Company
sold short foreign currency futures to hedge its foreign currency exposure
related to this equity investment. These currency futures were closed in October
1999.
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 December 31, 1999 and December 31,
1998 were as follows.
Investment Hedge Net Exposure
---------- ----------- ------------
DECEMBER 31, 1999: (Dollars in Thousands)
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
DECEMBER 31, 1998:
Ocwen UK (1)........................ $ 53,436 $ 43,828 $ (9,608)
Kensington.......................... $ 46,586 $ 45,093 $ (1,493)
(1) Equity investment in Ocwen UK excludes unrealized gains on
securities available for sale.
The net exposures are subject to gain or loss if foreign currency
exchange rates fluctuate. See the "Foreign Currency Management" section of Note
22 to the Consolidated Financial Statements (which is incorporated herein by
reference) for additional disclosures regarding the Company's foreign currency
derivative financial instruments.
LIQUIDITY, COMMITMENTS AND OFF-BALANCE SHEET RISKS
Liquidity is a measurement of the Company's ability to meet
potential cash requirements, including ongoing commitments to fund deposit
withdrawals, repay borrowings, fund investment, loan acquisition and lending
activities and for other general business purposes. The primary sources of funds
for liquidity consist of deposits, FHLB advances, reverse repurchase agreements,
lines of credit and maturities and payments of principal and interest on loans
and securities and proceeds from sales and securitizations thereof.
Sources of liquidity include certificates of deposit obtained
primarily from wholesale sources. At December 31, 1999, the Company had $1.54
billion of certificates of deposit, including $1.21 billion of brokered
certificates of deposit obtained through national investment banking firms, all
of which are non-cancelable. At the same date, scheduled maturities of
certificates of deposit during the 12 months ending December 31, 2000 and 2001,
and thereafter amounted to $760.6 million, $400.6 million and $369.1 million,
respectively. Brokered and other wholesale deposits generally are more
responsive to changes in interest rates than core deposits and, thus, are more
likely to be withdrawn from the Company upon maturity as changes in interest
rates and other factors are perceived by investors to make other investments
more attractive. Management of the Company believes that it can adjust the rates
paid on certificates of deposit to retain deposits in changing interest rate
environments and that brokered and other wholesale deposits can be both a
relatively cost-effective and stable source of funds. There can be no assurance
that this will continue to be the case in the future, however.
Sources of borrowings include FHLB advances, which are required to
be secured by single family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. At December 31, 1999,
the Company was eligible to borrow up to an aggregate of $575.7 million from the
FHLB of New York (subject to the availability of acceptable collateral) and had
$9.2 million of residential loans and $35.1 million of short duration CMOs (all
of which were held by the Bank) pledged as security for any such advances. At
December 31, 1999, the Company had contractual relationships with 12 brokerage
60
<PAGE>
firms and the FHLB of New York pursuant to which it could obtain funds from
reverse repurchase agreements. At December 31, 1999, the Company had
unrestricted cash and cash equivalents of $334.6 million, $357.1 million of
short duration CMOs and $105.1 million of subordinate and residual mortgages
which could be used to secure additional borrowings. At December 31, 1999, 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. Please also see the
"Short-Term Highly Liquid Investments," "Securities Sold Under Agreements to
Repurchase," and "Derivative Financial Instruments" sections of Note 1 and Notes
3, 9, 16, 17, 18, 20, 31 and 32 to the Consolidated Financial Statements (which
are incorporated herein by reference).
The Company's operating activities (used) provided $(180.5) million,
$288.3 million and $60.7 million of cash flows during 1999, 1998 and 1997,
respectively. During the foregoing years, cash resources were provided primarily
by net income and proceeds from sales of loans available for sale, and cash
resources were used primarily to purchase and originate loans available for
sale.
The Company's investing activities provided (used) cash flows
totaling $482.4 million, $(220.3) million and $(443.6) million during 1999, 1998
and 1997, respectively. During the foregoing years, cash flows from investing
activities were provided primarily by principal payments on discount loans and
loans held for investment, maturities of and principal payments received on
securities available for sale and proceeds from sales of discount loans,
securities available for sale and real estate owned. Cash flows from investing
activities were primarily utilized to purchase discount loans and securities
available for sale. Cash flows from investing activities for 1999 included
$122.1 million of proceeds from the sale of Ocwen UK. Cash flows used for
investing activities in 1998 included $426.1 million for the acquisitions of
subsidiaries, primarily Ocwen UK.
The Company's financing activities (used) provided cash flows of
$(365.2) million, $225.3 million, and $482.5 million during 1999, 1998 and 1997,
respectively. Cash flows from financing activities were primarily related to
changes in the Company's deposits, issuance of obligations outstanding under
lines of credit and issuance of common stock and the Capital Securities in 1997.
Cash flows from financing activities were primarily utilized to repay reverse
repurchase agreements and obligations outstanding under lines of credit, as well
as the repurchase of debt and common stock in 1999.
The Bank is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of U.S.
government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings association maintain
liquid assets of not less than 4% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet applicable liquidity
requirements. The Bank's liquidity, as measured for regulatory purposes,
averaged 11.73%, 8.34%, 5.6%, 8.8% and 12.9% during the years ended December 31,
1999, 1998, 1997, 1996 and 1995, respectively, and amounted to 10.92% at
December 31, 1999.
The Bank's ability to make capital distributions pursuant to the OTS
capital distribution regulations is limited by the regulatory capital levels
which it has committed to the OTS it would maintain, commencing on June 30,
1997. As a result of 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 December 31, 1999. See "Regulatory
Capital Requirements." In addition to the foregoing OTS limitations, there are
certain contractual restrictions on the Bank's ability to pay dividends as set
forth in the indenture governing the Bank's 12% Debentures. See Note 19 to the
Consolidated Financial Statements (which is incorporated herein by reference).
Future cash dividends depend on future operating results of the Bank.
There are restrictions on OAC's ability to pay dividends under the
Indenture governing OAC's 11.5% Redeemable Notes. As of December 31, 1999, OAC
was not permitted to pay dividends under the Indenture. See Note 19 to the
Consolidated Financial Statements (which is incorporated herein by reference).
At December 31, 1999, the Company had $26.0 million of unfunded
commitments related to the origination of loans and funding of construction
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 30 to the Consolidated Financial Statements (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 "Asset and Liability Management" above.
The Company conducts business with a variety of financial
institutions and other companies in the normal course of business, including
counterparties to its off-balance sheet financial instruments. The Company is
subject to potential financial loss if the counterparty is unable to complete an
agreed upon transaction. The Company seeks to limit counterparty risk through
financial analysis, dollar limits and other monitoring procedures.
61
<PAGE>
REGULATORY CAPITAL AND OTHER REQUIREMENTS
Federally-insured institutions such as the Bank are required to
maintain minimum levels of regulatory capital. These standards generally must be
as stringent as the comparable capital requirements imposed on national banks.
In addition to regulatory capital requirements of general applicability, a
federally-chartered savings association such as the Bank may be required to meet
individual minimum capital requirements established by the OTS on a case-by-case
basis upon a determination that a savings association's capital is or may become
inadequate in view of its circumstances.
Following an examination in late 1996 and early 1997, the Bank
committed to the OTS to maintain a core capital (leverage) ratio and a total
risk-based capital ratio of at least 9% and 13%, respectively. The Bank
continues to be in compliance with this commitment as well as the regulatory
capital requirements of general applicability, as indicated in Note 26 to the
Consolidated Financial Statements (which is incorporated herein by reference).
The Bank's core capital, Tier 1 risk-based capital and total risk-based capital
ratios at December 31, 1999, were 10.67%, 14.02% and 19.12%, 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.
Although the above individual regulatory capital requirements have
been agreed to by the OTS, there can be no assurance that in the future the OTS
will agree to a decrease in such requirements or will not seek to increase such
requirements or will not impose these or other individual regulatory capital
requirements in a manner which affects the Bank's status as a "well-capitalized"
institution under applicable laws and regulations.
RECENT ACCOUNTING DEVELOPMENTS
For information relating to the effects on the Company of the
adoption of recent accounting standards, see Note 1 to the Consolidated
Financial Statements (which is incorporated herein by reference).
YEAR 2000 DATE CONVERSION
The Company did not experience any significant malfunctions or
errors in its computer systems and applications when the year changed from 1999
to 2000, nor were business operations disrupted. Prior to December 31, 1999, the
Company completed its project plan to achieve year 2000 readiness of its mission
critical and non-mission critical systems, including hardware infrastructure and
software applications. The project plan was divided into six phases:
identification, evaluation, remediation, validation, risk assessment and
contingency planning.
During the course of the project, the Company expended approximately
131% of budgeted manhours and incurred costs of approximately $2.7 million,
which included approximately $309,000 for Year 2000 testing tools, additional
hardware, and outside consulting assistance, while the remainder consisted of
labor and overhead expense from within the Company.
During 1998 and 1999, the Company substantially completed the
systems identification and evaluation phases of the project as well as
remediation and validation of its mission critical systems. The Company also
focused on any remaining validation tasks, including remediation and validation
of its non-mission critical systems and end-to-end testing with third parties.
As part of the identification and evaluation phases of the project,
the Company documented critical operating functions within each business unit,
as well as strategic third-party and vendor relationships. These efforts also
served as the basis of the Company's year 2000 risk assessment and contingency
planning efforts. The Company retained in a business continuity expert to
prepare contingency plans and assist with the testing and validation of these
plans. The business continuity expert reviewed the Company's year 2000 customer
disclosure, mission critical systems testing results, critical vendor listings,
software and hardware inventories, and disaster recovery plans for critical
business units. On the basis of this review, the business continuity expert
built a Company intranet business continuity template and database and
established roles and responsibilities for key personnel in the business
continuity plan.
The Company believes that any Year 2000 problems that may still
occur in its computer systems and applications are likely to be minor and
correctable. In addition, the Company still could be negatively affected by
potential failures in non-critical vendor or customer computer systems or
end-to-end disruptions involving as yet unidentified, and hence untested,
third-party systems and records stored on those systems. The Company is
currently not aware of any significant Year 2000 or related problems that have
arisen for its customers or vendors.
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.
62
<PAGE>
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 REGISTRATION STATEMENTS ON FORMS
S-1 AND S-3 AND PERIODIC REPORTS ON FORMS 10-Q, 8-K AND 10-K AND EXHIBIT 99.1,
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 PUBLICLY RELEASE THE RESULT OF ANY REVISIONS THAT MAY BE MADE TO
ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATED OR
UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
63
<PAGE>
REPORT OF MANAGEMENT
The management of Ocwen is responsible for the preparation and fair
presentation of the financial statements and other financial information
contained in this annual report. The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States applied on a consistent basis and include amounts
based on management's best estimates and judgments. Nonfinancial information
included in this annual report has also been prepared by management and is
consistent with the consolidated financial statements. In the opinion of
management, the consolidated financial statements fairly reflect the Company's
financial position, results of operations and cash flows.
To assure that financial information is reliable and assets are
safeguarded, management has established and maintains an effective system of
internal accounting controls and procedures that provide reasonable assurance as
to the integrity and reliability of the financial statements, the protection of
assets against loss from unauthorized use or disposition and the prevention and
detection of errors and irregularities on a timely basis.
PricewaterhouseCoopers LLP conducts its audit of the consolidated
financial statements in accordance with auditing standards generally accepted in
the United States. Such standards include the evaluation of internal accounting
controls to establish a basis for developing the scope of its examination of the
consolidated financial statements. In addition to the use of independent
certified public accountants, the Company maintains a professional staff of
internal auditors who conduct financial, procedural and special audits. To
ensure their independence, both PricewaterhouseCoopers LLP and the internal
auditors have direct access to the Audit Committee of the Board of Directors.
The Audit Committee, which consists solely of independent directors
of the Company, makes recommendations to the Board of Directors concerning the
appointment of the independent certified public accountants and meets with
PricewaterhouseCoopers LLP and the internal auditors to discuss the results of
their audits, the Company's internal accounting controls and financial reporting
matters.
- --------------------------------------------------------------------------------
/s/ WILLIAM C. ERBEY /s/ MARK S. ZEIDMAN
- --------------------------------------------------------------------------------
William C. Erbey Mark S. Zeidman
Chairman and Chief Executive Officer Senior Vice President and
Chief Financial Officer
- --------------------------------------------------------------------------------
64
<PAGE>
OCWEN FINANCIAL CORPORATION
PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
200 East Las Olas Boulevard
Suite 1700
Fort Lauderdale, FL 33301
Telephone (954) 764-7111
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Ocwen Financial Corporation
In our opinion, the accompanying consolidated statements of
financial condition and the related consolidated statements of operations, of
comprehensive income, of changes in stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Ocwen
Financial Corporation (the "Company") and its subsidiaries at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Fort Lauderdale, Florida
February 9, 2000
65
<PAGE>
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
ASSETS:
Cash and amounts due from depository institutions .............................. $ 153,459 $ 120,805
Interest earning deposits ...................................................... 116,399 49,374
Federal funds sold ............................................................. 112,000 275,000
Securities available for sale, at fair value ................................... 587,518 593,347
Loans available for sale, at lower of cost or market ........................... 45,213 177,847
Investment securities .......................................................... 10,965 10,825
Loan portfolio, net ............................................................ 157,408 230,312
Match funded loans and securities, net ......................................... 157,794 --
Discount loan portfolio, net ................................................... 913,229 1,026,511
Investments in low-income housing tax credit interests ......................... 150,989 144,164
Investments in unconsolidated entities ......................................... 37,118 86,893
Real estate owned, net ......................................................... 167,506 201,551
Investment in real estate ...................................................... 268,241 36,860
Premises and equipment, net .................................................... 49,038 33,823
Income taxes receivable ........................................................ -- 34,333
Deferred tax asset, net ........................................................ 136,920 66,975
Excess of purchase price over net assets acquired .............................. 13,207 12,706
Principal, interest and dividends receivable ................................... 10,024 18,993
Escrow advances on loans and loans serviced for others ......................... 162,548 108,078
Other assets ................................................................... 59,737 98,711
----------- -----------
$ 3,309,313 $ 3,327,108
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits ..................................................................... $ 1,842,286 $ 2,194,816
Securities sold under agreements to repurchase ............................... 47,365 72,051
Bonds-match funded agreements ................................................ 141,515 --
Obligations outstanding under lines of credit ................................ 187,866 179,285
Notes, debentures and other interest bearing obligations ..................... 317,573 225,000
Accrued interest payable ..................................................... 32,569 33,706
Excess of net assets acquired over purchase price ............................ 56,841 --
Income taxes payable ......................................................... 6,369 --
Accrued expenses, payables and other liabilities ............................. 57,487 60,282
----------- -----------
Total liabilities ........................................................ 2,689,871 2,765,140
----------- -----------
Company obligated, mandatorily redeemable securities of subsidary
trust holding solely junior subordinated debentures of the Company ........ 110,000 125,000
Minority interest .............................................................. -- 592
COMMITMENTS AND CONTINGENCIES (NOTE 30)
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; 68,571,575 and
60,800,357 shares issued and outstanding at December 31, 1999, and December
31, 1998, respectively .................................................... 686 608
Additional paid-in capital .................................................. 232,340 166,234
Retained earnings ........................................................... 277,002 257,170
Accumulated other comprehensive income, net of taxes:
Net unrealized gain on securities available for sale ...................... 163 14,057
Net unrealized foreign currency translation loss .......................... (749) (1,693)
----------- -----------
Total stockholders' equity .................................................. 509,442 436,376
----------- -----------
$ 3,309,313 $ 3,327,108
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
For the Years Ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME:
Federal funds sold and repurchase agreements ...................... $ 8,942 $ 7,930 $ 8,975
Securities available for sale ..................................... 62,698 40,320 28,545
Loans available for sale .......................................... 25,724 56,791 18,368
Investment securities and other ................................... 2,086 3,197 4,045
Loans ............................................................. 28,683 38,609 54,701
Match funded loans and securities ................................. 3,237 -- --
Discount loans .................................................... 121,854 160,847 157,649
Securities held for trading ....................................... -- -- 248
------------ ------------ ------------
253,224 307,694 272,531
------------ ------------ ------------
INTEREST EXPENSE:
Deposits .......................................................... 98,370 116,584 122,070
Securities sold under agreements to repurchase .................... 7,456 6,514 1,000
Obligations outstanding under lines of credit ..................... 16,318 34,587 5,578
Bonds-match funded agreements ..................................... 2,101 -- --
Notes, debentures and other interest bearing obligations .......... 31,297 27,208 27,641
------------ ------------ ------------
155,542 184,893 156,289
------------ ------------ ------------
Net interest income before provision for loan losses .............. 97,682 122,801 116,242
Provision for loan losses ......................................... 6,710 18,509 32,218
------------ ------------ ------------
Net interest income after provision for loan losses ............... 90,972 104,292 84,024
------------ ------------ ------------
NON-INTEREST INCOME:
Servicing fees and other charges .................................. 75,437 59,180 25,962
Gain on interest earning assets, net .............................. 44,298 129,988 82,212
Impairment charges on securities available for sale ............... (58,777) (129,714) --
(Loss) gain on real estate owned, net ............................. (2,060) 14,033 7,277
Amortization of excess of net assets acquired over purchase price . 3,201 -- --
Other income ...................................................... 83,620 39,696 8,498
------------ ------------ ------------
145,719 113,183 123,949
------------ ------------ ------------
NON-INTEREST EXPENSE:
Compensation and employee benefits ................................ 102,173 115,556 77,573
Occupancy and equipment ........................................... 18,501 17,652 8,742
Technology and communication costs ................................ 19,647 17,560 9,492
Loan expenses ..................................................... 12,618 25,373 7,059
Net operating losses on investments in real estate and certain
low-income housing tax credit interests ......................... 7,368 8,621 4,792
Amortization and write-off of excess of purchase price
over net assets acquired ........................................ 4,448 11,614 557
Other operating expenses .......................................... 31,390 31,886 18,659
------------ ------------ ------------
196,145 228,262 126,874
------------ ------------ ------------
Distributions on Company-obligated, mandatory redeemable
securities of subsidiary trust holding solely junior
subordinated debentures ......................................... 13,111 13,594 5,249
Equity in (losses) earnings of investments in unconsolidated entities (12,616) (7,985) 23,688
------------ ------------ ------------
Income (loss) before income taxes and extraordinary gain ............ 14,819 (32,366) 99,538
Income tax (expense) benefit ........................................ (2,608) 30,699 (21,309)
Minority interest in net loss of consolidated subsidiary ............ 638 467 703
------------ ------------ ------------
Income (loss) before extraordinary gain ............................. 12,849 (1,200) 78,932
Extraordinary gain on repurchase of debt, net of taxes .............. 6,983 -- --
------------ ------------ ------------
Net income (loss) ................................................... $ 19,832 $ (1,200) $ 78,932
============ ============ ============
EARNINGS (LOSS) PER SHARE:
Basic:
Net income (loss) before extraordinary gain ..................... $ 0.20 $ (0.02) $ 1.40
Extraordinary gain .............................................. 0.11 -- --
------------ ------------ ------------
Net income (loss) ............................................... $ 0.31 $ (0.02) $ 1.40
============ ============ ============
Diluted:
Net income (loss) before extraordinary gain ..................... $ 0.20 $ (0.02) $ 1.39
Extraordinary gain .............................................. 0.11 -- --
------------ ------------ ------------
Net income (loss) ............................................... $ 0.31 $ (0.02) $ 1.39
============ ============ ============
Weighted average common shares outstanding:
Basic ............................................................. 63,051,015 60,736,950 56,185,956
Diluted ........................................................... 63,090,282 60,736,950 56,836,484
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATE STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
-------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) ...................................................... $ 19,832 $ (1,200) $ 78,932
-------- -------- --------
Other comprehensive (loss) income, net of taxes:
Change in unrealized loss (gain) on securities available for sale
arising during the year ............................................ (9,338) 1,493 (8,500)
Less: Reclassification adjustment .................................... (4,556) 17,578 --
-------- -------- --------
Net change in unrealized loss (gain) on securities
available for sale (net of a tax benefit (expense) of
$7,771 and $(16,673) for 1999 and 1998, respectively) ........... (13,894) 19,071 (8,500)
-------- -------- --------
Change in unrealized foreign currency translation adjustment arising
during the year .................................................... (240) (1,693) --
Less: Reclassification adjustment for losses on foreign currency
translation adjustment included in net income ...................... 1,184 -- --
-------- -------- --------
Net change in unrealized foreign currency translation loss
(net of tax (expense) benefit of $(514) and $912 for 1999 and 1998,
respectively) ...................................................... 944 (1,693) --
-------- -------- --------
Other comprehensive (loss) income .................................... (12,950) 17,378 (8,500)
-------- -------- --------
Comprehensive income ................................................... $ 6,882 $ 16,178 $ 70,432
======== ======== ========
Disclosure of reclassification adjustment:
Unrealized holding losses arising during the year on securities sold
or impaired ........................................................ $(36,671) $(37,390)
Add: Adjustment for realized losses and impairment charges on
securities available for sale included in net income (loss) ........ 32,115 54,968
-------- --------
Net reclassification adjustment for (gains) losses recognized in other
comprehensive income (loss) in prior years (net of tax benefit
(expense) of $2,558 and $(27,448) for 1999 and 1998, respectively).. $ (4,556) $ 17,578
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
Notes
Accumulated Receivable
Other on Exercise
Common Stock Additional Comprehensive of Common
------------------------- Paid-in Retained Income, Stock
Shares Amount Capital Earnings Net of Taxes Options Total
------------ ------------ ------------ ------------ ------------- ------------ ------------
<S> > <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 ....... 53,488,340 $ 535 $ 22,990 $ 180,417 $ 3,486 $ (3,832) $ 203,596
Net income .......................... -- -- -- 78,932 -- -- 78,932
Issuance of common stock ............ 6,906,198 69 141,934 -- -- -- 142,003
Repurchase of common stock options .. -- -- (3,208) -- -- -- (3,208)
Exercise of common stock options .... 171,297 2 3,035 -- -- -- 3,037
Notes receivable on exercise
of common stock options,
net of advances .................. -- -- -- -- -- 3,832 3,832
Other comprehensive income,
net of taxes:
Change in unrealized gain (loss)
on securities, available
for sale....................... -- -- -- -- (8,500) -- (8,500)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1997 ....... 60,565,835 606 164,751 259,349 (5,014) -- 419,692
Net loss ............................ -- -- -- (1,200) -- -- (1,200)
Conversion of investment in an
unconsolidated entity to the
equity method .................... -- -- -- (979) -- -- (979)
Repurchase of common stock .......... (318,311) (3) (7,769) -- -- -- (7,772)
Issuance of common stock ............ 320,550 3 7,825 -- -- -- 7,828
Repurchase of common stock options .. -- -- (6,502) -- -- -- (6,502)
Exercise of common stock options .... 232,283 2 7,929 -- -- -- 7,931
Other comprehensive income,
net of taxes:
Change in unrealized gain (loss) on
securities available for sale .... -- -- -- -- 19,071 -- 19,071
Change in unrealized foreign
currency translation loss ........ -- -- -- -- (1,693) -- (1,693)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 ....... 60,800,357 608 166,234 257,170 12,364 -- 436,376
Net income .......................... -- -- -- 19,832 -- -- 19,832
Repurchase of common stock........... (4,611,700) (46) (30,645) -- -- -- (30,691)
Exercise of common stock options .... 5,069 -- 23 -- -- -- 23
Directors' compensation ............. 6,099 -- 43 -- -- -- 43
Issuance of common stock for
acquisition of Ocwen Asset
Investment Corp................... 12,371,750 124 96,685 -- -- -- 96,809
Other comprehensive income,
net of taxes:
Change in unrealized gain (loss)
on securities available
for sale ...................... -- -- -- -- (13,894) -- (13,894)
Change in unrealized foreign
currency translation loss ..... -- -- -- -- 944 -- 944
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1999........ 68,571,575 $ 686 $ 232,340 $ 277,002 $ (586) $ -- $ 509,442
============ ============ ============ ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ 19,832 $ (1,200) $ 78,932
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Net cash provided by trading activities ................................. 18,723 15,284 106,108
Proceeds from sales of loans available for sale ......................... 568,490 1,659,368 519,163
Purchases of loans available for sale ................................... (47,129) (370,865) (278,081)
Origination of loans available for sale ................................. (728,509) (959,105) (316,101)
Principal payments received on loans available for sale ................. 25,949 82,728 22,240
Premium amortization on securities, net ................................. 11,074 56,487 63,506
Depreciation and amortization ........................................... 28,327 26,229 10,865
Provision for loan losses ............................................... 6,710 18,509 32,218
Provision for real estate owned ......................................... 28,008 18,626 13,450
Gain on interest-earning assets, net .................................... (44,298) (129,988) (82,212)
Impairment charges on securities available for sale ..................... 58,777 129,714 --
Loss on sales of premises and equipment ................................. -- 47 1
Gain on sale of low-income housing tax credit interests ................. (6,591) (7,366) (6,053)
Gain on real estate owned, net .......................................... (36,265) (43,839) (30,651)
Gain on sale of investment in real estate held .......................... (1,753) (10,383) --
Impairment loss on investment in real estate ............................ 2,817 -- --
Equity in losses (earnings) of unconsolidated entities .................. 12,616 7,985 (23,688)
Gain on sale of Ocwen UK ................................................ (50,371) -- --
Decrease (increase) in principal, interest and dividends receivable ..... 7,762 (1,713) (459)
Decrease (increase) in income taxes receivable .......................... 39,322 (37,465) 18,247
Increase in deferred tax asset .......................................... (53,273) (21,827) (39,288)
Increase in escrow advances ............................................. (54,313) (57,016) (23,468)
Decrease in other assets, net ........................................... 30,126 (82,219) (28,161)
(Decrease) increase in accrued expenses, interest payable
and other liabilities ................................................ (16,547) (4,257) 24,118
----------- ----------- -----------
Net cash (used) provided by operating activities .......................... (180,516) 288,275 60,686
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale .................... 43,923 269,828 202,670
Purchase of securities available for sale ............................... (589,845) 820,455 (389,330)
Maturities of and principal payments received on securities
available for sale .................................................... 553,136 359,525 46,084
Purchase of securities held for investment .............................. (140) -- (42,166)
Acquisition of subsidiaries ............................................. 30,068 (426,096) (11,635)
Proceeds from the sale of Ocwen UK ...................................... 122,101 -- --
Purchase of low-income housing tax credit interests ..................... (56,174) (49,063) (54,573)
Proceeds from sales of low-income housing tax credit interests .......... 44,233 37,918 22,026
Proceeds from sales of discount loans, net .............................. 275,732 626,423 500,151
Proceeds from sale of real estate held for investment ................... 23,436 47,644 14,905
Proceeds from sales of loans held for investment ........................ 51,691 -- 2,384
Purchase and originations of loans held for investment,
net of undisbursed loan funds ......................................... (36,991) (188,716) (138,884)
Purchase of discount loans, net ......................................... (584,328) (938,859) (1,464,611)
Decrease (increase) in investment in unconsolidated entities ............ 10,687 (70,190) 90,541
Principal payments received on loans held for investment ................ 137,199 227,349 291,998
Principal payments received on discount loans ........................... 301,826 446,566 382,781
Purchase of and capital improvements to real estate held for investment . (19,115) -- (39,844)
Proceeds from sale of real estate owned ................................. 251,621 301,485 196,180
Purchase of real estate owned in connection with discount loan purchase . (47,340) (19,949) (38,486)
Additions to premises and equipment ..................................... (29,285) (23,680) (13,745)
----------- ----------- -----------
Net cash provided (used) by investing activities .......................... $ 482,435 $ (220,270) $ (443,554)
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS)
For the Years Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits ..................................... (348,012) 208,821 66,069
(Decrease) increase in securities sold under
agreements to repurchase ......................................... (34,059) (36,199) 33,704
Repurchase of Capital Securities .................................... (15,000) -- --
Proceeds from obligations under lines of credit, net of repayments... 110,413 60,981 118,304
Payments of obligations assumed in connection with acquisition of
subsidiary ....................................................... -- -- (3,000)
Proceeds from issuance of other interest bearing obligations ........ 6,236 -- --
Payments on advances from Federal Home Loan Bank .................... -- -- (399)
Repayments and repurchases of notes, debentures and other, net ..... (54,150) (1,975) --
Repayments of loans made to executive officers, net ................. -- -- 3,832
Exercise of common stock options .................................... 23 7,931 3,037
Advances from the Federal Home Loan Bank ............................ -- -- --
Proceeds from issuance of Capital Trust Securities .................. -- -- 125,000
Payment of Capital Trust Securities issuance costs .................. -- -- (4,262)
Issuance of shares of common stock .................................. -- 56 142,003
Repurchase of common stock options .................................. -- (6,502) (3,208)
Repurchase of common stock .......................................... (30,691) (7,772) --
----------- ----------- -----------
Net cash (used) provided by financing activities ...................... (365,240) 225,341 482,482
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents .................. (63,321) 293,346 99,614
Cash and cash equivalents at beginning of period ...................... 445,179 151,833 52,219
----------- ----------- -----------
Cash and cash equivalents at end of period ............................ $ 381,858 $ 445,179 $ 151,833
=========== =========== ===========
RECONCILIATION OF CASH AND CASH EQUIVALENTS AT END OF PERIOD:
Cash and amounts due from depository institutions ................... $ 153,459 $ 120,805 $ 11,832
Interest-earning deposits ........................................... 116,399 49,374 140,001
Federal funds sold and repurchase agreements ........................ 112,000 275,000 --
----------- ----------- -----------
$ 381,858 $ 445,179 $ 151,833
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................................ $ 153,891 $ 183,424 $ 148,895
Income taxes ........................................................ $ 633 $ 36,754 $ 28,228
Supplemental schedule of non-cash investing and financing activities:
Real estate owned acquired through foreclosure ...................... $ 157,111 $ 280,522 $ 205,621
Exchange of discount loans and loans available for sale
for securities ................................................... $ 758,032 $ 2,125,080 $ 897,358
Transfer of securities available for sale to investment in
unconsolidated entities .......................................... $ $ 35,158 $ --
Acquisition of businesses:
Fair value of assets acquired ....................................... $ (706,329) $ (449,420) $ (15,052)
Liabilities assumed ................................................. 599,855 15,069 3,399
Stock issued ........................................................ 96,809 7,772 --
----------- ----------- -----------
Cash paid ........................................................... (9,665) (426,579) (11,653)
Less cash acquired .................................................. 39,733 483 18
----------- ----------- -----------
Net cash acquired (paid) for assets acquired ........................ $ 30,068 $ (426,096) $ (11,635)
=========== =========== ===========
Sale of subsidiary:
Fair value of assets sold ........................................... $ 413,121 $ -- $ --
Liabilities sold .................................................... (345,327) -- --
Cash sold ........................................................... 3,936 -- --
Gain on sale ........................................................ 50,371 -- --
Net cash received for assets sold ..................................... -- --
----------- ----------- -----------
$ 122,101 $ -- $ --
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
71
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Ocwen Financial Corporation ("OCN" or the "Company") is a specialty
financial services company whose primary business activities 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 Company's consolidated financial
statements include the accounts of OCN 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"). As more fully described in Note 2, 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. As more fully described in Note 2,
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").
RECLASSIFICATION
Certain amounts included in the 1998 and 1997 consolidated financial
statements have been reclassified in order to conform to the 1999 presentation.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, interest-bearing and non-interest-bearing deposits and all
highly liquid debt instruments purchased with an original maturity of three
months or less. Cash flows associated with items intended as hedges of
identifiable transactions or events are classified in the same category as the
cash flows from the items being hedged.
SHORT-TERM HIGHLY LIQUID INVESTMENTS
The Company's short-term highly liquid investments generally consist
of federal funds sold and assets purchased under agreements to resell. The
Company invests in these assets to maximize its return on liquid funds. At
December 31, 1999 and 1998, such investments amounted to $112,000 and $275,000,
respectively, of federal funds sold which had an overnight maturity. The average
investment in federal funds sold and assets purchased under agreements to resell
amounted to $174,494 and $149,441 during 1999 and 1998, respectively.
The Bank is required by the Federal Reserve System to maintain
non-interest-earning cash reserves against certain of its transaction accounts
and time deposit accounts. Such reserves totaled $32,189 and $5,557 at December
31, 1999 and 1998, respectively.
TRADING ACTIVITIES
Securities acquired and sold shortly thereafter resulting from the
securitization of loans available for sale are accounted for as the sale of
loans and the purchase and sale of trading securities. Securities held for
trading purposes are carried at fair value with the unrealized gains or losses
included in gains on sales of interest-earning assets, net.
SECURITIES AVAILABLE FOR SALE
Certain mortgage-related securities are designated as assets
available for sale because the Company does not intend to hold them to maturity.
Securities available for sale are carried at fair value with the net unrealized
gains or losses reported as a separate component of accumulated comprehensive
income in stockholders' equity. At disposition, the realized net gain or loss is
included in earnings on a specific identification basis. The amortization of
premiums and accretion of discounts are computed using the interest method after
considering actual and estimated prepayment rates, if applicable. Actual
prepayment experience is
72
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
periodically reviewed and effective yields are recalculated when differences
arise between prepayments originally anticipated and amounts actually received
plus anticipated future prepayments.
On a quarterly basis the Company evaluates each individual security
in its available for sale portfolio to determine whether a decline in value
below amortized cost has occurred which is other than temporary. In making this
assessment, the Company considers several factors, including but not limited to
the following:
o Determining whether the present value of estimated future
cash flows discounted at a risk-free rate (the rate on
monetary assets of a comparable duration which are
essentially risk free, such as the three-month Treasury bill
rate) is less than the amortized cost basis of the
instrument;
o Examining whether the duration of the decline in market value
has exceeded six consecutive months; and
o Identifying and understanding the reasons for significant
declines in value (i.e., greater than 20%).
For each security where the Company concludes that all or a portion
of the decrease in value is other than temporary, such amount is charged to
earnings, thereby establishing a new cost basis for the security.
LOANS AVAILABLE FOR SALE AND HELD FOR INVESTMENT
Loans originated or purchased by the Company which the Company
presently does not intend to hold to maturity are designated as loans available
for sale upon origination or purchase and are stated at the lower of cost, after
considering deferred loan fees and costs, or aggregate market value. Unrealized
losses are recorded as a reduction in earnings and are included under the
caption "Gain on interest-earning assets, net" in the consolidated statements of
operations. Loan origination fees and certain direct loan origination costs are
deferred and included in the carrying value. Upon the sale of a loan, any
unamortized deferred loan fees, net of costs, are included in the gain or loss
on sale of interest earning assets. Gains and losses on disposal of such loans
are computed on a specific identification basis.
Loans held for investment are stated at amortized cost, less an
allowance for loan losses, discount, deferred loan fees and undisbursed loan
funds. To qualify for this treatment, upon origination or purchase the Company
must have both the ability and the intent to hold such loans to maturity. Loan
origination fees and certain direct loan origination costs are deferred and
recognized over the lives of the related loans as a yield adjustment and
included in interest income using the interest method applied on a loan-by-loan
basis.
Interest income is accrued as it is earned. Loans are placed on
non-accrual status after being delinquent greater than 89 days or earlier if the
borrower is deemed by management to be unable to continue performance. When a
loan is placed on non-accrual status, interest accrued but not received is
reversed. Loans are returned to accrual status only when the loan is reinstated
and ultimate collectibility is no longer in doubt. In addition, the amortization
of deferred loan fees is suspended when a loan is placed on nonaccrual status.
ALLOWANCE FOR ESTIMATED LOAN LOSSES
The allowance for estimated loan losses is maintained at a level
that management, based upon an evaluation of known and inherent risks in the
portfolio, considers adequate to provide for losses. Specific valuation
allowances are established for impaired loans in the amount by which the
carrying value, before allowance for estimated losses, exceeds the fair value of
collateral less costs to dispose on an individual loan basis, except for single
family residential mortgage loans and consumer loans which are generally
evaluated for impairment as homogeneous pools of loans. The Company considers a
loan to be impaired when, based upon current information and events, it believes
that it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement on a timely basis. The
Company measures these impaired loans at the fair value of the loans' underlying
collateral less estimated disposal costs. Impaired loans may be left on accrual
status during the period the Company is pursuing repayment of the loan. These
loans are placed on non-accrual status at such time that the loans either: (i)
become 90 days delinquent; or (ii) the Company determines the borrower is
incapable of, or has ceased efforts toward, curing the cause of the impairment.
Impairment losses are recognized through an increase in the allowance for loan
losses and a corresponding charge to the provision for loan losses. When an
impaired loan is either sold, transferred to real estate owned ("REO") or
charged off, any related valuation allowance is removed from the allowance for
loan losses. Charge-offs occur when loans, or a portion thereof, are considered
uncollectible and of such little value that their continuance as bankable assets
is not warranted. Management's periodic evaluation of the allowance for
estimated loan losses is based upon an analysis of the portfolio, historical
loss experience, economic conditions and trends, collateral values and other
relevant factors. Future
73
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
adjustments to the allowance may be necessary if economic conditions and trends,
collateral values and other relevant factors differ substantially from the
assumptions used in making the evaluation.
DISCOUNT LOAN PORTFOLIO
Certain mortgage loans, for which the borrower is not current as to
principal and interest payments or for which there is a reason to believe the
borrower will be unable to continue to make its scheduled principal and interest
payments, are acquired at a discount. The Company accounts for its initial
investment in a pool of loans based upon the pricing methodologies used to bid
on the pool. The acquisition cost is allocated to each loan within the pool when
the bid price was determined based upon an analysis of the expected future cash
flows of each individual loan. The acquisition cost is accounted for in the
aggregate when the bid price was determined using assumptions concerning the
expected future cash flows from groups of loans within the pool. For those
single family residential mortgage loans which are brought current by the
borrower and certain multi-family and commercial real estate loans which are
current and which the Company believes will remain current, the remaining
unamortized discount is accreted into interest income as a yield adjustment
using the interest method over the contractual maturity of the loan. For all
other loans, interest is reported as cash is received. Gains on the repayment
and discharging of loans are reported as interest income. In situations where
the collateral is foreclosed upon, the loans are transferred to real estate
owned upon receipt of title to the property and accretion of the related
discount is discontinued.
REAL ESTATE OWNED
Properties acquired through foreclosure are valued at the lower of
the adjusted cost basis of the loan or fair value less estimated costs of
disposal of the property after the date of foreclosure. Properties held are
periodically re-evaluated to determine that they are being carried at the lower
of cost or fair value less estimated costs to dispose. Sales proceeds and
related costs are recognized with passage of title to the buyer and, in cases
where the Company finances the sale, receipt of sufficient down payment. Rental
income related to properties is reported as income as earned. Holding and
maintenance costs related to properties are reported as period costs as
incurred. No depreciation expense related to the properties has been recorded.
Decreases in the market value of foreclosed real estate subsequent to
foreclosure are recognized as a valuation allowance on a property specific
basis. Subsequent increases in market value of the foreclosed real estate are
reflected as reductions in the valuation allowance, but not below zero. Such
changes in the valuation allowance are charged or credited to income.
MORTGAGE SERVICING RIGHTS
In connection with the securitization and sale of loans, the Company
generally retains the rights to service such loans for investors. A servicing
asset or liability and other retained interests are recognized as an allocation
of the carrying amount of the assets sold between the asset sold and the
servicing obligation and other retained interests based on the relative fair
value of the assets sold to the interests retained. The Company also acquires
mortgage servicing rights which are recorded at cost. Mortgage servicing assets
are amortized in proportion to and over the period of estimated net servicing
income or loss. The Company evaluates the mortgage servicing assets for
impairment based on the fair value of the servicing asset. The Company estimates
fair values by discounting servicing assets cash flows using discount and
prepayment rates that it believes market participants would use.
The Company receives fees from investors for servicing mortgage
loans. Servicing fees, generally expressed as a percent of the unpaid principal
balance, are collected from the borrowers' payments. During any period in which
the borrower is not making payments, the Company is required under certain
servicing agreements to advance its own funds to meet contractual principal and
interest remittance requirements for certain investors, maintain property taxes
and insurance, and process foreclosures. The Company generally recovers such
advances from borrowers for reinstated and performing loans and from investors
for foreclosed loans.
74
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
INVESTMENT IN REAL ESTATE
Investment in real estate is recorded at cost less accumulated
depreciation. The Company reviews its investment in real estate for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.
Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets as follows:
Buildings and improvements 39 - 40 years
Tenant improvements Lesser of lease term
or useful life
Land improvements 20 years
Furniture, fixtures and equipment 5 -10 years
Expenditures for repairs and maintenance are charged to operations
as incurred. Significant improvements are capitalized. The leases are classified
as operating leases in accordance with SFAS No. 13 "Accounting for Leases." Fees
and costs incurred in the successful negotiation of leases are deferred and
amortized on a straight-line basis over the terms of the respective leases.
Rental income is reported on a straight-line basis over the terms of the
respective leases.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS
Low-income housing tax credit partnerships own multi-family
residential properties which have been allocated tax credits under the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code"). The obligations
of the partnership to sustain qualifying status of the properties covers a
15-year period; however, tax credits accrue over a 10-year period on a
straight-line basis. Investments by the Company in low-income housing tax credit
partnerships 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 through issue number 94-1.
For the Company's limited partnership investments made prior to this date, the
Company records its receipt of income tax credits and other tax benefits on a
level yield basis over the 15-year obligation period and reports the tax credits
and tax benefits net of amortization of its investment in the limited
partnership as a reduction of income tax expense. Low-income housing tax credit
partnerships in which the Company has invested as a limited partner, and through
which a subsidiary acts as the general partner, are consolidated and included in
the Company's consolidated financial statements. For all investments in
low-income housing tax credit partnerships made after May 18, 1995, the Company
capitalizes interest expense and certain direct costs incurred during the
pre-operating period.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of purchase price over net assets of acquired businesses
is stated at cost and is amortized on a straight-line basis over the estimated
future periods to be benefited, not to exceed 15 years. The carrying value of
cost in excess of net assets acquired is reviewed for impairment whenever events
or changes in circumstances indicate that it may not be recoverable.
Additionally, the Company periodically evaluates the amortization periods to
determine whether events or circumstances warrant revised amortization periods.
The results of operations of acquired companies are included in the consolidated
statements of operations beginning with the acquisition date.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost and, except for land, are
depreciated over their estimated useful lives on the straight-line method. The
estimated useful lives of the related assets range from three to 39 years.
CAPITALIZED SOFTWARE COSTS
Certain costs attributable to developing, modifying and enhancing
its software revenue products are capitalized in accordance with SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." Costs incurred up to the establishment of technological feasibility
are expensed as research and development costs. Once the products are made
available for general release to customers, the capitalized costs are amortized
using the straight-line method over the estimated economic lives of the
individual products. The unamortized costs by product are reduced to an amount
not to exceed the future net realizable value by product at each financial
statement date.
75
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company periodically enters into sales of securities under
agreements to repurchase the same securities ("reverse repurchase agreements").
Reverse repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the accompanying
consolidated statements of financial condition. All securities underlying
reverse repurchase agreements are reflected as assets in the accompanying
consolidated statements of financial condition and are held in safekeeping by
custodians.
EXCESS OF NET ASSETS ACQUIRED OVER PURCHASE PRICE
The effects of the acquisition of OAC resulted in a new basis of
accounting reflecting fair values of assets and liabilities at the date of
acquisition. The excess of assets over the purchase price of acquired net assets
resulting from the acquisition is stated at cost and is being amortized on a
straight-line basis over the estimated future periods to be benefited of five
years.
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 instruments are subject to fluctuations in value,
such fluctuations are generally offset by the change in value of the underlying
exposures being hedged. The Company does not enter into any derivative financial
instruments for trading purposes. To qualify for hedge accounting, the asset or
liability to be hedged must be specifically identified and expose the Company to
interest rate or currency risk, and the hedging instrument must substantially
reduce or alter the risk of loss from the asset or liability being hedged. If
the derivative financial instrument fails or ceases to qualify for hedge
accounting, it is accounted for at fair value with changes in fair value
recorded in earnings in the consolidated statements of operations.
The Company manages its exposure to interest rate movements by
seeking to match asset and liability balances within maturity categories, both
directly and through the use of derivative financial instruments. These
derivative instruments include interest rate swaps ("swaps") and interest rate
futures contracts that are designated and effective as hedges, as well as swaps
that are designated and effective in modifying the interest rate and/or maturity
characteristics of specified assets or liabilities. Gains and losses on swaps
are accounted for on the accrual basis.
The net interest received or paid on swaps is reflected as interest
income or expense of the related hedged position. Gains and losses resulting
from the termination of swaps are recognized over the shorter of the remaining
contract lives of the swaps or the lives of the related hedged positions or, if
the hedged positions are sold, are recognized in the current period as gains on
sales of interest-earning assets, net. Gains and losses on futures contracts are
deferred as an adjustment of the carrying value of the related asset or
liability and amortized over the terms of the related assets or liabilities and
reflected as interest income or expense of the related hedged positions. If the
hedged positions are sold, any unamortized deferred gains or losses on futures
contracts are recognized in the current period as gains on sales of
interest-earning assets, net. Interest rate contracts are measured at fair
value.
The Company enters into foreign currency futures contracts and
foreign currency swap agreements to hedge its investments in foreign entities.
The Company's periodically adjusts the amount of foreign currency derivative
contracts it has entered into in response to changes in its recorded investment.
The discount on the currency swap, representing the difference between the
contracted forward rate and the spot rate at the date of inception, is amortized
over the life of the currency swap on a straight-line basis. The value of the
currency swap is calculated as the notional amount of the currency swap
multiplied by the difference between the spot rate at the date of inception and
the spot rate at the financial statement date. The unamortized discount related
to foreign currency swaps and the values of financial hedge instruments are
reported as translation adjustments and are included as a component of
accumulated other comprehensive income in stockholders' equity.
FOREIGN CURRENCY TRANSLATION
In accordance with SFAS No. 52, "Foreign Currency Translation,"
assets and liabilities of foreign entities where the functional currency is not
the U.S. dollar are translated into U.S. dollars at the current rate of exchange
existing at the statement of financial condition date and revenues and expenses
are translated at average monthly rates. The resulting translation adjustments
are included as a component of accumulated comprehensive income in stockholders'
equity.
76
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
INCOME TAXES
The Company files consolidated Federal income tax returns with its
subsidiaries. Consolidated income tax is allocated among the subsidiaries
participating in the consolidated returns as if each subsidiary of the Company,
which has one or more subsidiaries, filed its own consolidated return and those
with no subsidiaries filed separate returns.
The Company accounts for income taxes using the asset and liability
method which requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities. Additionally,
deferred taxes are adjusted for subsequent tax rate changes.
INVESTMENT IN UNCONSOLIDATED ENTITIES
The Company's investments in unconsolidated entities 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
initially recorded at the cost of the shares or interests acquired and
thereafter is periodically increased (decreased) by the investor's proportionate
share of the earnings (losses) of the investee and decreased by the dividends or
distributions received by the investor from the investee.
BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share is calculated based upon the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per share is calculated based upon the weighted average number of
shares of common stock outstanding and all dilutive potential common shares
outstanding during the year. The computation of diluted earnings per share
includes the impact of the exercise of the outstanding options to purchase
common stock and assumes that the proceeds from such issuance are used to
repurchase common shares at fair value. Common stock equivalents would be
excluded from the diluted calculation if a net loss was incurred for the period
as they would be antidilutive.
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances, excluding those resulting from investments by and distributions
to owners. SFAS No. 130 requires that comprehensive income be presented
beginning with net income, adding the elements of comprehensive income not
included in the determination of net income, to arrive at comprehensive income.
Accumulated other comprehensive income is presented net of income taxes and is
comprised of unrealized gains and losses on securities available for sale, and
unrealized foreign currency translation gains and losses.
RISKS AND UNCERTAINTIES
In the normal course of business, the Company encounters two
significant types of risk: economic and regulatory. There are three main
components of economic risk: credit risk, market risk and concentration of
credit risk. Credit risk is the risk of default on the Company's loan portfolios
that results from a borrowers' inability or unwillingness to make contractually
required payments. Market risk includes interest rate risk, foreign currency
exchange rate risk, and equity price risk. The Company is exposed to interest
rate risk to the degree that its interest-bearing liabilities mature or reprice
at different speeds, or different bases, than its interest-earning assets. The
Company is exposed to foreign currency exchange rate risk in connection with its
investment in non-U.S. dollar functional currency operations and to the extent
its foreign exchange positions remain unhedged. The Company is exposed to equity
price risk as a result of its investments in the equity securities of other
entities. Market risk also reflects the risk of declines in the valuation of
loans held for sale and securities available for sale, and in the value of the
collateral underlying loans and the value of real estate held by the Company.
Concentration of credit risk refers to the risk that, if the Company extends a
significant portion of its total outstanding credit to borrowers in a specific
geographical area or industry or on the security of a specific form of
collateral, the Company may experience disproportionately high levels of default
and losses if those borrowers, or the value of such type of collateral, is
adversely affected by economic or other factors that are particularly applicable
to such borrowers or collateral.
The Bank is subject to the regulations of various government
agencies. These regulations can and do change significantly from period to
period. The Bank also undergoes periodic examinations by the regulatory
agencies, which may subject it to further changes with respect to asset
valuations, amounts of required loss allowances and operating restrictions
resulting from the regulators' judgments based on information available to them
at the time of their examination.
77
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near or
medium term relate to the determination of the allowance for losses on loans and
discount loans.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative and hedging activities and
supersedes and amends a number of existing standards. Initial application of
SFAS No. 133 should be as of the beginning of an entity's fiscal quarter; on
that date, hedging relationships must be designated anew and documented pursuant
to the provisions of SFAS No. 133. Earlier application of SFAS No. 133 is
encouraged but is permitted only as of the beginning of any fiscal quarter that
begins after issuance of SFAS No. 133. The Company has not yet adopted SFAS No.
133 nor has it determined the impact on the results of operations, financial
position or cash flows as a result of implementing SFAS No. 133.
In June 1999, the FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of Effective Date of
SFAS No. 133 an amendment of SFAS No. 133." SFAS No. 137 defers the effective
date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000.
SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial condition. The gain
or loss recognition is determined on the intended use and resulting designation
of the financial instruments as follows:
o Gains or losses on derivative instruments not designated as hedging
instruments are recognized in the period of change in fair value.
o Gains or losses on derivative instruments designated as hedging the
exposure to changes in the fair value of a recognized asset, liability or
firm commitment are recognized in earnings in the period of the fair
value change, together with the offsetting fair value loss or gain on the
hedged item.
o Gains or losses on derivative instruments designated as hedging exposure
to variable cash flows arising from a forecasted transaction are
initially reported, to the extent the fair value change is offset by the
change in the forecasted cash flows, as a component of other
comprehensive income. The portion of the change in fair value in excess
of the offsetting change in forecasted cash flows is reported in earnings
in the period of the change.
o Gains or losses on derivative instruments designated as foreign currency
hedges of net investments in foreign operations are reported in other
comprehensive income as part of the foreign currency translation
adjustment.
SFAS No. 133 precludes the use of nonderivative financial
instruments as hedging instruments, except that nonderivative financial
instruments denominated in a foreign currency may be designated as a hedge of
the foreign currency exposure of an unrecognized firm commitment denominated in
a foreign currency or a net investment in a foreign operation.
Under SFAS No. 133, an entity that elects to apply hedge accounting
is required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
NOTE 2: ACQUISITION AND DISPOSITION TRANSACTIONS
On October 7, 1999, Ocwen Acquisition Company ("Acquisition Sub"), a
Virginia corporation and an indirect wholly-owned subsidiary of OCN, merged (the
"Merger") with and into OAC, a Virginia corporation, in accordance with the
Agreement of Merger (the "Merger Agreement") dated as of July 25, 1999 among
OAC, OCN, and Acquisition Sub. In accordance with the Merger Agreement, OAC
shareholders (except for OCN or its subsidiaries) received 0.71 shares of OCN
stock for each outstanding share of OAC common stock. A total of 12,371,750
shares of OCN stock at a value of $96,809 were issued to OAC shareholders. Prior
to the Merger, the Company, through IMI, owned 1,540,000 or 8.12% of the
outstanding common stock of OAC and 1,808,733 units or 8.71% of the outstanding
partnership units of Ocwen Partnership L.P. ("OPLP"). OPLP is the operating
partnership subsidiary of OAC.
78
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The Merger, which resulted in OCN acquiring the remaining interest
in OAC, reflects an aggregate purchase price of $101,271, including direct costs
of the acquisition. The Merger was accounted for as a purchase and the purchase
price has been allocated to OAC's assets and liabilities based on their fair
market values as follows:
Purchase price....................................... $ 101,271
Fair value of net assets............................. 161,313
------------
Excess of net assets acquired over purchase price.... $ 60,042
============
The excess of net assets acquired over the purchase price is being
amortized on a straight-line basis over a period of five years and amounted to
$56,841, net of accumulated amortization of $3,201, at December 31, 1999.
Results of operations from OAC from the date of merger to December 31, 1999 are
included in OCN's consolidated statement of operations for 1999.
On October 20, 1999, OAC merged into Small Commercial Properties
Corporation I ("SCP"), a Florida corporation and an indirect wholly-owned
subsidiary of OCN. Immediately thereafter, SCP changed its name to Ocwen Asset
Investment Corp. As a result of the merger on October 20, 1999, OAC ceased to
qualify as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended (the "Code").
The following unaudited pro forma results of operations of OCN are
presented as if the acquisition of OAC had occurred at January 1, 1998:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Interest income................................................................ $ 311,327 $ 371,775
Interest expense............................................................... 121,149 152,630
------------ ------------
Net interest income before provision for loan losses......................... 113,362 133,479
Provision for loan losses.................................................... 7,787 19,151
------------ ------------
Net interest income after provision for loan losses.......................... 109,973 128,961
------------ ------------
Non-interest income............................................................ 112,672 36,322
Non-interest expense........................................................... 195,042 225,153
Distributions on Company-obligated, mandatory redeemable
securities of subsidiary trust holding solely
junior subordinated debentures............................................. 13,111 13,594
Equity in (losses) earnings of investments in unconsolidated entities.......... (9,010) 716
------------ ------------
Income (loss) before income taxes and extrordinary gain........................ 8,871 (68,230)
Income tax (expense) benefit................................................... (2,608) 37,647
Minority interest in net loss of consolidated subsidiary....................... 638 467
------------ ------------
Income (loss) before extraordinary gain........................................ 6,901 (30,116)
Extraordinary gain on repurchase of debt, net of taxes......................... 6,983 615
------------ ------------
Net income (loss).............................................................. $ 13,884 $ (29,501)
============ ============
Earnings (loss) per share......................................................
Basic:
Net income (loss) before extraordinary gain................................ $ 0.10 $ (0.41)
Extraordinary gain......................................................... 0.10 0.01
------------ ------------
Net income (loss).......................................................... $ 0.20 $ (0.40)
============ ===========
Diluted:
Net income (loss) before extraordinary gain................................ $ 0.10 $ (0.41)
Extraordinary gain......................................................... 0.10 0.01
------------ ------------
Net income (loss).......................................................... $ 0.20 $ (0.40)
============ ===========
</TABLE>
The pro forma consolidated results of operations include adjustments
to give effect to the purchase accounting adjustments as if the acquisition
occurred on January 1, 1998 and to eliminate material intercompany transactions.
The unaudited pro forma information is not necessarily indicative of the results
of operations that would have occurred had the acquisition occurred on January
1, 1998, or the future results of the combined operations.
79
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
On September 30, 1999, the Company sold all the shares of its
wholly-owned subsidiary, Ocwen UK, to Malvern House Acquisition Limited for the
pound sterling equivalent of $122,101 in cash. Ocwen UK was originally formed to
acquire substantially all of the assets, and certain of the liabilities, of the
United Kingdom operations of Cityscape Financial Corp., and commenced operations
on April 24, 1998. As a result of the transaction, the Company recorded a pretax
gain on sale of $50,371.
On June 2, 1999, OTX acquired substantially all of the assets of
Synergy Software, LLC ("Synergy"), a developer of commercial and multi-family
mortgage servicing systems, for $10,000 of which $5,000 has been paid and $5,000
is a holdback which will be released over time if certain performance objectives
are attained. The acquisition was accounted for as a purchase. The excess of
purchase price over net assets acquired related to this transaction amounted to
$4,547, net of accumulated amortization of $401 at December 31, 1999 and is
being amortized on a straight-line basis over a period of seven years. Synergy
is a wholly-owned subsidiary of OTX.
NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS
A majority of the Company's assets, liabilities and off-balance
sheet instruments and commitments are considered financial instruments. For the
majority of the Company's financial instruments, principally loans and deposits,
fair values are not readily available since there are no available trading
markets as characterized by current exchanges between willing parties.
Accordingly, fair values can only be derived or estimated using various
valuation techniques, such as computing the present value of estimated future
cash flows using discount rates commensurate with the risks involved. However,
the determination of estimated future cash flows is inherently subjective and
imprecise. In addition, for those financial instruments with option-related
features, prepayment assumptions are incorporated into the valuation techniques.
It should be noted that minor changes in assumptions or estimation methodologies
can have a material effect on these derived or estimated fair values.
The fair values reflected below are indicative of the interest rate
environments as of December 31, 1999 and 1998, and do not take into
consideration the effects of interest rate fluctuations. In different interest
rate environments, fair value results can differ significantly, especially for
certain fixed-rate financial instruments and non-accrual assets. In addition,
the fair values presented do not attempt to estimate the value of the Company's
fee generating businesses and anticipated future business activities. In other
words, they do not represent the Company's value as a going concern.
Furthermore, the differences between the carrying amounts and the fair values
presented may not be realized.
Reasonable comparability of fair values among financial institutions
is difficult due to the wide range of permitted valuation techniques and
numerous estimates that must be made in the absence of secondary market prices.
This lack of objective pricing standards introduces a degree of subjectivity to
these derived or estimated fair values. Therefore, while disclosure of estimated
fair values of financial instruments is required, readers are cautioned in using
this data for purposes of evaluating the financial condition of the Company.
The methodologies used and key assumptions made to estimate fair
value, the estimated fair values determined and recorded carrying values follow:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents have been valued at their carrying amounts
as these are reasonable estimates of fair value given the relatively short
period of time between origination of the instruments and their expected
realization.
SECURITIES AVAILABLE FOR SALE
The Company adjusts its securities portfolio to fair value at the
end of each month based upon the lower of dealer quotations or internal values,
subject to an internal review process. For those securities which do not have an
available market quotation, the Company will request market values and
underlying assumptions from the various securities dealers that underwrote, are
currently financing the securities, or have had prior experience with the type
of security to be valued. When quotations are obtained from two or more dealers,
the average dealer quote is generally utilized.
LOANS, MATCH FUNDED LOANS AND SECURITIES, AND DISCOUNT LOANS
The fair value of performing loans is estimated based upon quoted
market prices for similar whole loan pools. The fair value of non-performing
loans is based on estimated cash flows discounted using a rate commensurate with
the risk associated with the estimated cash flows. The fair value of the match
funded loans and the discount loan portfolio is estimated based upon current
80
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
market yields at which recent pools of similar mortgages have traded taking into
consideration the timing and amount of expected cash flows. The match funded
securities are marked to fair value at the end of each month in the same manner
as securities available for sale.
INVESTMENT SECURITIES
Investment securities represent required holdings of specified
levels of common stock issued by the Federal Home Loan Bank. These securities
are subject to regulatory restrictions that limit the Company's ability to
dispose of them freely and are carried at cost.
DEPOSITS
The fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the
required cash payments at the market rates offered for deposits with similar
maturities on the respective financial statement dates.
BORROWINGS
The fair value of the Company's bond-match funded loan agreements,
notes and debentures and capital securities are based upon quoted market prices.
The fair value of the Company's other borrowings, including securities sold
under agreements to repurchase and obligations outstanding under lines of
credit, approximate carrying value.
DERIVATIVE FINANCIAL INSTRUMENTS
The fair values of all derivative financial instruments are based on
quoted market prices.
LOAN COMMITMENTS AND LETTERS OF CREDIT
The fair value of loan commitments and letters of credit are
estimated considering the difference between interest rates on the respective
financial statement dates and the committed rates.
81
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The carrying amounts and the estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents ...................... $ 381,858 $ 381,858 $ 445,179 $ 445,179
Securities available for sale .................. 587,518 587,518 593,347 593,347
Loans available for sale ....................... 45,213 45,213 177,847 177,847
Investment securities .......................... 10,965 10,965 10,825 10,825
Loan portfolio, net ............................ 157,408 157,184 230,312 232,242
Match funded loans and securities, net ......... 157,794 154,623 -- --
Discount loan portfolio, net ................... 913,229 935,336 1,026,511 1,046,945
FINANCIAL LIABILITIES:
Deposits ....................................... 1,842,286 1,848,339 2,194,816 2,218,542
Securities sold under agreements to repurchase.. 47,365 47,365 72,051 72,051
Bond-match funded loan agreements .............. 141,515 141,557 -- --
Obligations outstanding under lines of credit... 187,866 187,866 179,285 179,285
Notes, debentures and other interest-bearing
obligations .................................. 317,573 290,244 225,000 205,750
Capital securities ............................. 110,000 72,600 125,000 97,500
DERIVATIVE FINANCIAL INSTRUMENTS:
Interest rate swaps ............................ 1,274 3,702 -- (2,283)
U.S. Treasury futures .......................... 178 178 -- --
Swaptions and put options ...................... 726 726 -- --
Currency Swap .................................. (976) (976) (2,096) (2,096)
British Pound futures .......................... 121 121 (187) (187)
Canadian Dollar futures ........................ (320) (320) -- --
OTHER:
Loan commitments ............................... -- 25,985 -- 133,489
Letters of credit .............................. -- 30,205 -- 15,878
</TABLE>
NOTE 4: SECURITIES HELD FOR TRADING
The Company traded assets totaling $820,235, $2,250,831, and
$1,023,965 in aggregate sales proceeds during the years ended December 31, 1999,
1998 and 1997, respectively, primarily in connection with the Company's
securitizations of loans, resulting in realized net gains of $36,804, $109,601,
and $72,214 for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company held no securities for trading at December 31, 1999 or 1998.
82
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 5: SECURITIES AVAILABLE FOR SALE
The amortized cost, fair value and gross unrealized gains and losses
on the Company's securities available for sale are as follows at the periods
ended:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Mortgage-related securities Single family residential:
AAA-rated collateralized mortgage obligations $ 393,426 $ 50 $ (1,089) $ 392,387
BB-rated subordinates................................... 4,697 1,244 (33) 5,908
B-rated subordinates.................................... 5,380 990 (272) 6,098
Unrated subordinates.................................... 15,790 2,543 (1,046) 17,287
Unrated subprime residuals ............................. 125,452 2,126 (3,491) 124,087
----------- ----------- ----------- -----------
544,745 6,953 (5,931) 545,767
----------- ----------- ----------- -----------
Multi-family and commercial:
B-rated subordinates.................................... 38,234 -- -- 38,234
Unrated subordinates.................................... 3,503 -- -- 3,503
Unrated interest-only................................... -- 14 -- 14
----------- ------------ ----------- -----------
41,737 14 -- 41,751
----------- ------------ ----------- -----------
$ 586,482 $ 6,967 $ (5,931) $ 587,518
=========== =========== =========== ===========
</TABLE>
The amortized cost of mortgage-related securities at December 31,
1999, was net of unaccreted (discounts) and unamortized premiums of $(104,425).
One security in the available for sale portfolio, with a fair value
of $13,210, is pledged as collateral to the State of New Jersey in connection
with the Bank's sales of certificates of deposit over $100 to New Jersey
municipalities. Mortgage-related securities with an amortized cost of $108,234
and a fair value of $105,615 were posted as collateral for securities sold under
agreements to repurchase at December 31, 1999.
A profile of the maturities of securities available for sale at
December 31, 1999, follows. Mortgage-backed securities are included based on
their weighted-average maturities, reflecting anticipated future prepayments.
Amortized Cost Fair Value
-------------- ----------
Due within one year ..................... $ 363,195 $ 363,672
Due after 1 through 5 years ............. 162,155 161,609
Due after 5 through 10 years ............ 41,993 43,045
Due after 10 years ...................... 19,139 19,192
------------- ----------
$ 586,482 $ 587,518
============= ==========
83
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Mortgage-related securities Single family residential:
AAA-rated collateralized mortgage obligations .... $ 343,686 $ 552 $ (39) $ 344,199
BB-rated subordinates ............................ 8,517 -- -- 8,517
B-rated subordinates ............................. 6,344 -- -- 6,344
Unrated subordinates ............................. 37,872 2,723 -- 40,595
AAA-rated subprime residuals (1) ................. 6,178 753 -- 6,931
BBB-rated subprime residuals (1) ................. 15,681 1,912 -- 17,593
Unrated subprime residuals (1) ................... 141,526 11,425 -- 152,951
--------- --------- --------- ---------
559,804 17,365 (39) 577,130
--------- --------- --------- ---------
Multi-family and commercial:
B-rated subordinates ............................. 7,684 1,290 (161) 8,813
Unrated subordinates ............................. 4,126 3,340 (135) 7,331
AAA-rated interest-only .......................... 71 -- -- 71
BB-rated interest-only ........................... -- 2 -- 2
--------- --------- --------- ---------
11,881 4,632 (296) 16,217
--------- --------- --------- ---------
$ 571,685 $ 21,997 $ (335) $ 593,347
========= ========= ========= =========
</TABLE>
(1) Includes subprime residuals with a total fair value of $87,334
((pound)51,274) and amortized cost of $73,615 ((pound)44,354)
relating to Ocwen UK.
One security in the available for sale portfolio, with a fair value
of $9,929 is pledged as collateral to the State of New Jersey in connection with
the Bank's sales of certificates of deposit over $100 to New Jersey
municipalities. Mortgage-related securities with an amortized cost of $137,705
and a fair value of $148,839 were posted as collateral for securities sold under
agreements to repurchase at December 31, 1998.
The amortized cost of mortgage-related securities at December 31,
1998, was net of unaccreted (discounts) and unamortized premiums of $(65,546).
A profile of the maturities of mortgage-related securities at
December 31, 1998, follows. Mortgage-backed securities are included based on
their weighted-average maturities, reflecting anticipated future prepayments
based on consensus of dealers in the market.
Amortized Cost Fair Value
-------------- ----------
Due within one year .................... $ 328,551 $ 332,338
Due after 1 through 5 years ............ 151,625 160,659
Due after 5 through 10 years ........... 55,780 61,615
Due after 10 years ..................... 35,729 38,735
------------- ----------
$ 571,685 $ 593,347
============= ==========
84
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
Gross realized gains and losses, proceeds on sales, premiums
amortized against and discounts accreted to income were as follows during the
periods ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ------------ ---------
<S> <C> <C> <C>
Securities:
Gross realized gains ............ $ 6,567 $ 9,082 $ 9,637
Gross realized losses ........... (1,517) (957) (3,591)
--------- ------------ ---------
Net realized gains(1) ........... $ 5,050 $ 8,125 $ 6,046
========= ============ =========
Proceeds on sales ............... $ 43,923 $ 269,828 $ 202,670
========= ============ =========
Net premium amortization ........ $ 11,074 $ 56,487 $ 63,506
========= ============ =========
</TABLE>
(1) Excludes impairment charges incurred during 1999 and 1998 related to
AAA-rated agency interest-only securities, subordinates and subprime
residual securities.
NOTE 6: 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 December 31:
Carrying Value
------------------------
1999 1998
-------- --------
Loan type:
Single family residential (1) ............... $ 45,084 $177,578
Consumer .................................... 129 269
-------- --------
Total loans available for sale .............. $ 45,213 $177,847
======== ========
(1) Includes $87,644 ((pound)52,808) of loans related to Ocwen UK at
December 31, 1998.
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 December 31, 1999:
Single family
Residential Consumer Total
------------- ------------ ------------
New Jersey................. $ 7,637 $ -- $ 7,637
Florida.................... 5,372 59 5,431
New York................... 4,694 -- 4,694
Illinois................... 3,737 -- 3,737
Michigan................... 2,856 -- 2,856
Other (1).................. 20,788 70 20,858
------------ ------------ ------------
Total................... $ 45,084 $ 129 $ 45,213
============ ============ ============
(1) Consists of properties located in 36 other states, none of which
aggregated over $2.8 million in any one state.
85
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The following table presents a summary of the Company's
non-performing loans (loans which were past due 90 days or more) in the loans
available for sale portfolio at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Non-performing loans:
Single family (1)........................... $ 15,319 $ 39,415
Consumer.................................... 1 9
---------- ----------
$ 15,320 $ 39,424
========== ==========
Non-performing loans as a percentage of:
Total loans available for sale.............. 33.88% 22.17%
Total assets................................ 0.46% 1.18%
</TABLE>
(1) Includes $7,245 ((pound)4,365) of non-performing loans related to
Ocwen UK at December 31, 1998.
NOTE 7: LOAN PORTFOLIO
The Company's loan portfolio consisted of the following at December
31:
<TABLE>
<CAPTION>
Carrying Value
------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
LOAN TYPE:
Single family residential........................ $ 4,334 $ 30,361
Multi-family residential:
Permanent...................................... 23,430 53,311
Construction................................... 57,936 22,288
--------------- ---------------
Total multi-family residential................. 81,366 75,599
--------------- ---------------
Commercial real estate:
Hotel:
Permanent.................................... -- 29,735
Construction................................. 38,645 6,896
Office ........................................ 64,745 93,068
Land .......................................... 2,238 2,266
Other ......................................... -- 6,762
--------------- ---------------
Total commercial real estate................. 105,628 138,727
--------------- ---------------
Consumer ........................................ 82 132
--------------- ---------------
Total loans.................................. 191,410 244,819
Undisbursed loan funds........................... (24,654) (7,099)
Unamortized deferred fees........................ (2,089) (2,480)
Allowance for loan losses........................ (7,259) (4,928)
--------------- ---------------
Loans, net................................... $ 157,408 $ 230,312
=============== ===============
</TABLE>
At December 31, 1999 the Company had $1.6 million of multi-family
residential loans outstanding at market interest rates and terms which were
issued to facilitate the sale of the Company's real estate owned and real estate
held for development. At December 31, 1998 the Company had $3.6 million of
single family residential loans and $3.6 million of multi-family residential
loans outstanding at market interest rates and terms, which were issued to
facilitate the sale of the Company's real estate owned and real estate held for
development.
Included in the loan portfolio at December 31, 1999 and 1998, was
$0.5 million and $12.3 million, respectively, of loans in which the Company
participated in the residual profits of the underlying real estate. The Company
records any residual profits as part of interest income when received.
86
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The following table presents a summary of the Company's
non-performing loans, allowance for loan losses and significant ratios for its
loan portfolio at and for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NON-PERFORMING LOANS:
Single family residential ................... $ 982 $ 1,169 $ 1,575
Multi-family residential .................... 11,037 7,392 7,583
Commercial real estate and other ............ 19,360 488 --
-------- -------- --------
$ 31,379 $ 9,049 $ 9,158
======== ======== ========
ALLOWANCE FOR LOAN LOSSES:
Balance, beginning of year .................. $ 4,928 $ 3,695 $ 3,523
Provision for loan losses ................... 1,636 891 325
Charge-offs ................................. (8) (219) (153)
Recoveries .................................. -- 561 --
Acquired allowance (OAC acquisition) ........ 703 -- --
-------- -------- --------
Balance, end of year ........................ $ 7,259 $ 4,928 $ 3,695
======== ======== ========
SIGNIFICANT RATIOS:
Non-performing loans as a percentage of:
Total loans .............................. 18.82% 3.81% 3.36%
Total assets ............................. 0.95% 0.27% 0.30%
Allowance for loan losses as a percentage of:
Total loans .............................. 4.35% 2.07% 1.35%
Non-performing loans ..................... 23.13% 54.46% 40.35%
</TABLE>
If non-accrual loans had been current in accordance with their
original terms, interest income for the years ended December 31, 1999, 1998, and
1997, would have been greater by approximately $1,139, $284 and $515,
respectively. No interest has been accrued on loans greater than 89 days past
due.
At December 31, 1999, the Company had two commercial loans with an
aggregate carrying value of $1,793, net of allowance for loan losses of $1,982,
which were impaired as defined in accordance with SFAS No. 114, and as amended
by SFAS No. 118. The Company had no such impaired loans at December 31, 1998.
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 December 31, 1999:
<TABLE>
<CAPTION>
Single Family Multi-family Commercial
Residential Residential Real Estate Consumer Total
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
New York.................. $ 651 $ 37,973 $ 19,773 $ 32 $ 58,429
California................ 404 17,432 3,515 -- 21,351
Florida................... 89 -- 14,124 -- 14,213
Delaware.................. 504 50 13,300 -- 13,854
Massachusetts............. 66 -- 10,229 -- 10,295
Other..................... 2,620 25,911 44,687 50 73,268
------------ ------------ ------------ ------------ ------------
Total.................. $ 4,334 $ 81,366 $ 105,628 $ 82 $ 191,410
============ ============ ============ ============ ============
</TABLE>
NOTE 8: DISCOUNT LOAN PORTFOLIO
The Company has acquired, through private sales and auctions,
mortgage loans at a discount because the borrowers are either not current as to
principal and interest payments or there is doubt as to the borrowers' ability
to pay in full the contractual principal and interest. The Company estimates the
amounts it will realize through foreclosure, collection efforts or other
resolution of each loan and the length of time required to complete the
collection process in determining the amounts it will bid to acquire such loans.
87
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The resolution alternatives applied to the discount loan portfolio
are: (i) the borrower brings the loan current in accordance with original or
modified terms; (ii) the borrower repays the loan or a negotiated amount; (iii)
the borrower agrees to a deed-in-lieu of foreclosure, in which case it is
classified as real estate owned and held for sale by the Company and (iv) the
Company forecloses on the loan and the property is either acquired at the
foreclosure sale by a third-party or by the Company, in which case it is
classified as real estate owned and held for sale. Upon receipt of title to the
property, the loans are transferred to real estate owned.
The Company's discount loan portfolio consists of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Single family residential loans.................. $ 597,719 $ 597,100
Multi-family residential loans................... 191,971 244,172
Commercial real estate loans:
Office buildings............................ 97,784 154,063
Hotels...................................... 75,095 100,407
Retail properties........................... 105,247 21,230
Other properties............................ 87,148 173,310
--------------- ---------------
365,274 449,010
Other loans...................................... 21,615 10,144
--------------- ---------------
Total discount loans........................ 1,176,579 1,300,426
--------------- ---------------
Unaccreted discount:
Single family residential loans............. (147,630) (161,650)
Multi-family residential loans............. (37,981) (20,795)
Commercial real estate loans................ (57,604) (69,747)
Other loans................................. (954) (321)
--------------- ---------------
(244,169) (252,513)
--------------- ---------------
932,410 1,047,913
Allowance for loan losses........................ (19,181) (21,402)
--------------- ---------------
Discount loans, net.............................. $ 913,229 $ 1,026,511
=============== ===============
</TABLE>
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 December 31, 1999:
<TABLE>
<CAPTION>
Commercial
Single Family Multi-Family Real Estate
Residential Residential and Other Total
------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
California.............. $ 47,164 $ 7,633 $ 87,186 $ 141,983
New York................ 50,125 2,201 36,475 88,801
Illinois................ 19,905 55,721 1,298 76,924
Michigan................ 16,100 36,697 21,573 74,370
Florida................. 38,745 17,514 13,116 69,375
Other................... 278,050 34,223 168,684 480,957
----------- -------------- ----------- -----------
Total................ $ 450,089 $ 153,989 $ 328,332 $ 932,410
=========== ============== =========== ===========
</TABLE>
88
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth the payment status at December 31 of
the loans in the Company's gross discount loan portfolio:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Loans without Forbearance Agreements:
Current....................................... $ 509,845 $ 578,269
Past due 31 days to 89 days................... 23,438 35,555
Past due 90 days or more...................... 448,312 509,838
Acquired and servicing not yet transferred.... 87,538 57,048
------------ ------------
Subtotal................................... 1,069,133 1,180,710
------------ ------------
Loans with Forbearance Agreements:
Current....................................... 2,958 1,180
Past due 31 days to 89 days................... 8,904 4,046
Past due 90 days or more(1)(2)................ 95,584 114,490
------------ ------------
Subtotal................................... 107,446 119,716
------------ ------------
Total........................................... $ 1,176,579 $ 1,300,426
============ ============
</TABLE>
(1) Includes $73,209 of loans which were less than 90 days past due
under the terms of the forbearance agreements at December 31, 1999,
of which $52,005 million were current and $21,204 million were past
due 31 to 89 days.
(2) Includes $110,072 of loans which were less than 90 days past due
under the terms of the forbearance agreements at December 31, 1999,
of which $77,893 million were current and $32,179 million were past
due 31 to 89 days.
The following schedule presents a summary of the Company's allowance
for loan losses and significant ratios for its discount loans at and for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year....................................... $ 21,402 $ 23,493 $ 11,538
Provision for loan losses.......................................... 5,434 17,618 31,894
Charge-offs........................................................ (8,052) (20,130) (20,349)
Recoveries......................................................... 397 421 410
----------- ----------- -----------
Balance at end of year............................................. $ 19,181 $ 21,402 $ 23,493
=========== =========== ===========
SIGNIFICANT RATIOS:
Allowances for loan losses as a percentage of:
Total loans (1)................................................ 2.06% 2.04% 1.61%
Total assets................................................... 0.58% 0.64% 0.77%
Net charge-offs as a percentage of average discount loans.......... 0.83% 1.53% 1.55%
</TABLE>
(1) Total loans are net of undisbursed loan proceeds and unaccreted
discount.
NOTE 9: MATCH FUNDED LOANS AND SECURITIES
Match funded loans and securities are comprised of the following at
December 31:
1999
---------------
Single family residential loans (1)............ $ 104,588
Deferred fees.................................. 1,008
Allowance for loan losses...................... (495)
---------------
Match funded loans, net..................... 105,101
Match funded securities available for sale..... 52,693
---------------
Balance at end of period....................... $ 157,794
===============
(1) Includes $1,127 of non-performing loans.
89
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
At December 31, 1999, the Company held match funded loans acquired
as a result of the OAC acquisition. These loans were securitized and transferred
by OAC to OAC Mortgage Residential Securities, Inc., a real estate mortgage
investment conduit (the "Trust") on November 13, 1998. On that date, the Trust
issued two classes of notes secured by the related group of mortgage loans. At
December 31, 1999, Loan Group I consisted of approximately 705 mortgage loans
original terms of up to 30 years and which are secured by first liens on single
family residential properties. At that same date, Loan Group II consisted of
approximately 467 mortgage loans with original terms of up to 30 years and which
are secured by first or second liens on single family residential properties.
Upon the transfer, OAC received approximately $173,900 of proceeds. The transfer
did not qualify as a sale under SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Accordingly,
the proceeds received from the transfer are reported as a liability (bonds-match
funded agreements) in the Consolidated Statement of Financial Condition. See
Note 17.
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 December 31, 1999:
Michigan..................... $ 22,809
California................... 11,263
Florida...................... 6,792
Texas........................ 5,807
Other........................ 57,917
------------
Total........................ $ 104,588
============
Additionally, at December 31, 1999, the Company held match funded
securities, with an amortized cost of $53,561 and a fair value of $52,693 (net
of gross unrealized losses of $868) resulting from the Company's transfer of
four unrated residual securities to Ocwen NIM Corp. on December 16, 1999 in
exchange for $43,000 in non-recourse notes (Series 1999-OAC1). Upon the
transfer, the Company received approximately $40,100 of proceeds. The transfer
did not qualify as a sale under SFAS No. 125. Accordingly, the amount of
proceeds from the transfer are reported as a liability (bonds-match funded
agreements) in the Consolidated Statement of Financial Condition. See Note 17.
The following table summarizes the maturities of the match-funded
securities at December 31, 1999. Maturities are based on weighted-average unpaid
principal balance and reflect anticipated future prepayments based on a
consensus of dealers in the market.
<TABLE>
<CAPTION>
Entity Amortized Cost Fair Value
------ ---------------- -----------------
<S> <C> <C>
Due within one year.................... $ 8,669 $ 8,490
Due after 1 through 5 years............ 23,115 22,761
Due after 5 through 10 years........... 9,162 9,025
Due after 10 years..................... 12,615 12,417
---------------- -----------------
$ 53,561 $ 52,693
================ =================
NOTE 10: INVESTMENT IN UNCONSOLIDATED ENTITIES
Carrying Value
------------------------------------
Entity 1999 1998
------ ---------------- -----------------
OAC .................................. $ -- $ 16,268
OPLP .................................. -- 22,820
Kensington............................. 36,215 46,586
Other.................................. 903 1,219
---------------- -----------------
$ 37,118 $ 86,893
================ =================
</TABLE>
At December 31, 1998, the Company, through IMI, owned 1,540,000
shares or 8.12% of the outstanding common stock of OAC. Also at December 31,
1998, the Company, through IMI, owned 1,808,733 units or 8.71% of the
partnership units of OPLP. The Company began accounting for these entities under
the equity method effective May 5, 1998 upon the increase in the combined
90
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
ownership of OAC and OPLP to 16.83%. An adjustment to reduce retained earnings
in the amount of $979 (net of income taxes of $526) was recorded upon conversion
to the equity method to reflect the cumulative effect of the accounting change.
As more fully described in Note 2, the Company acquired the remaining
outstanding shares of OAC on October 7, 1999. During 1999, prior to the
acquisition of OAC, the Company recorded equity in losses of its investment in
OAC and OPLP of $(1,809) and $(1,797), respectively. During 1998, the Company
recorded equity in the losses of its investment in OAC and OPLP of $(4,007) and
$(4,694), respectively.
The Company's investment in unconsolidated entities at December 31,
1999 includes 35.84% of the total outstanding common stock of Kensington, an
originator of non-conforming residential mortgages in the U.K., purchased on
February 25, 1998, for $45,858 ((pound)27,837). The Company's investment in
Kensington amounted to $36,215 and $46,586 at December 31, 1999 and 1998,
respectively, net of the excess of the purchase price over the net investment.
The excess of the purchase price over the net investment amounted to $32,057
((pound)19,456) and $34,492 ((pound)20,933) at December 31, 1999 and 1998,
respectively, net of accumulated amortization of $4,464 ((pound)2,709) and
$2,029 ((pound)1,231), for 1999 and 1998, respectively, and is being amortized
over a period of 15 years. The Company recorded equity in (losses) earnings of
Kensington of ($9,154) and $439 during 1999 and 1998, respectively, including
$2,435 and $2,029 amortization of excess cost over purchase price during 1999
and 1998, respectively.
The below financial data is presented under U.K. GAAP. For purposes
of recording the Company's equity in earnings of Kensington, the Company adjusts
this financial data to conform to U.S. GAAP. The principal adjustment made to
conform to U.S. GAAP is related to the accounting for securitizations in
accordance with SFAS No. 125.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
AT NOVEMBER 30,
Total assets................................... $ 275,177 $ 232,160
=========== ===========
Total liabilities.............................. $ 243,108 $ 202,775
=========== ===========
FOR THE TWELVE MONTHS ENDED NOVEMBER 30,
Total operating income......................... $ 57,972 $ 31,047
=========== ===========
Total operating expenses....................... $ 49,339 $ 24,530
=========== ===========
Income before income taxes..................... $ 8,633 $ 6,517
=========== ===========
Net income..................................... $ 3,544 $ 6,517
=========== ===========
</TABLE>
On December 12, 1997, BCBF, LLC ("LLC"), a limited liability company
formed in March 1996 between the Company and BlackRock Capital Finance LP,
distributed all of its assets. The Company's equity in earnings of the LLC of
$23,688 for 1997 includes 50% of the net income of the LLC before deduction of
the Company's 50% share of loan servicing fees which were paid 100% to the
Company. Equity in earnings for 1997 also includes the recapture of $5,114 of
valuation allowances established in 1996 by the Company on its equity investment
in the joint venture as a result of the resolution and securitization of loans.
The Company has recognized 50% of the loan servicing fees not eliminated in
consolidation in servicing fees and other charges. Because the LLC was a
pass-through entity for federal income tax purposes, provisions for income taxes
were established by each of the Company and its co-investor, and not the LLC.
91
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
Set forth below is the statement of operation of the LLC for the
year ended December 31, 1997.
Interest income............................. $ 8,928
Interest expense............................ --
----------
Net interest income...................... 8,928
----------
Non-interest income:
Gain on sale of loans held for sale...... 27,994
Loss on real estate owned, net........... (93)
Loan fees................................ 23
----------
27,924
Operating expenses:
Loan servicing fees...................... 1,850
Other loan expenses...................... 13
----------
1,863
Net income.................................. $ 34,989
==========
In March 1997, as part of a larger transaction involving the Company
and an affiliate of BlackRock, the LLC securitized 1,196 loans with an unpaid
principal balance of $51,714, past due interest of $14,209 and a net book value
of $40,454. Proceeds from the sale of the related securities amounted to
$58,866. In December 1997, as part of a larger transaction involving the Company
and BlackRock, the LLC securitized 534 loans with an unpaid principal balance of
$26,644, past due interest of $8,303 and a net book value of $20,139. Proceeds
from the sale of the related securities amounted to $30,178.
The Company's investment in unconsolidated entities also includes a
joint venture investment in BCFL, L.L.C. ("BCFL"), a limited liability
corporation formed in January 1997 between the Company and BlackRock. The
Company owns a 10% interest in BCFL which was formed to acquire multi-family
loans. At December 31, 1999 and 1998, the Company's investment amounted to $449
and $1,133, respectively. Equity in earnings of BCFL amounted to $144 and $277
during 1999 and 1998, respectively.
NOTE 11: REAL ESTATE OWNED
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. Real estate owned, net of valuation allowance, is held for sale and
was provided from the following portfolios at December 31:
December 31,
------------------------
1999 1998
---------- ----------
Discount loan portfolio:
Single family residential............. $ 72,193 $ 94,641
Multi-family residential.............. 2,601 20,130
Commercial real estate................ 85,233 82,591
---------- ----------
Total............................. 160,027 197,362
Loan portfolio........................... 2,183 227
Loans available for sale................. 5,296 3,962
---------- ----------
Total............................. $ 167,506 $ 201,551
========== ==========
92
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth certain geographical information by
type of property at December 31, 1999 related to the Company's real estate
owned.
<TABLE>
<CAPTION>
Multi-family Residential
Single Family Residential and Commercial Total
------------------------- ------------------------- ------------------------
No. of No. of No. of
Amount Properties Amount Properties Amount Properties
-------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Florida ................. $ 5,523 110 $ 48,291 6 $ 53,814 116
Georgia ................. 2,405 32 14,393 1 16,798 33
Connecticut ............. 2,959 51 12,612 2 15,571 53
California .............. 7,527 95 3,066 4 10,593 99
New York ................ 5,715 108 789 2 6,504 110
Other (1)................ 54,043 1,237 10,183 24 64,226 1,261
-------- -------- --------- -------- --------- --------
Total................. $ 78,172 1,633 $ 89,334 39 $ 167,506 1,672
======== ======== ========= ======== ========= ========
</TABLE>
(1) Consists of properties located in 44 other states, none of which
aggregated over $6,293 in any one state.
The following schedule presents the activity, in aggregate, in the
valuation allowance on real estate owned for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year....................... $ 15,325 $ 12,346 $ 11,493
Provision for losses............................... 28,008 18,626 13,450
Charge-offs and sales.............................. (26,152) (15,647) (12,597)
----------- ----------- -----------
Balance at end of year............................. $ 17,181 $ 15,325 $ 12,346
=========== =========== ===========
</TABLE>
93
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 12: INVESTMENT IN REAL ESTATE
The Company's investment in real estate consisted of the following
at December 31:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Properties held for investment (1):
Office buildings......................................... $ 202,607 $ --
Retail................................................... 33,224 --
Building improvements.................................... 17,590 --
Tenant improvements and lease commissions................ 8,150 --
Furniture and fixtures................................... 44 --
------------- -------------
261,615 --
Accumulated depreciation................................. (9,011) --
------------- -------------
252,604 --
------------- -------------
Properties held for lease:
Land and land improvements 1,256 5,173
Building 14,629 28,059
Accumulated depreciation................................. (248) (350)
------------- -------------
15,637 32,882
------------- -------------
Other investments in real estate:
Nonresidential........................................... -- 3,978
------------- -------------
$ 268,241 $ 36,860
============= =============
</TABLE>
(1) Acquired as a result of the acquisition of OAC.
During 1999, the Company recognized an impairment charge of $2,817
on one nonresidential property.
NOTE 13: MORTGAGE SERVICING RIGHTS
The Company services for other investors mortgage loans which it
does not own. The total unpaid principal balance of such loans serviced for
others was $11,105,283 and $10,592,466 at December 31, 1999 and 1998,
respectively. Servicing fee income on such loans amounted to $58,698, $49,229,
and $22,056 for the years ended December 31, 1999, 1998 and 1997, respectively.
The unamortized balance of mortgage servicing rights, which are
included in other assets, is as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Unamortized balance..................................................... $ 13,313 $ 8,690
Valuation allowance..................................................... (1,630) (1,630)
-------------- -------------
$ 11,683 $ 7,060
============== =============
The following table summarizes the activity in mortgage servicing
assets for the years ended December 31:
1999 1998
-------------- -------------
Balance at the beginning of year........................................ $ 7,060 $ 5,738
Purchases............................................................... 9,415 1,191
Servicing rights arising from the sale of loans with
servicing rights retained............................................. -- 2,886
Amortization............................................................ (4,792) (2,755)
-------------- -------------
$ 11,683 $ 7,060
============== =============
</TABLE>
94
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
Escrow advances related to loans serviced for others consisted of
the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Principal and interest advances...................................... $ 59,118 $ 28,853
Taxes and insurance advances......................................... 41,569 24,751
Other advances....................................................... 30,921 20,091
-------------- -------------
$ 131,608 $ 73,695
============== =============
</TABLE>
NOTE 14: INVESTMENTS IN LOW INCOME HOUSING TAX CREDIT INTERESTS
The carrying value of the Company's investments in low-income
housing tax credit interests are as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Investments solely as a limited partner made prior to May 18, 1995.............. $ 17,327 $ 19,607
Investments solely as a limited partner made on or after May 18, 1995........... 59,541 56,299
Investments both as a limited and, through subsidiaries, as a general partner... 74,121 68,258
--------------- ---------------
$ 150,989 $ 144,164
=============== ===============
</TABLE>
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 December 31, 1999, the Company's
largest single investment was $8,242, which related to a project located in
Columbia, South Carolina.
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 $2,953, $4,651 and $6,846 for the years
ended December 31, 1999, 1998 and 1997, respectively. Had these investments been
accounted for under the equity method, net income would have been reduced by
$60, $1,113 and $665 for the years ended December 31, 1999, 1998 and 1997,
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 $15,289, $13,017, and $8,035 for the years
ended December 31, 1999, 1998 and 1997, respectively, and recorded a loss after
depreciation of $6,291, $6,905 and $4,935 from operations on the underlying real
estate for the years ended December 31, 1999, 1998 and 1997, respectively.
Included in other income for the years ended December 31, 1999, 1998
and 1997, are gains of $6,591, $7,366 and $6,053, respectively, on the sales of
certain investments in low-income housing tax credit interests which had
carrying values of $41,744, $28,887 and $15,728, respectively, at time of sale.
NOTE 15: PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Computer hardware and software............................................... $ 39,224 $ 36,000
Buildings.................................................................... 19,192 --
Leasehold improvements....................................................... 9,651 9,062
Land and land improvements................................................... 4,782 4,782
Furniture and fixtures....................................................... 6,704 7,203
Office equipment............................................................. 2,269 1,625
Construction in progress..................................................... -- 951
Less accumulated depreciation and amortization............................... (32,784) (25,800)
-------------- -------------
$ 49,038 $ 33,823
============== =============
</TABLE>
Depreciation expense amounted to $13,546, $11,703 and $6,821 for
1999, 1998 and 1997, respectively. Buildings represents the Company's nationwide
customer service and collection facility in Orlando, Florida, construction of
which was completed during 1999.
95
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 16: DEPOSITS
The Company's deposits consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Non-interest-bearing deposits.................... $ 280,273 $ 251,429
NOW and money market checking accounts........... 30,343 35,070
Savings accounts................................. 1,361 1,326
----------------- -----------------
311,977 287,825
----------------- -----------------
Certificates of deposit.......................... 1,536,997 1,916,548
Unamortized deferred fees........................ (6,688) (9,557)
----------------- -----------------
1,530,309 1,906,991
----------------- -----------------
Total deposits................................... $ 1,842,286 $ 2,194,816
================= =================
</TABLE>
At December 31, 1999 and 1998, certificates of deposit, net of
unamortized deferred fees, include $1,449,873 and $1,847,335, respectively, of
deposits originated through national, regional and local investment banking
firms which solicit deposits from their customers, all of which are
non-cancelable. Additionally, at December 31, 1999 and 1998, $100,366 and
$100,463, respectively, of certificates of deposit were issued on an uninsured
basis. Of the $100,366 of uninsured deposits at December 31, 1999, $57,455 were
from political subdivisions in New Jersey and are secured or collateralized as
required under state law. Non-interest bearing deposits at December 31, 1999 and
1998 included $259,406 and $232,917, respectively, of escrow balances primarily
related to principal and interest collected but not yet remitted in accordance
with loan servicing agreements.
The contractual remaining maturity of the Company's certificates of
deposit at December 31, 1999 is as follows:
Within one year................................ $ 760,594
Within two years............................... 400,619
Within three years............................. 234,126
Within four years.............................. 73,646
Within five years.............................. 37,294
Thereafter..................................... 24,030
-------------
$ 1,530,309
=============
Deferred fees on certificates of deposits are amortized on a
straight-line basis over the term of the respective certificates of deposit.
Such amortization amounted to $5,098, $6,353 and $6,619 for the years ended
December 31, 1999, 1998 and 1997, respectively, and is included in interest
expense on deposits. Interest expense by type of deposit account is as follows
for the years ended December 31:
1999 1998 1997
-------- -------- --------
NOW accounts and money market checking ..... $ 1,313 $ 1,434 $ 1,220
Savings .................................... 38 38 49
Certificates of deposit .................... 97,019 115,112 120,801
-------- -------- --------
$ 98,370 $116,584 $122,070
======== ======== ========
Accrued interest payable on deposits amounted to $15,078 and $22,687
at December 31, 1999 and 1998, respectively.
NOTE 17: BONDS - MATCH FUNDED AGREEMENTS
Bonds-match funded agreements were comprised of the following at
December 31, 1999:
OAC Mortgage Residential Securities, Inc. .... $ 100,968
Ocwen NIM Corp................................ 40,547
-----------
$ 141,515
===========
96
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
At December 31, 1999, the Company held $100,968 of bonds-match
funded agreements which were acquired as a result of the acquisition of OAC. See
Note 9. In addition, on December 16, 1999, the Company transferred four unrated
residual securities to Ocwen NIM Corp. in exchange for non-recourse notes
(Series 1999-OAC1). Upon the transfer, the Company received approximately
$40,100 of proceeds. The transfer did not qualify as a sale under FAS 125.
Accordingly, the amount of proceeds from the transfers are reported as a
liability. See Note 9.
At December 31, 1999, bonds-match funded agreements had a weighted
average interest rate of 6.86%. Accrued interest payable on bonds-match funded
agreements at that date amounted to $264. Interest expense on bonds-match funded
agreement amounted to $2,101 during 1999.
NOTE 18: OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT
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(4)
------ ------------- ------------- ------------- --------------- -----------------------------
<S> <C> <C> <C> <C> <C>
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 - 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
=============
DECEMBER 31, 1998:
OFS (1)............. $ 8,321 $ 200,000 $ 100,000 July 2001 LIBOR + 75 basis points
9,757 185,000 100,000 April 1999 LIBOR + 60 basis points
30,666 50,000 50,000 May 1999 LIBOR + 112 basis points
2,276 20,000 -- month to month LIBOR + 250 basis points
8,472 15,000 -- April 1999 LIBOR + 150 basis points
IMI (3) ............ 2,477 Lesser of $15,000 N/A N/A LIBOR + 150 basis points
or 60% of market
value of
collateral
Ocwen UK (1)........ 92,753 166,000 73,247 April 1999 LIBOR + 87.5 basis points
24,563 124,500 99,937 November 1999 LIBOR + 80 basis points
-------------
$ 179,285
=============
</TABLE>
(1) These lines were used to fund subprime mortgage loan originations,
generally advanced at a rate of 80% to 98% of the principal balance
of the mortgage loan and are secured by such mortgage loans.
(2) These lines are collateralized by commercial loans and investments
in real estate.
(3) Line was collateralized by the OAC shares held by the Company.
(4) LIBOR was 5.82% and 5.06% at December 31, 1999 and 1998,
respectively.
Accrued interest payable on obligations outstanding under lines of
credit amounted to $200 and $930 at December 31, 1999 and 1998, respectively.
Interest expense on obligations outstanding under lines of credits amounted to
$16,318, $34,587, and $5,578 during 1999, 1998, and 1997, respectively.
97
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 19: NOTES, DEBENTURES AND OTHER INTEREST-BEARING OBLIGATIONS
Notes, debentures and other interest-bearing obligations mature as
follows:
December 31,
----------------------
1999 1998
---------- ----------
2003:
11.875% Notes due October 1.......................... $ 103,850 $ 125,000
2004:
Loan due May 24 (LIBOR plus 150 basis points)........ 6,236 --
2005:
12% Subordinated Debentures due June 15.............. 67,000 100,000
11.5% Notes due July 1............................... 140,487 --
---------- ----------
$ 317,573 $ 225,000
========== ==========
The 12% Subordinated Debentures due 2005 (the "Debentures") were
issued by the Bank in the original amount of $100,000 with interest payable
semiannually on June 15 and December 15. The Debentures are unsecured general
obligations of the Bank and are subordinated in right of payment to all existing
and future senior debt.
The Debentures may not be redeemed prior to June 15, 2000, except as
described below. On or after such date, the Debentures may be redeemed at any
time at the option of the Bank, in whole or in part, together with accrued and
unpaid interest, if any, on not less than 30 nor more than 60 days notice at the
following redemption prices (expressed as a percentage of the principal amount),
if redeemed during the twelve-month period beginning June 15 of the years
indicated below:
Year Redemption Price
---- ----------------
2001 ....................... 104.000%
2002 ....................... 102.667%
2003........................ 101.333%
2004 and thereafter ........ 100.000%
In connection with the issuance of the Debentures, the Bank incurred
certain costs which have been capitalized and are being amortized on a
straight-line basis over the expected life of the Debentures. The unamortized
balance of these issuance costs amounted to $1,468 and $1,894, at December 31,
1999 and 1998, respectively, and is included in other assets. Accrued interest
payable on the Debentures amounted to $335 and $500 at December 31, 1999 and
1998, respectively. During 1999, the Bank repurchased $33,000 of its Debentures
in the open market, resulting in an extraordinary gain of $1,605 ($1,323 net of
taxes).
The 11.875% Notes due October 1, 2003, ("the Notes") were issued by
the Company in the original amount of $125,000 with interest payable
semiannually on April 1 and October 1. The Notes are unsecured general
obligations of the Company and are subordinated in right of payment to the
claims of creditors of the Company's subsidiaries.
The Notes may not be redeemed prior to October 1, 2001, except as
described below. On or after such date, the Notes may be redeemed at any time at
the option of the Company, in whole or in part, at the following redemption
prices (expressed as a percentage of the principal amount) plus accrued and
unpaid interest, if redeemed during the twelve-month period beginning October 1
of the years indicated below:
Year Redemption Price
---- ----------------
2001........................ 105.938%
2002........................ 102.969%
During 1999, the Company repurchased $21,150 of its Notes in the
open market, resulting in an extraordinary gain of $1,322 ($1,090 net of taxes).
The indenture governing the Notes requires the Company to maintain,
at all times when the Notes are not rated in an investment grade category by one
or more nationally recognized statistical rating organizations, unencumbered
liquid assets with a value equal to 100% of the required interest payments due
on the Notes on the next two succeeding semiannual interest payment dates. The
Company maintained an investment in cash and cash equivalents of $15,054 and
$14,844 at December 31,
98
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
1999 and 1998, respectively, that is restricted for purposes of meeting this
liquidity requirement. The indenture further provides that the Company shall not
sell, transfer or otherwise dispose of shares of common stock of the Bank or
permit the Bank to issue, sell or otherwise dispose of shares of its common
stock unless in either case the Bank remains a wholly-owned subsidiary of the
Company.
In connection with the issuance of the Notes, the Company incurred
certain costs which have been capitalized and are being amortized on a
straight-line basis over the life of the Notes. The unamortized balance of these
issuance costs amounted to $3,030 and $3,838 at December 31, 1999 and 1998,
respectively, and is included in other assets. Accrued interest payable on the
Notes amounted to $3,083 and $3,711 at December 31, 1999 and 1998, respectively.
As a result of the acquisition of OAC, the Company acquired the
11.5% Redeemable Notes ("the Redeemable Notes") due 2005 which were issued by
OAC during 1998 in the original amount of $150,000. Interest on the Redeemable
Notes is payable semi-annually on January 1 and July 1, beginning January 1,
1999. The Redeemable Notes will mature on July 1, 2005 and will be redeemable,
at the option of the Company, in whole or in part, on or after July 1, 2002, at
the redemption prices specified below (expressed as percentages of the principal
amount thereof), in each case, together with accrued and unpaid interest, if
any, thereon to the date of redemption, upon not less than 30 nor more than 60
days' notice, if redeemed during the twelve-month period beginning on July 1 of
the years indicated below:
Year Redemption Price
---- ----------------
2002........................ 105.750%
2003........................ 102.875
2004 and thereafter......... 100.000
During the first 36 months after the date of original issue of the
Redeemable Notes, the Company may use the net proceeds of one or more offerings
of its common stock to redeem up to 25% of the aggregate principal amount of the
Redeemable Notes at a redemption price of 111.50% of the principal amount
thereof, plus accrued and unpaid interest to the date of redemption, provided
that, after any such redemption, the aggregate principal amount of the
Redeemable Notes outstanding must equal at least $112,500. At December 31, 1999,
the outstanding balance of the Redeemable Notes was $140,487. Accrued interest
payable on the Redeemable Notes amounted to $8,223. Interest expense on the
Redeemable Notes amounted to $4,226 during 1999.
OAC is subject to various restrictive covenants under the Indenture
governing the Redeemable Notes (the "Redeemable Note Indenture"). The Redeemable
Note Indenture prohibits OAC from incurring or issuing debt, other than certain
permitted indebtedness ("Permitted Indebtedness"), if certain financial tests
are not satisfied. One such test requires that the ratio of adjusted Funds From
Operations ("FFO") to adjusted fixed charges for the previous four fiscal
quarters exceeds 1.25 to 1.00. Given that adjusted FFO to adjusted fixed charges
for the four quarters ended December 31, 1999 was 0.56, OCN does not expect this
financial test to be satisfied for some time to come. Permitted Indebtedness,
the incurrence of which is not limited under the Redeemable Note Indenture,
includes: (i) up to $150 million of debt that may be incurred under certain
warehouse lines of credit or mortgage loan repurchase agreements; (ii) match
funded debt that may be incurred by a special purpose, bankruptcy remote
subsidiary of OAC; (iii) renewals or refinancings of existing debt structured to
meet certain conditions; (iv) debt that may be incurred in hedge transactions;
(v) up to $10 million of capital lease and purchase money financing; and (vi) up
to $50 million of additional debt. OCN believes that OAC can meet its financing
needs from sources of Permitted Indebtedness during 2000 although there can be
no assurance that this will be the case. The Redeemable Note Indenture also
prohibits OAC from making certain restricted payments, including dividends. As
of December 31, 1999, OAC was not permitted to pay dividends under the
Redeemable Note Indenture.
NOTE 20: CAPITAL SECURITIES
In August 1997, Ocwen Capital Trust ("OCT") issued $125,000 of
10-7/8% Capital Securities (the "Capital Securities"). Proceeds from issuance of
the Capital Securities were invested in 10-7/8% Junior Subordinated Debentures
issued by 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
99
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
such distributions until OCT has sufficient funds available therefore.
Accumulated distributions payable on the Capital Securities amounted to $4,815
and $5,664 at December 31, 1999 and 1998, 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 an investment company event) at a
redemption price equal to the greater of (a) 100% of the principal amount
thereof or (b) the sum of the present values of the principal amount and premium
payable with respect to an optional redemption of such Junior Subordinated
Debentures on August 1, 2007, together with scheduled payments of interest from
the prepayment date to August 1, 2007, discounted to the prepayment date on a
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.
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 $4,041 and $4,187 at December 31, 1999 and
1998, respectively, and is included in other assets.
NOTE 21: BASIC AND DILUTED EARNINGS PER SHARE
Under SFAS No. 128, the Company is required to present both basic
and diluted EPS on the face of its statement of operations. Basic EPS excludes
common stock equivalents and is calculated by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares outstanding, including the dilutive potential common shares
related to outstanding stock options. In computing diluted net loss per share
for 1998, the conversion of common stock equivalents was not assumed as the
effect would be antidilutive.
100
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The following is a reconciliation of the calculation of basic EPS to diluted
EPS.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Net income (loss) ....................... $ 19,832 $ (1,200) $ 78,932
=========== ============ ===========
Basic EPS:
Weighted average shares of common stock.. 63,051,015 60,736,950 56,185,956
=========== ============ ===========
Basic EPS .......................... $ 0.31 $ (0.02) $ 1.40
=========== ============ ===========
Diluted EPS:
Weighted average shares of common stock.. 63,051,015 60,736,950 56,185,956
Effect of dilutive securities:
Stock options(1) ................... 39,267 -- 650,528
----------- ------------ -----------
63,090,282 60,736,950 56,836,484
=========== ============ ===========
Diluted EPS ........................ $ 0.31 $ (0.02) $ 1.39
=========== ============ ===========
</TABLE>
(1) Excludes the effect of 1,565,343 and 1,763,250 of options that are
antidilutive for 1999 and 1998, respectively.
NOTE 22: DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments for the purpose of
managing its exposure to adverse fluctuations in interest and foreign currency
exchange rates. While these hedging instruments are subject to fluctuations in
value, such fluctuations are generally offset by the change in value of the
underlying exposures being hedged.
When entering into these derivative financial instruments, it is the
Company's intent to account for them under current hedge accounting guidelines .
None of these instruments are entered into for trading purposes.
In certain instances, although the instruments are economic hedges
of the underlying risks, they do not meet the hedge accounting criteria. In
these instances, the gain or loss on the derivative financial instrument is
included in earnings.
Because interest rate futures, swaptions, put options and foreign
currency futures contracts are exchange traded, holders of these instruments
look to the exchange for performance under these contracts and not the entity
holding the offsetting futures contract, thereby minimizing the risk of
nonperformance under these contracts. The Company is exposed to credit loss in
the event of nonperformance by the counterparty to the interest and currency
swaps and controls this risk through credit monitoring procedures. The notional
principal amount does not represent the Company's exposure to credit loss.
INTEREST RATE MANAGEMENT
In managing its interest rate risk, the Company enters into interest
rate swaps ("interest swaps"). Under interest swaps, the Company agrees with
other parties to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by reference to an
agreed notional amount. The terms of the interest swaps provide for the Company
to receive a floating rate of interest based on the London Interbank Offered
Rate ("LIBOR") and to pay fixed interest rates. The interest rates swaps are
used to alter the interest rate on current LIBOR rate debt incurred to fund the
Company's acquisitions of real estate, subordinate and residual securities, and
securities sold under agreements to repurchase. The fair value of the interest
rate swaps are not recognized in the consolidated financial statements as the
swaps are accounted for on the accrual basis of accounting.
The Company is exposed to credit loss if: (i) the counterparties to
the interest rate swap do not perform and (ii) the floating interest rate
received by the Company exceeds the fixed interest rate paid by it. All of the
counterparties have long-term debt ratings of A+ or above by Standard and Poor's
and A1 or above by Moody's. Although a swap generally may not be sold or
transferred without the consent of the counterparty, management does not believe
that this consent would be withheld. Although none of the Company's interest
rate swaps are exchange-traded, there are a number of financial institutions
which enter into these types of transactions as part of their day-to-day
activities.
101
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The terms of the outstanding interest swaps at December 31, 1999,
are as follows. At December 31, 1998, the Company had no interest swaps
outstanding.
<TABLE>
<CAPTION>
Notional LIBOR Floating Rate
Maturity Amount Index Fixed Rate at End of Year Fair Value
--------------------------- ----------- ------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
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
=========== ==========
</TABLE>
The swaps had the effect of decreasing net interest income by $72,
$115, and $198 for the years ended December 31, 1999, 1998 and 1997,
respectively.
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.
Interest rate futures contracts are commitments to either purchase or sell
designated financial instruments at a future date for a specified price and may
be settled in cash or through delivery. U.S. Treasury futures have been sold by
the Company to economically hedge the risk of a reduction in the market value of
fixed rate mortgage loans and certain fixed rate mortgage-backed and related
securities available for sale in a rising interest rate environment. While
qualifying for hedge accounting the gain or loss on the futures contracts are
accounted for as an adjustment to the basis of the underlying hedged item.
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 December 31, 1999 are as
follows. At December 31, 1998, the Company had no interest rate futures
contracts outstanding.
<TABLE>
<CAPTION>
Notional Strike
Amount Maturity Price Fair Value
--------------- -------- ----------- ---------------
<S> <C> <C> <C> <C>
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>
The realized gains and (losses) on these financial instruments
included in earnings amounted to $208, $(5,819) and $(6,808) for the years ended
December 31, 1999, 1998 and 1997, respectively.
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. A European swaption is an option to
enter into an interest rate swap at a future date at a specific rate. A European
put option allows the Company to sell a specified quantity of an asset, at a
specified price at a specified date. While qualifying for hedge accounting, the
gain or loss on the swaptions and put options are deferred to be accounted for
as an adjustment to the basis of the underlying hedged item when it is incurred.
During the fourth quarter of 1999, these financial instruments ceased to qualify
for hedge accounting and gains or losses are included in earnings. The following
table sets forth the terms and values of these financial instruments at December
31, 1999. The Company held no such financial instruments at December 31, 1998.
<TABLE>
<CAPTION>
Notional Strike
Amount Maturity Rate/Price Fair Value
----------- -------- ---------- -----------
<S> <C> <C> <C> <C>
European 10-year treasury swaptions......................... $ 7,500 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>
The realized gains on these financial instruments included in
earnings amounted to $588 for the year ended December 31, 1999.
102
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The fair value of the interest rate swaps, the U.S. Treasury futures
and European swaptions and put options represent the estimated amount that the
Company would receive or pay to terminate these agreements taking into account
current interest rates. Market quotes are available for these agreements. The
following table summarizes the Company's use of interest rate risk management
instruments.
<TABLE>
<CAPTION>
Notional Amount
----------------------------------------------------------------------------------
Short U.S. Treasury
Eurodollar Futures Interest European Treasury European Treasury
Swaps Sold Short Rate Swaps Swaptions Put Options
------------ ------------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 36,860 $ 194,500 $ -- $ -- $ --
Purchases................................. -- 440,500 -- -- --
Maturities................................ (36,860) -- -- -- --
Terminations.............................. -- (635,000) -- -- --
------------ ------------- ------------ ---------- ----------
BALANCE, DECEMBER 31, 1998 -- -- -- -- --
Purchases(1).............................. -- 244,000 200,780 20,400 13,200
Maturities................................ -- (14,000) -- (2,000) (10,700)
Terminations.............................. -- (211,000) -- -- --
------------ ------------- ------------ ---------- ----------
BALANCE, DECEMBER 31, 1999 $ -- $ 19,000 $ 200,780 $ 18,400 $ 2,500
============ ============= ============ ========== ==========
</TABLE>
(1) Purchases include $48,000 of U.S. Treasury futures sold short and
$200,780 of interest rate swaps acquired as a result of the OAC
acquisition.
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 Company has determined that the local currency of its previously
owned foreign subsidiary, Ocwen UK, its equity investment in Kensington, its
investment in UK residuals and its investment in the Nova Scotia Shopping
Center, is the functional currency. In accordance with SFAS No. 52, "Foreign
Currency Translation," assets and liabilities of a foreign entity denominated in
a foreign currency are translated into U.S. dollars at the current rate of
exchange existing at the statement of financial condition date and revenues and
expenses are translated at average monthly rates. The Company's foreign currency
derivative financial instruments qualify for hedge accounting. Accordingly, the
gains or losses are included in the net unrealized foreign currency translation
in accumulated other comprehensive income in stockholders' equity.
As a result of the acquisition of OAC, the Company acquired foreign
currency futures contracts ("currency futures") that hedge the currency exposure
related to the acquired investments in foreign subsidiaries which own UK
residuals and the Nova Scotia shopping center. Currency futures are commitments
to either purchase or sell foreign currency at a future date for a specified
price.
The Company entered into a foreign currency swap agreement
("currency swap") with a AAA-rated counterparty to hedge its equity investment
in Kensington. Under the terms of the currency swap, the Company will swap
(pound)27,500 for $43,546 in five years based on the exchange rate on the date
the contract became effective.
In addition, during 1998 the Company sold short currency futures to
further hedge its foreign currency exposure related to its equity investment in
Kensington. These currency futures were closed during January 1999.
Prior to the sale of Ocwen UK, the Company sold short foreign
currency futures contracts ("currency futures") to hedge its foreign currency
exposure related to its investment in Ocwen UK. Periodically, the Company
adjusted the amount of currency futures contracts it had entered into in
response to changes in its investment in Ocwen UK. In connection with the sale
of Ocwen UK, the currency futures were closed in October 1999.
103
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth the terms and values of these foreign
currency financial instruments at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Notional Amount
---------------------------- Contract Unamortized
Maturity Pay Receive Rate Discount Fair Value
-------- ------------- ---------- -------- ----------- ----------
DECEMBER 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Currency swaps................................ 2003 (pound)27,500 $ 43,546 1.5835 $ 1,119 $ (976)
============= ========== ========= ========
DECEMBER 31, 1998:
Currency swaps................................ 2003 (pound)27,500 $ 43,546 1.5835 $ 1,562 $ (2,096)
============= ========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Maturity Notional Amount Strike Rate Fair Value
-------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999:
Canadian Dollar currency futures.............. 2000 C$ 22,100 .6786 $ (300)
2000 1,600 .6796 (20)
-------------
British Pound currency futures................ 2000 (pound) 3,750 1.6005 65
2000 15,875 1.6225 56
---------
$ 199
=========
DECEMBER 31, 1998:
British Pound currency futures................ 1999 (pound) 938 1.6500 $ (6)
1999 (pound)26,563 1.6500 (181)
---------
$ (187)
=========
</TABLE>
On January 1, 1999, eleven of the fifteen member countries of the
European Union converted to a common currency (the "Euro"). Since such time
transactions have been conducted using either the Euro or the countries'
existing currencies. The Euro conversion had no effect on the Company's
financial condition or results of operations.
NOTE 23: INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income (loss) before extraordinary gain ...................... $ 2,608 $(30,699) $ 21,309
Benefit of tax deduction in excess of amounts recognized
for financial reporting purposes related to employee
stock options reflected in stockholders' equity ....... (8) (2,398) (1,965)
Benefit of tax deduction in excess of amounts recognized
for financial reporting purposes related to director
restricted stock reflected in stockholders' equity ..... (13) (13) --
-------- -------- --------
$ 2,587 $(33,110) $ 19,344
======== ======== ========
</TABLE>
104
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
The components of income tax expense (benefit) attributable to
income before extraordinary gain were as follows:
Years Ended December 31,
-----------------------------------------
1999 1998 1997
-------- -------- --------
CURRENT:
Federal ....................... $ 33,930 $(11,668) $ 42,482
State ......................... 3,293 4,608 3,579
-------- -------- --------
37,223 (7,060) 46,061
-------- -------- --------
DEFERRED:
Federal ....................... (39,234) (27,443) (23,085)
Foreign ....................... 5,987 5,995 --
State ......................... (1,368) (2,191) (1,667)
-------- -------- --------
(34,615) (23,639) (24,752)
-------- -------- --------
Total ......................... $ 2,608 $(30,699) $ 21,309
======== ======== ========
Income tax expense differs from the amounts computed by applying the
U.S. Federal corporate income tax rate of 35% as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Expected income tax expense at statutory rate.................. $ 5,187 $ (11,328) $ 34,838
Differences between expected and actual tax:
Excess of cost over net assets acquired, net................ 1,249 19 (30)
Tax effect of utilization of net operating loss............. -- (3,003) (906)
State tax (after Federal tax benefit)....................... 1,251 1,571 1,243
Low-income housing tax credits.............................. (18,242) (17,666) (14,881)
Sale of Ocwen UK............................................ 9,730 -- --
OAC loss not included in OCN consolidated tax group......... 223 -- --
Deferred tax asset valuation allowance...................... 2,500 -- --
Adjustments resulting from IRS audit........................ -- -- 921
Other....................................................... 710 (292) 124
---------- ---------- ----------
Actual income tax (benefit) expense....................... $ 2,608 $ (30,699) $ 21,309
========== ========== ==========
</TABLE>
For taxable years beginning prior to January 1, 1996, a savings
institution that met certain definitional tests relating to the composition of
its assets and the sources of its income (a "qualifying savings institution")
was permitted to establish reserves for bad debts and make annual additions
thereto under the experience method. Alternatively, a qualifying savings
institution could elect, on an annual basis, to use the percentage of taxable
income method to compute its allowable addition to its bad debt reserve on
qualifying real property loans (generally loans secured by an interest in
improved real estate). The applicable percentage was 8% for tax periods after
1987. The Bank utilized the percentage of taxable income method for these years.
On August 20, 1996, President Clinton signed the Small Business Job
Protection Act (the "Act") into law. One provision of the Act repealed the
reserve method of accounting for bad debts for savings institutions effective
for taxable years beginning after 1995. The Bank, therefore, was required to use
the specific charge-off method on its 1996 and subsequent federal income tax
returns. The Bank will be required to recapture its "applicable excess
reserves," which are its federal tax bad debt reserves in excess of the base
year reserve amount described in the following paragraph. The Bank will include
one-sixth of its applicable excess reserves in taxable income in each year from
1996 through 2001. As of December 31, 1995, the Bank had approximately $42,400
of applicable excess reserves. As of December 31, 1996, the Bank had fully
provided for the tax related to this recapture.
The base year reserves will continue to be subject to recapture and
the Bank could be required to recognize a tax liability if: (1) the Bank fails
to qualify as a "bank" for federal income tax purposes, (2) certain
distributions are made with respect to the stock of the Bank, (3) the bad debt
reserves are used for any purpose other than to absorb bad debt losses, or (4)
there is a change in federal tax law. The enactment of this legislation is
expected to have no material impact on the Bank's or the Company's operations or
financial position.
105
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
In accordance with SFAS No. 109, "Accounting for Income Taxes," a
deferred tax liability has not been recognized for the tax bad debt base year
reserves of the Bank. The base year reserves are generally the balance of
reserves as of December 31, 1987, reduced proportionately for reductions in the
Bank's loan portfolio between that date and December 31, 1995. At December 31,
1999 and 1998, the amount of those reserves was approximately $5,700. This
reserve could be recognized in the future under the conditions described in the
preceding paragraph.
The net deferred tax asset was comprised of the following as of:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
--------- -------
<S> <C> <C>
DEFERRED TAX ASSETS:
Tax residuals and deferred income on tax residuals ..... $ 2,438 $ 5,328
State taxes ............................................ 2,654 2,511
Application of purchase accounting ..................... 1,697 127
Accrued profit sharing ................................. 5,710 3,861
Accrued other liabilities .............................. 365 773
Interest expense related to discount loan portfolio .... 13,728 12,554
Valuation allowance on real estate owned ............... 5,969 3,828
Gain on loan foreclosure ............................... 12,308 6,246
Bad debt and allowance for loan losses ................. 11,923 7,857
Impairment on securities available for sale ............ 69,333 16,308
Mortgage servicing rights impairment and amortization .. 1,540 787
Goodwill impairment and amortization ................... 84 3,521
Foreign currency exchange .............................. 1,068 --
Capital loss carryforward .............................. 4,160 --
Net U.S. tax benefit on undistributed foreign income ... 3,050 --
Contingent interest income on equity participation loans 1,757 2,673
Impairment on real estate investments .................. -- 4,978
Partnership losses and low-income housing tax credits .. 35,896 7,113
Foreign currency translation adjustments ............... 398 912
Other .................................................. 13,591 2,068
--------- -------
187,669 81,445
--------- -------
DEFERRED TAX LIABILITIES:
Net U.S. tax on undistributed foreign income ........... -- 784
Deferred interest income on discount loan portfolio .... 6,647 4,698
Research and development cost .......................... 1,823 --
Unrealized gain on securities available for sale ....... 123 7,894
Other .................................................. 783 1,094
--------- -------
9,376 14,470
--------- -------
178,293 66,975
Deferred tax asset valuation allowance .................... (41,373) --
--------- -------
Net deferred tax assets ................................... $ 136,920 $66,975
========= =======
</TABLE>
Deferred tax assets, net of deferred fees, include tax residuals
which result from the ownership of Real Estate Mortgage Investment Conduits
("REMIC"). While a tax residual is anticipated to have little or no future cash
flows from the REMIC from which it has been issued, the tax residual does bear
the income tax liability and benefit resulting from the annual differences
between the interest paid on the debt instruments issued by the REMIC and the
interest received on the mortgage loans held by the REMIC. Typically this
difference generates taxable income to the Company in the first several years of
the REMIC and equal amounts of tax losses thereafter, thus resulting in the
deferred tax asset.
International Hotel Group ("IHG"), a wholly-owned subsidiary of IMI,
and IHG's subsidiaries had at December 31, 1999, approximately $1,079 of
Separate Return Limitation Year ("SRLY") net operating loss carryforwards. The
SRLY net operating loss
106
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
carryforward can only offset the future taxable income of IHG and its
subsidiaries. The $1,079 operating loss carryforward will expire, if unused, in
the year 2008. At December 31, 1999, the Company had tax credit carryforwards of
$11.2 million related to low-income housing tax credits.
As discussed further in the following paragraphs, as of December 31,
1999, the Company had a deferred tax asset valuation allowance totaling $41,373.
This allowance is comprised of $38,873 relating to built-in loss limitations
arising from the acquisition of OAC, and $2,500 relating to management's
evaluation of the future realization of the deferred tax asset.
Management conducts periodic evaluations to determine whether it is
more likely than not that the deferred tax asset can be realized in future
periods. Among the factors considered in this evaluation are estimates of future
earnings, the future reversal of temporary differences and the impact of tax
planning strategies that can be implemented if warranted. As a result of this
evaluation, the Company included in its tax provision an increase of $2,500 to
its valuation allowance.
Prior to the acquisition of OAC, OAC was a REIT for federal tax
purposes and will file a REIT federal income tax return through October 20,
1999. OAC will be included in the Company's consolidated federal income tax
return beginning on October 21, 1999. OAC had at October 6, 1999, approximately
$131,567 of net unrealized built-in losses. Any such loss recognized within the
five-year period beginning on October 7, 1999 (the "recognition period") is
treated as a pre-change loss and, as such, is subject to an annual limit as to
the amount which may offset the taxable income of the Company and its
subsidiaries ("the IRC section 382 limitation"). A net unrealized built-in loss
is an amount by which the tax basis of the corporation's assets at the time of
the change in ownership exceeds the aggregate fair market value of those assets
at that time. The IRC section 382 limitation is determined by multiplying the
value of OAC's stock by the federal long-term tax-exempt rate and amounts to
approximately $5,300. If a deduction is denied for any recognized built-in loss
in any post-change year, the loss is carried forward to subsequent years under
rules similar to the standard loss carryforward rules. As a result of these
limitations, a corresponding deferred tax asset valuation allowance was
established at acquisition date as part of purchase accounting in the amount of
$38,873.
NOTE 24: EMPLOYEE BENEFIT AND COMPENSATION PLANS
The Company maintains a defined contribution plan to provide
postretirement benefits to eligible employees. The Company also adopted a number
of compensation plans for certain employees. These plans were designed to
facilitate a pay-for-performance policy, further align the interests of officers
and key employees with the interests of the Company's shareholders and assist in
the attraction and retention of employees vital to the Company's long-term
success. These plans are summarized below.
RETIREMENT PLAN
The Company maintains a defined contribution 401(k) plan. The
Company matches 50% of each employee's contributions, limited to 2% of the
employee's compensation. The Company's contributions to the 401(k) plan in the
years ended December 31, 1999, 1998, and 1997, were $702, $611, and $368,
respectively.
In connection with its acquisition of Berkeley Federal Savings Bank
in June 1993, the Bank assumed the obligations under a noncontributory defined
benefit pension plan (the "Plan") covering substantially all employees upon
their eligibility under the terms of the Plan. The Plan was frozen after the
plan year ended December 31, 1993, and has been fully funded.
ANNUAL INCENTIVE PLAN
In May 1998, the Company's shareholders approved the Ocwen Financial
Corporate 1998 Annual Incentive Plan (the "AIP") to replace the Company's former
annual incentive plan. Participation in the AIP is limited to officers and other
key employees of the Company and designated subsidiaries that are selected by
the AIP Committee. Performance targets are established based on the achievement
of specified levels of increases in net earnings, return in equity, average net
equity used or growth in assets, as well as individual participant performance
targets. Awards under the AIP are based on achieving the performance targets and
are paid in cash or a combination of cash and non-qualified stock options to
purchase OCN's common stock. Such non-qualified stock options are granted
pursuant to the Ocwen Financial Corporation Non-Qualified Stock Option Plan.
107
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
Stock options awarded to key employees under the AIP (both the 1998
plan and former plan) to purchase shares of OCN common stock are summarized as
follows.
<TABLE>
<CAPTION>
Options Exercise Options Forfeited or Options
Granted Price Exercised Repurchased Vested
--------- ---------- --------- ------------ -------
<S> <C> <C> <C> <C> <C>
1995...................................... 594,760 $ 2.880 223,919 281,841 89,000
1995...................................... 14,220 0.472 10,137 4,083 --
1996...................................... 1,147,370 11.000 174,573 395,953 576,844
1997...................................... 1,083,794 20.350 -- 237,034 846,760
1998...................................... 80,000 24.875 -- 80,000 --
1998...................................... 181,945 12.313 -- 40,206 47,246
1999...................................... 358,858 6.250 -- -- --
</TABLE>
Stock options awarded under the AIP prior to 1998 have a one-year
vesting period. Stock options awarded under the AIP in 1998 and 1999 vest
ratably over a three-year period. The difference, if any, between the fair
market value of the stock at the date of grant and the exercise price is treated
as compensation expense. There was no compensation for the year ended December
31, 1999 and 1998 related to options granted. Included in compensation expense
for the year ended December 31, 1997 is $5,514 related to options granted.
LONG-TERM INCENTIVE PLAN
In May 1998 the Company's shareholders approved the Ocwen Financial
Corporation Long-Term Incentive Plan (the "LIP"). Participation in the LIP is
limited to officers and other key employees of the Company and designated
subsidiaries that are selected by the LIP Administrator. The LIP provides for
the grant of basis points to participants. In connection with this grant, the
LIP Administrator has established a five-year performance cycle as well as
Company and individual participant performance targets for such period. At the
end of the performance cycle, the Company is to determine the value of the Basis
Points held by each participant based on the extent to which the related
performance targets are achieved and is to pay each participant their respective
value in restricted common stock of the Company. The number of shares received
is to be determined based on the fair market value, as defined, of the common
stock on the last day of the performance cycle. The restricted stock issued to
participants is to vest over a five-year period and, upon vesting, certificates
representing the shares are to be held by the Company in a nonqualified
irrevocable trust established by the Company for the benefit of the participant
and is to be issued to participants in 20% increments in each year over a
five-year pay-out period. While the shares are held by the Company, the
participant is to have all the rights of a shareholder, including the right to
vote except that (i) the participant will not be entitled to receive a
certificate representing the shares and (ii) the shares may not be transferred,
sold, assigned, pledged or otherwise encumbered. Any cash dividends paid on
common stock are to be reinvested to purchase additional shares of common stock,
subject to the same restrictions that apply to restricted stock. Compensation
expense of $3,645 and $2,369 was recorded in 1999 and 1998, respectively, for
future distributions under the Plan.
108
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA EFFECT OF SFAS NO. 123
In accordance with the provisions of SFAS No. 123, the Company has
retained its current accounting method for its stock-based employee compensation
plans under the provisions of APB 25. However, entities continuing to apply APB
25 are required to disclose pro forma net income and earnings per share as if
the fair value method of accounting for stock-based employee compensation plans
as prescribed by SFAS No. 123 had been utilized. The following is a summary of
the Company's pro forma information:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss), as reported........................................... $ 19,832 $ (1,200) $ 78,932
Pro forma net income (loss).............................................. $ 18,917 $ (2,638) $ 72,668
Earnings per share, as reported:
Basic................................................................. $ 0.31 $ (0.02) $ 1.40
Diluted............................................................... $ 0.31 $ (0.02) $ 1.39
Pro forma earnings per share:
Basic................................................................. $ 0.30 $ (0.04) $ 1.29
Diluted............................................................... $ 0.30 $ (0.04) $ 1.28
The fair value of the option grants were estimated using the
Black-Scholes option-pricing model with the following assumptions:
Years Ended December 31,
--------------------------------------------
1999 1998 1997
-------- -------- --------
Expected dividend yield.................................................. 0.00% 0.00% 0.00%
Expected stock price volatility.......................................... 47.00% 57.00% 48.00%
Risk-free interest rate.................................................. 6.34% 4.54% 5.71%
Expected life of options................................................. 5 years 5 years 5 years
</TABLE>
NOTE 25: STOCKHOLDERS' EQUITY
On October 7, 1999, as a result of the Company's acquisition of OAC,
the Company issued to OAC shareholders (except for OCN or its subsidiaries) 0.71
shares of OCN stock for each outstanding share of OAC common stock, or a total
of 12,371,750 shares. See Note 2.
On April 16, 1999, the Company announced that its Board of Directors
authorized the repurchase of up to six million of its issued and outstanding
shares of common stock. As of December 31, 1999, the Company had repurchased
4,611,700 shares at an average price of $6.61 per share.
On October 29, 1997, the Company's Board of Directors approved a
2-for-1 stock split of its issued and outstanding common stock. The stock split
was effected through the distribution of authorized but unissued shares of its
common stock on November 20, 1997, to holders of record of its common stock at
the close of business on November 12, 1997. All references in the consolidated
financial statements to the number of shares and per share amounts have been
adjusted retroactively for the recapitalization and the stock splits.
On August 12, 1997, the Company completed a secondary stock offering
to the public of 6,900,000 shares which resulted in net proceeds of $141,898.
Effective August 1, 1997, shares of the Company's common stock began trading on
the New York Stock Exchange ("NYSE") under the symbol "OCN." Upon effectiveness
of the NYSE listing, the Company delisted its common stock from NASDAQ.
NOTE 26: 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
109
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
approval of a capital plan and can be subject to a capital directive and certain
restrictions on its operations. At December 31, 1999, the minimum regulatory
capital requirements were:
o Tangible and core capital of 1.50 percent and 3.00 percent of total
adjusted assets, respectively, consisting principally of stockholders'
equity, but excluding most intangible assets, such as goodwill and any
net unrealized gains or losses on debt securities available for sale.
o Risk-based capital consisting of core capital plus certain subordinated
debt and other capital instruments and, subject to certain limitations,
general valuation allowances on loans receivable, equal to 8.00 percent
of the value of risk-weighted assets.
At December 31, 1999 and 1998, the Bank was "well capitalized" under
the prompt corrective action ("PCA") regulations adopted by the OTS pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To
be categorized as "well capitalized," the Bank must maintain minimum core
capital, Tier 1 risk-based capital and 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 December 31, 1999 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.
The following tables summarize the Bank's actual and required
regulatory capital at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
To Be Well
Capitalized Committed
Minimum For Capital For Prompt Corrective Capital
DECEMBER 31, 1999 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.. 11.33% $ 261,014
Net unrealized loss on certain available for
sale securities............................... 601
----------
Non-includable subsidiary........................ (12,013)
Acquired real estate............................. (4,631)
Excess mortgage servicing rights................. (969)
----------
Tangible capital, and ratio to adjusted total
assets........................................ 10.67% $ 244,002 1.50% $ 34,287
========== =========
Tier 1 (core) capital, and ratio to adjusted
total assets.................................. 10.67% $ 244,002 3.00% $ 68,573 5.00% $ 114,289 9.00%
========== ========= =========
Tier 1 capital, and ratio to risk-weighted
assets........................................ 14.02% $ 244,002 6.00% $ 104,426
========== =========
Allowance for loan and lease losses.............. 21,783
Subordinated debentures.......................... 67,000
----------
Tier 2 Capital................................... 88,783
----------
Total risk-based capital, and ratio to risk-
weighted assets............................... 19.12% $ 332,785 8.00% $ 139,235 10.00% $ 174,043 13.00%
========== ========= =========
Total regulatory assets.......................... $2,302,793
==========
Adjusted total assets............................ $2,285,781
==========
Risk-weighted assets............................. $1,740,436
==========
</TABLE>
110
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
To Be Well
Capitalized Committed
Minimum For Capital For Prompt Corrective Capital
DECEMBER 31, 1998 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 9.30% $ 241,419
Net unrealized gain on certain available for
sale securities........................... (303)
----------
Non-includable subsidiary................. (6,030)
Excess mortgage servicing rights............. (411)
----------
Tangible capital, and ratio to adjusted total
assets.................................... 9.07% $ 234,675 1.50% $ 38,821
========== =========
Tier 1 (core) capital, and ratio to adjusted
total assets.............................. 9.07% $ 234,675 3.00% $ 77,641 5.00% $ 129,402 9.00%
========== ========= =========
Tier 1 capital, and ratio to risk-weighted
assets.................................... 11.71% $ 234,675 6.00% $ 120,221
========== =========
Allowance for loan and lease losses.......... 25,047
Subordinated debentures...................... 100,000
----------
Tier 2 Capital............................... 125,047
----------
Low-level recourse reduction................. (13,897)
----------
Total risk-based capital, and ratio to risk-
weighted assets........................... 17.26% $ 345,825 8.00% $ 160,295 10.00% $ 200,368 13.00%
========== ========= =========
Total regulatory assets...................... $2,594,792
==========
Adjusted total assets........................ $2,588,048
==========
Risk-weighted assets......................... $2,003,684
==========
</TABLE>
The OTS has promulgated a regulation governing capital
distributions. The Bank is considered to be a Tier 1 association under this
regulation because it met or exceeded its fully phased-in capital requirements
at December 31, 1996. A Tier 1 association that before and after a proposed
capital distribution meets or exceeds its fully phased-in capital requirements
may make capital distributions during any calendar year equal to the greater of
(i) 100% of net income for the calendar year to date plus 50% of its "surplus
capital ratio" at the beginning of the year or (ii) 75% of its net income over
the most recent four-quarter period. In order to make these capital
distributions, the Bank must submit written notice to the OTS 30 days in advance
of making the distribution.
The OTS published amendments to its capital distribution regulation
effective April 1, 1999. Under the revised regulation, the Bank is required to
file either an application or a notice with the OTS at least 30 days prior to
making a capital distribution. The OTS may deny the Bank's application or
disapprove its notice if the OTS determines that (a) the Bank will be
"undercapitalized," "significantly undercapitalized" or "critically under
capitalized," as defined in the OTS capital regulations, following the capital
distribution, (b) the proposed capital distribution raises safety and soundness
concerns or (c) the proposed capital distribution violates a prohibition
contained in any statute, regulation or agreement between the Bank and the OTS
or a condition imposed on the Bank in an application or notice approved by the
OTS.
In addition to these OTS regulations governing capital
distributions, the indenture governing the 12% subordinated debentures the
("Debentures") due 2005 and issued by the Bank on June 12, 1995 in the original
amount of $100,000, limits the declaration or payment of dividends and the
purchase or redemption of common or preferred stock in the aggregate to the sum
of 50% of consolidated net income and 100% of all capital contributions and
proceeds from the issuance or sale (other than to a subsidiary) of common stock,
since the date the Debentures were issued (see Note 19).
111
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 27: OTHER INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Gain on sale of Ocwen UK............................. $ 50,371 $ -- $ --
Brokerage commissions (Ocwen UK)..................... 12,896 9,959 --
Gain on sale of low-income housing tax credit
interests.......................................... 6,591 7,366 6,053
Management fees (OAC)................................ 4,503 5,955 1,788
Software revenue (OTX)............................... 2,043 1,709 --
Gain on sale of real estate.......................... 1,753 10,383 --
Other................................................ 5,463 4,324 657
----------- ----------- -----------
$ 83,620 $ 39,696 $ 8,498
=========== =========== ===========
NOTE 28: OTHER OPERATING EXPENSES
Years Ended December 31,
----------------------------------------------
1999 1998 1997
----------- ----------- -----------
Professional fees (primarily consulting, legal and $ 10,524 $ 14,353 $ 4,556
auditing)..........................................
Marketing............................................ 5,556 5,246 774
Travel, lodging, meals and entertainment............. 4,107 4,573 2,636
FDIC insurance....................................... 1,832 1,867 1,593
Amortization of offering costs....................... 1,291 1,381 1,302
Amortization of capitalized software costs........... 1,310 933 --
Conferences and seminars............................. 772 1,117 666
Investment and treasury services..................... 448 694 269
Corporate insurance.................................. 716 608 611
Deposit related expenses............................. 406 420 255
OTS assessments and fees............................. 683 400 375
Due diligence costs.................................. 196 315 1,977
Other................................................ 3,549 (21) 3,645
----------- ----------- -----------
$ 31,390 $ 31,886 $ 18,659
=========== =========== ===========
</TABLE>
112
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 29: BUSINESS SEGMENT REPORTING
SFAS No. 131 requires public enterprises to report financial and
descriptive information about its reportable operating segments. Operating
segments are defined as components of an enterprise that (a) 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. An operating segment may engage in business activities for which it
has yet to earn revenues. The Company conducts a variety of business activities
within the following segments:
<TABLE>
<CAPTION>
Net Interest Non-Interest Non-Interest Net (Loss) Total
Income Income Expense Income Assets
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
Discount loans:
Single family residential loans...................... $ 25,189 $ (12,552) $ 15,989 $ (10,996) $ 596,400
Commercial real estate loans......................... 37,432 16,377 20,448 14,747 841,307
--------- --------- --------- --------- ----------
62,621 3,825 36,437 3,751 1,437,707
Domestic residential mortgage loan servicing........... 5,630 58,976 42,626 12,939 219,188
Investment in low-income housing tax credits........... (10,472) 10,013 12,364 8,960 185,346
Commercial real estate lending......................... 10,675 211 3,190 5,630 13,580
UK operations.......................................... 21,964 85,097 36,691 36,429 34,869
OTX 22 2,838 22,050 (19,190) 26,702
Domestic subprime single family residential lending.... 10,560 (27,391) 12,000 (18,234) 109,793
Investment securities.................................. 3,022 (1,628) 4,822 (3,874) 9,334
OAC 2,777 7,497 4,855 365 691,323
Unsecured collections.................................. 477 18 6,111 (4,110) 16,401
Corporate items and other.............................. (9,594) 6,263 14,999 (2,834) 565,070
--------- --------- --------- --------- ----------
$ 97,682 $ 145,719 $ 196,145 $ 19,832 $ 3,309,313
========= ========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Net Interest Non-Interest Non-Interest Net (Loss) Total
Income Income Expense Income Assets
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Discount loans:
Single family residential loans .................. $ 22,761 $ 35,523 $ 17,606 $ 15,444 661,647
Commercial real estate loans ..................... 58,368 39,120 23,357 37,001 748,204
---------- ---------- ---------- ---------- ----------
81,129 74,643 40,963 52,445 1,409,851
Domestic residential mortgage loan servicing ........ 6,604 46,751 39,946 8,148 76,079
Investment in low-income housing tax credits ........ (8,246) 9,137 11,498 9,662 200,566
Commercial real estate lending ...................... 16,066 10,409 4,491 13,549 74,439
UK operations ....................................... 12,045 48,159 41,772 12,246 298,198
OTX ................................................. 5 1,711 11,335 (9,619) 21,659
Domestic subprime single family residential lending.. 14,080 5,807 52,381 (21,951) 158,676
Investment securities ............................... (214) (85,031) 5,184 (59,281) 384,779
OAC ................................................. -- 5,872 7,529 (9,750) 43,216
Unsecured collections ............................... 75 -- 2,130 (1,036) 8,254
Corporate items and other ........................... 1,257 (4,275) 11,033 4,387 651,391
---------- ---------- ---------- ---------- ----------
$ 122,801 $ 113,183 $ 228,262 $ (1,200) 3,327,108
========== ========== ========== ========== ==========
</TABLE>
113
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Net Interest Non-Interest Non-Interest Net (Loss) Total
Income Income Expense Income Assets
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Discount loans:
Single family residential loans .................. $ 16,099 $ 45,768 $ 12,848 $ 25,100 $ 903,539
Commercial real estate loans ..................... 57,630 21,575 16,788 28,398 870,465
----------- ----------- ----------- ----------- -----------
73,729 67,343 29,636 53,498 1,774,004
Domestic residential mortgage loan servicing ........ 2,718 25,021 29,163 (954) 14,334
Investment in low-income housing tax credits ........ (4,178) 6,113 9,241 11,300 168,567
Commercial real estate lending ...................... 27,520 (207) 4,967 11,545 230,682
UK operations ....................................... -- -- -- -- --
OTX ................................................. -- (2) 389 (391) 5,117
Domestic subprime single family residential lending.. 7,159 18,457 24,694 1,841 224,859
Investment securities ............................... 4,581 5,209 2,147 2,894 344,544
OAC ................................................. -- 1,779 1,527 153 1,129
Unsecured collections ............................... -- -- 112 185 4
Corporate items and other ........................... 4,713 236 24,998 (1,139) 305,061
----------- ----------- ----------- ----------- -----------
$ 116,242 $ 123,949 $ 126,874 $ 78,932 3,068,301
=========== =========== =========== =========== ===========
</TABLE>
The Company's discount loan activities include asset acquisition and
resolution of single family residential, large commercial and small commercial
loans and the related real estate owned. Investment in low-income housing tax
credits includes the Company's investments, primarily through limited
partnerships, in qualified low-income rental housing for the purpose of
obtaining Federal income tax credits pursuant to Section 42 of the Code.
Low-income housing tax credits and benefits of $18,242, $17,666, and $14,881 are
included as credits against income tax expense for the years ended December 31,
1999, 1998, and 1997, respectively. Commercial real estate lending includes the
Company's origination of multi-family and commercial real estate loans held for
investment, is a business which the Company ceased in 1999. Domestic subprime
single residential family lending includes the Company's acquisition and
origination of single family residential loans to non-conforming borrowers,
which are recorded as available for sale. In August 1999, the Company closed its
domestic subprime origination business, which had been conducted primarily
through OFS. Domestic residential mortgage loan servicing includes the Company's
fee-for-services business of providing loan servicing, including asset
management and resolution services, to third-party owners of non-performing,
underperforming and subprime assets. UK operations include the Company's equity
investment in Kensington, as well as the activities of the Company's previously
owned subsidiary, Ocwen UK, which was sold on September 30, 1999. Ocwen UK was
primarily engaged in the origination and servicing of subprime loans in the
United Kingdom. OTX, which was formed in 1998, develops and markets advanced
software solutions for mortgage and real estate transactions, including
residential and commercial mortgage servicing systems. Investment securities
includes the results of the securities portfolio, whether available for sale or
investment, other than subprime residuals and subordinate interests related to
the Company's securitization activities which have been included in the related
business activity. OAC is a real estate investment company which has invested in
several categories of real estate and related assets, including subordinate
interests in commercial and residential mortgage-backed securities and
distressed commercial and multi-family real properties. Unsecured collections is
primarily comprised of activities related to the Company's charged-off unsecured
credit card receivables, which were acquired at a discount. Corporate items and
other consist primarily of individually insignificant business activities,
amounts not allocated to the operating segments, distributions on the Capital
Securities, transfer pricing mismatches and other general corporate expenses.
Interest income and expense have been allocated to each business
segment for the investment of funds raised or funding of investments made taking
into consideration the duration of such liabilities or assets. Allocations of
non-interest expense generated by corporate support services were made to each
business segment based upon management's estimate of time and effort spent in
the respective activity. Income taxes are allocated to each business segment
based on the Company's statutory tax rate, exclusive of low-income housing tax
credit interests. As such, the resulting amounts represent estimates of the
contribution of each business activity to the Company.
114
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 30: COMMITMENTS AND CONTINGENCIES
Certain premises are leased under various noncancellable operating leases with
terms expiring at various times through 2007, exclusive of renewal option
periods. The annual aggregate minimum rental commitments under these leases are
summarized as follows:
2000.......................................... $ 4,370
2001.......................................... 4,084
2002.......................................... 3,995
2003.......................................... 3,623
2004.......................................... 3,507
Thereafter.................................... 1,343
----------
Minimum lease payments ....................... $ 20,922
==========
Rent expense for the years ended December 31, 1999, 1998 and 1997
was $6,101, $6,410 and $2,877, respectively.
At December 31, 1999, the Company had $3,386 of commitments
remaining to fund previously originated loans secured by multi-family
residential buildings and $22,599 of commitments remaining to fund construction
loans secured by multi-family and commercial properties. In addition, the
Company through the Bank had commitments under outstanding letters of credit in
the amount of $30,205. The Company, through its investment in subordinated
securities and subprime residuals, which had a carrying value of $195,131 at
December 31, 1999, 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 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 OPLP in the Circuit Court of Cook County, Illinois. Walton has
alleged that OAC committed an anticipatory breach of contract with respect to
the proposed sale by OAC of all of its interest in its commercial
mortgage-backed securities portfolio to Walton. Walton has claimed damages in an
amount in excess of $20 million. OAC believes this suit is without merit and
continues to vigorously defend against the same.
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.
115
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 31: PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Assets:
Cash and cash equivalents................................................................ $ 77,197 $ 32,516
Investment in bank subsidiary............................................................ 247,093 230,720
Investments in non-bank subsidiaries..................................................... 316,708 328,179
Investment in unconsolidated entity...................................................... 36,216 46,586
Loan portfolio, net...................................................................... 405 2,484
Discount loan portfolio, net............................................................. 16,397 6,876
Income taxes receivable.................................................................. 14,556 35,321
Deferred tax asset....................................................................... 44,313 19,780
Other assets............................................................................. 3,483 4,945
----------- -----------
$ 756,368 $ 707,407
=========== ===========
Liabilities and Stockholders' Equity:
Notes payable............................................................................ $ 228,850 $ 250,000
Other liabilities........................................................................ 18,076 21,031
----------- -----------
Total liabilities................................................................... 246,926 271,031
Stockholders' equity..................................................................... 509,442 436,376
----------- -----------
$ 756,368 $ 707,407
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
----------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest income......................................................... $ 2,510 $ 11,534 $ 9,416
Interest expense........................................................ (29,846) (33,178) (20,367)
Non-interest income (loss).............................................. 51,079 (3,073) (1,240)
Impairment charges on securities available for sale..................... -- (45,737) --
Non-interest expense.................................................... (8,760) (5,004) (3,401)
Equity in (losses) earnings in unconsolidated entities.................. (9,154) 439 --
----------- ----------- -----------
Income (loss) before income taxes and extraordinary gain........... 5,829 (68,873) (15,592)
Income tax benefit...................................................... 3,990 42,942 5,083
----------- ----------- -----------
Income (loss) before equity in net income of subsidiaries and .....
extraordinary gain...................................................... 9,819 (25,931) (10,509)
Equity in net income of bank subsidiary................................. 45,166 55,714 82,420
Equity in net (loss) income of non-bank subsidiaries.................... (35,580) (30,983) 7,021
Extraordinary gain on repurchase of debt, net of tax.................... 427 -- --
----------- ----------- -----------
Net income (loss)....................................................... $ 19,832 $ (1,200) $ 78,932
=========== =========== ===========
</TABLE>
116
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................ $ 19,832 $ (1,200) $ 78,932
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Equity in income of bank subsidiary ....................... (45,166) (56,124) (88,598)
Equity in loss of non-bank subsidiaries ................... 35,580 38,107 459
Equity in loss (income) of unconsolidated entity, net ..... 9,154 (439) --
Premium amortization, net ................................. (5,913) 18,383 11,467
Provision for loan losses ................................. 1,177 162 --
Loss on interest-earning assets ........................... -- 44,998 --
Gain on sale of real estate held for investment ........... -- (2,389) --
Gain on sale of Ocwen UK .................................. (50,371) -- --
Increase in deferred tax assets ........................... (24,533) (13,144) (6,830)
Decrease (increase) in other assets ....................... 6,982 1,151 (4,658)
Decrease (increase) in income taxes receivable ............ 20,765 (21,582) (3,736)
(Decrease) increase in accrued expenses, payables
and other liabilities ................................... (2,955) 6,023 9,970
--------- --------- ---------
Net cash (used) provided by operating activities .......... (35,448) 11,644 (2,994)
--------- --------- ---------
Cash flows from investing activities:
Purchase of securities available for sale ................. -- (34,755) (146,643)
Maturities of and principal payments received
on securities available for sale ........................ -- 8 579
--------- --------- ---------
Net distributions from bank subsidiary .................... 955 96,189 37,291
Net investments in non-bank subsidiaries .................. (2,799) (203,241) (87,603)
Proceeds from sale of Ocwen UK ............................ 122,101 -- --
Investment in unconsolidated entity ....................... -- (45,886) --
Proceeds from sales of securities available for sale ...... -- 70,080 15,574
Principal payments received on loans held for investment .. 2,119 -- --
Principal payments received on discount loans ............. 17,596 -- --
Purchase of securities held for investment ................ -- -- (11,115)
Proceeds from sales of securities held for investment ..... -- 13,025 --
Purchase of discount loans ................................ (8,788) (2,557) (48,413)
Proceeds from sales of loans held for investment .......... -- 53,949 5,080
Proceeds from real estate held for investment ............. -- 13,064 --
Purchase of real estate held for investment ............... -- -- (995)
--------- --------- ---------
Net cash provided (used) by financing activities .......... 131,184 (40,124) (236,245)
--------- --------- ---------
Cash flows from financing activities:
(Repurchase) issuance of notes and debentures ............. (21,150) -- 120,738
Increase (decrease) in securities sold under
agreements to repurchase ................................ -- (3,075) 3,075
Repayments of loans to executive officers, net ............ 763 -- 3,832
Exercise of common stock options .......................... 23 7,931 3,037
Issuance of shares of communion stock ..................... -- 7,828 142,003
Repurchase of common stock options ........................ -- (6,502) (3,208)
Repurchase of common stock ................................ (30,691) (7,772) --
--------- --------- ---------
Net cash (used) provided by investing activities ............... (51,055) (1,590) 269,477
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........... 44,681 (30,070) 30,238
Cash and cash equivalents at beginning of year ................. 32,516 62,586 32,348
--------- --------- ---------
Cash and cash equivalents at end of year ....................... $ 77,197 $ 32,516 $ 62,586
========= ========= =========
</TABLE>
117
<PAGE>
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 32: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------------------------------------
December 31, September 30, June 30, March 31,
1999 1999 1999 1999
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income........................................... $ 68,124 $ 56,019 $ 63,547 $ 65,534
Interest expense.......................................... (42,119) (36,787) (37,838) (38,798)
Provision for loan losses................................. (1,522) (826) (623) (3,739)
----------- ----------- ----------- -----------
Net interest income after provision for loan losses.... 24,483 18,406 25,086 22,997
Non-interest income....................................... 10,920 64,412 24,812 45,575
Non-interest expense...................................... (41,939) (54,298) (47,785) (52,123)
Distributions on Capital Securities....................... (2,915) (3,399) (3,398) (3,399)
Equity in losses investments in unconsolidated entities... (3,133) (4,768) (3,470) (1,245)
----------- ----------- ----------- -----------
(Loss) income before income taxes and
extraordinary gain................................... (12,584) 20,353 (4,755) 11,805
Income taxes benefit (expense)............................ 6,987 (8,199) 972 (2,368)
Minority interest in net loss of
consolidated subsidiary................................ 140 369 96 33
----------- ----------- ----------- -----------
Income (loss) before extraordinary gain................... (5,457) 12,523 (3,687) 9,470
Extraordinary gain on repurchase of debt, net of tax...... 6,730 253 -- --
----------- ----------- ----------- -----------
Net income (loss)......................................... $ 1,273 $ 12,776 (3,687) $ 9,470
=========== =========== =========== ==========
Earnings (loss) per share:
Basic.................................................. $ 0.02 $ 0.21 $ (0.06) $ 0.16
=========== =========== =========== ==========
Diluted................................................ $ 0.02 $ 0.21 $ (0.06) $ 0.16
=========== =========== =========== ==========
Quarters Ended
-----------------------------------------------------------------
December 31, September 30, June 30, March 31,
1998 1998 1998 1998
------------ ------------- ----------- -----------
Interest income........................................... $ 66,237 $ 88,542 $ 90,891 $ 62,024
Interest expense.......................................... (43,602) (47,859) (52,576) (40,856)
Provision for loan losses................................. (4,775) (1,806) (9,675) (2,253)
----------- ----------- ----------- -----------
Net interest income after provision for loan losses.... 17,860 38,877 28,640 18,915
Non-interest income....................................... 30,610 54,942 (13,750) 41,381
Non-interest expense...................................... (72,486) (65,516) (56,249) (34,011)
Distributions on Capital Securities....................... (3,399) (3,398) (3,398) (3,399)
Equity in (losses) earnings of investments in
unconsolidated entities................................ (11,443) 2,915 543 --
----------- ----------- ----------- -----------
(Loss) income before income taxes...................... (38,858) 27,820 (44,214) 22,886
Income taxes benefit (expense)............................ 27,811 (2,922) 6,383 (573)
Minority interest in net loss (earnings) of
consolidated subsidiary................................ 469 33 (68) 33
----------- ----------- ----------- -----------
Net (loss) income......................................... $ (10,578) $ 24,931 $ (37,899) $ 22,346
=========== =========== =========== ===========
(Loss) earnings per share:
Basic.................................................. $ (0.17) $ 0.41 $ (0.62) $ 0.37
=========== =========== =========== ==========
Diluted................................................ $ (0.17) $ 0.41 $ (0.62) $ 0.36
=========== =========== =========== ==========
</TABLE>
118
<PAGE>
SHAREHOLDER INFORMATION
PRICE RANGE OF THE COMPANY'S COMMON STOCK
The Company's common stock is traded under the symbol "OCN" on the
New York Stock Exchange ("NYSE"). The following table sets forth for the high
and low sales prices for the common stock, as traded on the NYSE.
High Low
------------ ------------
1998:
First quarter.................................. $ 30.7500 $ 22.2500
Second quarter................................. 28.3750 22.3125
Third quarter.................................. 27.8750 8.5000
Fourth quarter................................. 16.1875 5.6875
1999:
First quarter.................................. $ 11.8750 $ 7.6875
Second quarter................................. 9.5625 7.5000
Third quarter.................................. 8.4375 5.8125
Fourth quarter................................. 7.4375 5.5625
At the close of business on March 15, 2000, the Company's common
stock price was $6.1875.
The Company does not currently pay cash dividends on common stock
and has no current plans to do so in the future. In the future, the timing and
amount of dividends, if any, will be determined by the Board of Directors of the
Company and will depend, among other factors, upon the Company's earnings,
financial condition, cash requirements, the capital requirements of the Bank and
other subsidiaries and investment opportunities at the time any such payment is
considered. In addition, the indentures relating to the Notes and the Junior
Subordinated Debentures contain certain limitations on the payment of dividends
by the Company.
As a holding company, the payment of any dividends by the Company
will be significantly dependent on dividends and other payments received by the
Company from its subsidiaries, including the Bank. For a description of
limitations on the ability of the Company to pay dividends on the common stock
and on the ability of the Bank to pay dividends on its capital stock to the
Company, see Notes 19, 20 and 26 to the Consolidated Financial Statements.
NUMBER OF HOLDERS OF COMMON STOCK
At March 9, 2000, 67,733,475 shares of Company common stock were
outstanding and held by approximately 1,315 holders of record. Such number of
stockholders does not reflect the number of individuals or institutional
investors holding stock in nominee name through banks, brokerage firms and
others.
119
EXHIBIT 21.0
SUBSIDIARIES OF OCWEN FINANCIAL CORPORATION
Name State of Organization
- ---- ---------------------
Ocwen Federal Bank FSB New Jersey
Ocwen Partnership, L.P. Virginia
Ocwen Asset Investment Corp. Florida
Ocwen Limited, Inc. Virginia
Investors Mortgage Insurance Holding Company Delaware
Ocwen Financial Services, Inc. Florida
Ocwen Capital Trust I Delaware
OAIC Mortgage Residential Securities Holdings, LLC Delaware
OAIC Bush Street, LLC Delaware
OAIC Mortgage Holdings, LLC Delaware
Ocwen Asset Investment - UK, LLC Delaware
NHP Affordable Housing Partners, L.P. Pennsylvania
OAIC Jacksonville, LLC Delaware
OAIC California Partnership, L.P. California
First Service Corporation Delaware
Ocwen Technology Xchange, Inc. Florida
27
EXHIBIT 23.0
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 filed on January 27, 1998 (Registration No. 333-44999),
Registration Statement on Form S-8 filed on August 25, 1998 (Registration No.
333-62217) and Registration Statement on Form S-3 filed on November 5, 1998
(Registration No. 333-64915) of Ocwen Financial Corporation of our report dated
February 9, 2000 appearing on page 65 of the 1999 Annual Report to Shareholders
which is incorporated by reference into this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
March 30, 2000
EXHIBIT 99.1
RISK FACTORS
Each of the factors set forth below could, directly or indirectly, affect
the Company's results of operations and financial condition. Capitalized terms
that are not defined herein shall have the meanings ascribed to them in the
Annual Report on Form 10-K of the Company to which this Exhibit relates.
CHANGING NATURE OF RISKS; NO ASSURANCES AS TO CONSISTENCY OF EARNINGS
CHANGING NATURE OF RISKS. The Company's corporate strategy emphasizes the
identification, development and management of specialized businesses which the
Company believes are not accurately evaluated and priced by the marketplace due
to market, economic and competitive conditions. This strategy can result in the
entry into or development of businesses and investment in assets which produce
substantial initial returns, which may be followed by an exit from any of those
businesses or the sale of those assets if, for example, results decrease because
markets become more efficient in the evaluation and pricing of such businesses
and assets. For example, historically, the Company's efforts have focused on
lending, the acquisition and resolution of discounted loans, and investment in
various types of mortgage-related securities. However, on October 26, 1998, the
Company announced that it would refocus its resources on its core competencies,
namely the acquisition and management of servicing-intensive assets and the
development of exportable loan serving technology for the mortgage and real
estate industries. Given that this strategy involves the potential of entering
and exiting different businesses, past financial performance may not be
considered a reliable indicator of future performance and historical trends may
not be reliable indicators of anticipated results or trends in future periods.
In addition, there can be no assurance that the Company will be able to
accomplish its strategic objectives as a result of changes in the nature of the
Company's operations over time or that such changes will not have a material
adverse effect from time to time or generally on the Company's business,
financial condition or results of operations.
INCONSISTENCY OF RESULTS AND NON-RECURRING ITEMS. In addition to
inconsistency in results caused by the entry or exit of businesses by the
Company, the consistency of the operating results of the Company has and may
continue to be significantly affected by inter-period variations in its current
operations, including in respect of (i) the amount of assets acquired,
particularly discounted loans; (ii) the amount of resolutions of discounted
loans, particularly large multi-family residential and commercial real estate
loans; (iii) the amount of multi-family residential and commercial real estate
loans which mature or are prepaid, particularly loans with terms pursuant to
which the Company participates in the profits of the underlying real estate; and
(iv) sales by the Company of loans and/or securities acquired from the Company's
securitization of loans. In addition, the Company's operating results have been
significantly affected by certain non-recurring items. For example, the Company
has earned significant non-interest income from gains on sales of
interest-earning assets and real estate owned. Gains on sales of
interest-earning assets and real estate owned generally are dependent on various
factors which are not within the control of the Company, including market and
economic conditions and accounting regulations. In addition, in the third
quarter of 1999, the Company decided to discontinue the practice of structuring
securitizations as sales transactions, thus precluding recognition of
gain-on-sale accounting. There can be no assurance that the level of gains on
sales of interest-earning assets and real estate owned reported by the Company
in prior periods will be repeated in future periods or that there will not be
substantial inter-period variations in the results from such activities or as a
result of other non-recurring items.
RISKS RELATED TO NON-TRADITIONAL OPERATING ACTIVITIES
As discussed below, the Company is engaged in a variety of businesses
which generally involve more uncertainties and risks than the single-family
residential lending activities historically emphasized by savings institutions.
In addition, many of the Company's business activities, including its lending
activities, are conducted on a nationwide basis, which reduces the risks
associated with concentration in any one particular market area but involves
other risks because, among other things, the Company may not be as familiar with
market conditions and other relevant factors as it would be in the case of
activities which are conducted in the market areas in which its executive
offices and branch office are located.
DISCOUNTED LOAN ACQUISITION AND RESOLUTION ACTIVITIES. The Company's
lending activities include the acquisition and resolution of non-performing or
underperforming single-family (one to four units) residential loans,
multi-family (over four units) residential loans and commercial real estate
loans which are purchased at a discount. Non-performing and subperforming
mortgage loans may be in default or may have a greater than normal risk of
future defaults and delinquencies, as compared to newly-originated, high-quality
loans of comparable type, size and geographic concentration. Returns on an
investment of this type
<PAGE>
depend on the borrower's ability to make required payments or, in the event of
default, the ability of the loan's servicer to foreclose and liquidate the
mortgage loan. There can be no assurance that the servicer can liquidate a
defaulted mortgage loan successfully or in a timely fashion.
The Company acquires discounted loans from governmental agencies, which in
the early years of the program consisted primarily of the Federal Deposit
Insurance Corporation (the "FDIC") and the Resolution Trust Corporation, a
federal agency formed to resolve failed savings institutions which has since
ceased operations, and in recent years has consisted primarily of the U.S.
Department of Housing and Urban Development. In addition to governmental
agencies, the Company acquires discounted loans from various private sector
sellers, such as banks, savings institutions, mortgage companies and insurance
companies. Although the Company believes that a permanent market for the
acquisition of non-performing and underperforming mortgage loans at a discount
has emerged in recent years, there can be no assurance that the Company will be
able to acquire the desired amount and type of discounted loans in future
periods or that there will not be significant inter-period variations in the
amount of such acquisitions. There also can be no assurance that the discount on
the non-performing and underperforming loans acquired by the Company will enable
the Company to resolve discounted loans in the future as profitably as in prior
periods. Adverse changes in national economic conditions or in the economic
conditions in regions in which the Company acquires pools of loans could impair
its ability to resolve successfully loans and could have an adverse effect on
the value of those loan pools. The yield on the Company's discounted portfolio
also is subject to significant inter-period variations as a result of the timing
of resolutions of discounted loans, particularly multi-family residential and
commercial real estate loans and non-performing single-family residential loans,
interest on which is recognized on a cash basis, and the mix of the overall
portfolio between performing and non-performing loans. In addition, the volume
of discounted loans acquired by the Company may vary over time, thereby
affecting results of operations in future periods as the quantity of loans
resolved in any one time period may be affected.
MULTI-FAMILY RESIDENTIAL, COMMERCIAL REAL ESTATE AND CONSTRUCTION LENDING
ACTIVITIES. The Company's lending activities have included (though to a lesser
extent than in previous years) nationwide loans secured by existing commercial
real estate, particularly hotels and office buildings, and existing multi-family
residential real estate. In addition, from time to time the Company has
originated loans for the construction of multi-family residential real estate
and land acquisition and development loans (again, to a lesser extent than in
previous years). Multi-family residential real estate, commercial real estate
and construction lending generally are considered to involve a higher degree of
risk than single-family residential lending due to a variety of factors,
including generally larger loan balances, the dependency on successful
completion or operation of the project for repayment, the difficulties in
estimating construction costs and loan terms which often require little or no
amortization of the loan over its term (typically five years) and, instead,
provide for a balloon payment at stated maturity. Furthermore, mezzanine loans,
which are subordinate to senior loans, and construction loans generally have
higher loan-to-value ratios than conventional loans. Although the Company's
borrowers generally have an equity investment of 10% to 15% of total project
costs, such equity may not be sufficient to protect the Company's investment in
these higher-yielding loans. There can be no assurance that any multi-family
residential, commercial real estate and construction lending activities engaged
in by the Company previously or in the future will not be adversely affected by
these and the other risks related to such activities.
SUBPRIME FAMILY RESIDENTIAL LENDING ACTIVITIES. The Company's lending
activities have also included the origination (the Company closed its domestic
subprime origination business in August 1999) or purchase on a nationwide basis
of single family residential loans made to borrowers who have significant equity
in the properties which secure the loans but who, because of prior credit
problems, the absence of a credit history or other factors, are unable or
unwilling to qualify as borrowers under federal agency guidelines. These loans
were offered pursuant to various programs, including programs which provide for
reduced or no documentation for verifying a borrower's income and employment.
Subprime loans present a higher level of risk of delinquency or default than
loans made to more creditworthy borrowers, and may not be as saleable as loans
which conform to the guidelines established by various federal agencies. While
the Company believes that the business practices it employs enable it to reduce
higher risks inherent in these loans, no assurance can be given that such
practices will afford adequate protection against higher delinquencies,
foreclosures or losses than anticipated, and as a result, the Company's
financial condition or results of operation could be adversely affected.
ENVIRONMENTAL RISKS OF LOAN ACQUISITION AND LENDING ACTIVITIES. The
Company evaluates the potential for significant environmental problems prior to
acquiring or originating a loan because there is a risk for any mortgage loan,
particularly a multifamily residential and commercial real estate loan, that
hazardous substances or other environmentally restricted substances could be
discovered on the related real estate. Through foreclosure, the Company could
become the owner of the real estate that secured its loan and might be required
to remove such substances from the affected properties or to engage in abatement
2
<PAGE>
procedures at its sole cost and expense. There can be no assurance that the cost
of such removal or abatement will not substantially exceed the value of the
affected properties or the loans secured by such properties, that the Company
would have adequate remedies against the prior owners or other responsible
parties or that the Company would be able to resell the affected properties
either prior to or following completion of any such removal or abatement
procedures. If such environmental problems are discovered prior to foreclosure,
the Company generally will not foreclose on the related loan; however, the value
of such property as collateral will generally be substantially reduced, and as a
result, the Company may suffer a loss upon collection of the loan.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. The Company
invests in low-income housing tax credit interests (generally limited
partnerships) in order to obtain federal income tax credits which are allocated
pursuant to Section 42 of the Internal Revenue Code of 1986, as amended (the
"Code"). There are many uncertainties and risks associated with an investment in
low-income housing tax credit interests, including the risks involved in the
construction, lease-up and operation of multi-family residential real estate,
the investor's ability to earn sufficient income to utilize the tax credits
resulting from such investments in accordance with the requirements of the Code
and the possibility of required recapture of previously-earned tax credits. In
addition, there are numerous tax risks associated with tax credits resulting
from potential changes to the Code. For example, the Balanced Budget Act of
1995, which was vetoed by the President of the United States in December 1995
for reasons which were unrelated to the tax credit program, generally would have
established a sunset date for the affordable housing tax credit program of the
Code for housing placed in service after December 31, 1997 and would have
required a favorable vote by Congress to extend the credit program. Although
this change would not have impacted the Company's existing investments, other
potential changes in the Code, which have been discussed from time to time,
could reduce the benefits associated with the Company's existing investments in
low-income housing tax credit interests, including the replacement of the
current graduated income taxation provisions in the Code with a "flat tax" based
system and increases in the alternative minimum tax, which cannot be reduced by
tax credits. Management of the Company is unable to predict whether any of the
foregoing or other changes to the Code will be subject to future legislation
and, if so, what the contents of such legislation will be and its effects, if
any, on the Company.
INVESTMENTS IN MORTGAGE-RELATED SECURITIES. From time to time the Company
invests in a variety of mortgage-related securities, such as senior, subordinate
and residual interests in collateralized mortgage obligations ("CMOs"),
including CMOs which have qualified as Real Estate Mortgage Investment Conduits.
Some mortgage-related securities exhibit considerably more price volatility than
mortgages or ordinary mortgage pass-through securities, due in part to the
uncertain cash flows that result from changes in the prepayment rates of the
underlying mortgages. Other mortgage-related securities, such as subordinate
interests, also involve substantially more credit risk than the senior classes
of the mortgage-related securities to which such interests relate and generally
are not as liquid as such senior classes. The Company has generally acquired
subordinate and residual interests primarily in connection with the
securitization of its loans, particularly single-family residential loans to
non-conforming borrowers and discounted loans, and under circumstances in which
it continues to service the loans which back the related securities. The Company
has sought to offset the risk of changing interest rates on certain of its
mortgage-related securities by selling U.S. Treasury futures contracts and
through other hedging techniques, and believes that the resulting interest-rate
sensitivity profile compliments the Company's overall exposure to changes in
interest rates. See "Economic Conditions" below. Although generally intended to
reduce the effects of changing interest rates on the Company, investments in
certain mortgage-related securities and hedging transactions could cause the
Company to recognize losses depending on the terms of the instrument and the
interest rate environment.
RISK OF FUTURE ADJUSTMENTS TO ALLOWANCES FOR LOSSES
The Company believes that it has established adequate allowances for
losses for each of its loan portfolio and discounted loan portfolio in
accordance with generally accepted accounting principles. Future additions to
these allowances, in the form of provisions for losses on loans and discounted
loans, may be necessary, however, due to changes in economic conditions,
increases in loans and discounted loans and the performance of the Company's
loan and discounted loan portfolios. In addition, the OTS, as part of its
examination process, periodically reviews the Company's allowances for losses
and the carrying value of its assets. As a result of OTS reviews, the Company in
the past has increased its allowances for losses on loans and discounted loans
and written down the carrying value of certain loans. There can be no assurance
that the Company will not determine, at the request of the OTS or otherwise, to
further increase its allowances for losses on loans and discounted loans or
adjust the carrying value of its real estate owned or other assets. Increases in
the Company's provisions for losses on loans would adversely affect the
Company's results of operations.
3
<PAGE>
RISKS RELATED TO REAL ESTATE OWNED
GENERAL. The Company's real estate owned consists almost entirely of
single-family residential real estate and multi-family residential and
commercial real estate acquired by foreclosure or deed-in-lieu thereof on loans
in the Company's discounted loan portfolio. Generally, real estate owned
properties are non-earning assets, although multi-family residential and
commercial real estate owned may provide some operating income to the Company
depending on the circumstances. Such operating income may be affected by
problems experienced by lessees, which may weaken their financial condition and
result in failure to make rental payments when due. At any time, a lessee of the
Company's properties may seek the protection of bankruptcy laws, which could
result in rejection and termination of the lessee's lease and thereby cause a
reduction in cash flow available for distribution to the Company. Moreover, the
value of real estate can be significantly affected by adverse changes in
national or local economic conditions, competition from other properties
offering the same or similar services, changes in interest rates and in the
availability, cost and terms of mortgage funds, acts of nature, including
earthquakes, hurricanes and other natural disasters, and other factors which are
beyond the control of the Company. These factors may require the establishment
of provisions for losses to ensure that real estate owned properties are carried
at the lower of cost or fair value, less estimated costs to dispose of the
properties, which may adversely affect operations. Real estate owned also
requires increased allocation of resources and expense to the management and
work out of the asset, property taxes and compliance with respect to
environmental laws and the Americans with Disabilities Act of 1990, which can
also adversely affect operations. There can be no assurance that the amount of
the Company's real estate owned will not increase in the future as a result of
the Company's discounted loan acquisition and resolution activities and the
Company's single-family residential, multi-family residential, commercial real
estate and construction lending activities.
ENVIRONMENTAL RISKS. Operating costs and the value of real property may be
affected by the obligation to pay for the cost of complying with existing
environmental laws, ordinances and regulations, as well as the cost of future
legislation. Under various federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be liable for the costs of removal or remediation of hazardous or
toxic substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. Therefore, an environmental
liability could have a material adverse effect on the underlying value of a real
property, and the revenue therefrom. Although the Company believes that its
pre-acquisition due diligence identified all material environmental concerns
which relate to its current investments in real estate and accurately assessed
the costs and liabilities to be concurred by it in this regard, there can be no
assurance that such investments will not raise material unanticipated
environmental concerns or costs in the future.
RISKS ASSOCIATED WITH ACQUISITIONS AND DIVESTITURES
Acquiring businesses and assets has been and may continue to be an
important focus of the Company's strategic efforts. Any acquisitions could vary
in size and may include those that are large relative to the Company. There can
be no assurance that suitable acquisition candidates can be identified, that
financing for such acquisitions would be available on satisfactory terms, that
the Company would be able to accomplish its strategic objectives as a result of
any such acquisitions, that any business or assets acquired by the Company would
be integrated successfully or that integration of acquired businesses would not
divert management resources or otherwise have a material adverse effect on the
Company's business, financial condition or results of operations. The Company is
continually evaluating possible acquisitions and engages in discussions with
acquisition candidates from time to time.
In addition, in the event that the Company chooses to divest any business
or sell any asset in the future, there can be no assurance that a suitable
purchaser could be identified, that the Company would be able to accomplish its
strategic objectives as a result of any such sale, that any proposed asset or
business sold by the Company would be completed or that the separation of any
such asset or business from the Company would not diminish management resources
or otherwise have a material adverse effect on the Company's business, financial
condition or results of operations.
4
<PAGE>
INTERNATIONAL OPERATIONS
The Company conducts business in the United States, the United Kingdom and
Italy and may explore opportunities outside of these markets. The Company's
foreign operations are subject to most of the same risks associated with its
U.S. operations, as well as additional risks, such as unexpected changes in U.K.
and European regulatory requirements, difficulties in managing international
operations, potentially adverse tax consequences, enhanced accounting and
control expenses and the burden of complying with foreign laws. Changes in
foreign currency exchange rates may also affect the value of the Company's
foreign assets and the gains realized from the sale of such assets. Although the
Company implements hedging strategies to limit the effects of currency exchange
rate fluctuations on the Company's results of operations, currency hedging
strategies, like those for interest rates, may not perform their intended
purpose. See "Economic Conditions". There can be no assurance that such factors
will not have a material adverse effect on the Company's business, results of
operations or financial condition. In addition, the Company's management has
only limited international experience outside of the U.S. the UK and Italy,
which could limit the Company's ability to capitalize on investment
opportunities that may arise elsewhere.
REGULATION AND REGULATORY CAPITAL REQUIREMENTS
Both the Company, as a savings and loan holding company, and the Bank, as
a federally-chartered savings institution, are subject to significant
governmental supervision and regulation, which is intended primarily for the
protection of depositors. Statutes and regulations affecting the Company and the
Bank may be changed at any time, and the interpretation of these statutes and
regulations by examining authorities also is subject to change. There can be no
assurance that future changes in applicable statutes and regulations or in their
interpretation will not adversely affect the business of the Company. The
applicable regulatory authorities may, as a result of such regulation and
examination, impose regulatory sanctions upon the Company or the Bank, as
applicable, as well as various requirements or restrictions which could
adversely affect their business activities. A substantial portion of the Bank's
operations involves businesses that are not traditionally conducted by savings
institutions and, as a result, there can be no assurance that future actions by
applicable regulatory authorities, or future changes in applicable statutes or
regulations, will not limit or otherwise adversely affect the Bank's ability to
engage in such activities.
Following an examination of the Bank in late 1996 and early 1997 by the
Office of Thrift Supervision (the "OTS"), the Bank committed to the OTS to
maintain, commencing on June 30, 1997, regulatory capital ratios which
significantly exceed the requirements which are generally applicable to
federally-chartered savings institutions such as the Bank. Specifically, the
Bank has committed to the OTS to maintain a core capital (leverage) ratio and a
total risk-based capital ratio of at least 9% and 13%, respectively (the
requirements of general applicability are 3% and 8%, respectively). At December
31, 1999, the Bank's core capital, Tier 1 risk-based capital and total
risk-based capital ratios amounted to 10.67%, 14.02% and 19.12%, respectively.
Based on discussions with the OTS, the Bank believes that this commitment does
not affect its status as a "well-capitalized" institution, assuming the Bank's
continued compliance with the regulatory capital requirements that it committed
to maintain. Under applicable laws and regulations, an institution is considered
to be "well-capitalized" if it maintains a total risk-based capital ratio of
10.0% or more, a Tier 1 risk-based capital ratio of 6.0% or more and a core
capital (leverage) ratio of 5.0% or more and is not subject to a written
agreement, order or directive issued by an appropriate agency to meet and
maintain a specific capital level for any capital measure.
There can be no assurance that in the future the OTS either will agree to
a decrease in the 9% core capital (leverage) ratio and the 13% total risk-based
capital ratio committed to be maintained by the Bank or will not seek an
increase in such requirements. Unless and until these regulatory capital
requirements are decreased, the Bank's ability to leverage its capital through
future growth in assets (including its ability to continue growing at historical
rates) will be adversely affected, as will the Company's ability to receive
dividends from the Bank, which are a primary source of payments on outstanding
indebtedness and other expenses of the Company. Although the Company and its
non-banking subsidiaries will not be restricted in their growth by these capital
requirements, because they do not have access to the Bank's funding sources,
their profitability may be different from the Bank's for particular types of
businesses. In addition, there can be no assurance that the Bank will continue
to meet the regulatory capital requirements that it has committed to maintain or
that the OTS will not formally impose such requirements pursuant to a written
agreement, order or directive, which would cause the Bank to cease to be a
"well-capitalized" institution under applicable laws and regulations. In the
event that the Bank ceased to be a "well-capitalized" institution, the Bank
would be prohibited from accepting, renewing or rolling over its brokered and
other wholesale deposits, which are its principal sources of funding, without
the prior approval of the FDIC, and the Bank could become subject to other
regulatory restrictions on its operations.
5
<PAGE>
ECONOMIC CONDITIONS
GENERAL. The success of the Company is dependent to a certain extent upon
the general economic conditions in the geographic areas in which it conducts
substantial business activities. Adverse changes in national economic conditions
or in the economic conditions of regions in which the Company conducts
substantial business likely would impair the ability of the Company to collect
on outstanding loans or dispose of real estate owned and would otherwise have an
adverse effect on its business, including the demand for new loans, the ability
of customers to repay loans and the value of both the collateral pledged to the
Company to secure its loans and its real estate owned. Moreover, earthquakes and
other natural disasters could have similar effects. Although such disasters have
not significantly adversely affected the Company to date, the availability of
insurance for such disasters in California, in which the Company conducts
substantial business activities, is severely limited. Moreover, changes in
building codes and ordinances, environmental considerations and other factors
also might make it infeasible to use insurance proceeds to replace a property if
it is damaged or destroyed. Under such circumstances, the insurance proceeds
received by a borrower or the Company might not be adequate to restore the
Company's economic position with respect to the affected collateral or real
estate. At December 31, 1999, the Company had loans aggregating $177.4 million
(including match funded loans and loans available for sale) secured by
properties located in California and $10.6 million of the Company's real estate
owned was located in California, which collectively represented 6% of the
Company's total assets at such date.
EFFECTS OF CHANGES IN INTEREST RATES. The Company's operating results
depend to a large extent on its net interest income, which is the difference
between the interest income earned on interest-earning assets and the interest
expense incurred in connection with its interest-bearing liabilities. Changes in
the general level of interest rates can affect the Company's net interest income
by affecting the spread between the Company's return on interest-earning assets
and the Company's cost of interest-bearing liabilities, as well as, among other
things, the ability of the Company to originate loans; the value of the
Company's interest-earning assets and its ability to realize gains from the sale
of such assets; the average life of the Company's interest-earning assets; the
value of the Company's mortgage servicing rights; and the Company's ability to
obtain deposits in competition with other available investment alternatives.
Interest rates are highly sensitive to many factors, including governmental
monetary policies, domestic and international economic and political conditions
and other factors beyond the control of the Company. Although management
believes that the maturities of the Company's assets are well balanced in
relation to its liabilities (which involves various estimates and assumptions,
including as to how changes in the general level of interest rates will impact
its assets and liabilities), there can be no assurance that the profitability of
the Company would not be adversely affected during any period of changing
interest rates.
POTENTIAL ADVERSE EFFECTS OF HEDGING STRATEGIES. The Company may utilize a
variety of financial instruments, including interest rate swaps, caps, floors
and other interest rate exchange contracts, in order to limit the effects of
interest rates on its operations. Among the risks inherent with respect to the
purchase and/or sale of such derivative instruments are (i) interest rate risk,
which consists of the risks relating to fluctuating interest rates; (ii) basis
risk, which consists of the risk of loss associated with variations in the
spread between the asset yield and the funding and/or hedge costs; (iii) credit
or default risk, which consists of the risk of insolvency or other inability of
the counterparty to a particular transaction to perform its obligations
thereunder; (iv) prepayment risk, which consists of reinvestment risk to the
extent the Company is not able to reinvest repayments, if any, at a yield which
is comparable to the yield being generated on the particular security; (v)
liquidity risk, which consists of the risk that the Company may not be able to
sell a particular security at a particular price; (vi) legal enforceability
risk, which consists of the risks related to Company's ability to enforce the
terms of a particular instrument or to obtain or collect upon a legal judgment
in the United States in the event that the counterparty to the transaction is a
foreign entity or the underlying collateral is located in a foreign
jurisdiction; and (vii) volatility risk, which consists of the risk that actual
volatility (i.e., the degree of uncertainty relating to the price of the
underlying asset) differs from the historical volatility or "implied" volatility
of the instrument.
RISKS RELATED TO RELIANCE ON BROKERED AND OTHER WHOLESALE DEPOSITS
The Company currently utilizes as its principal source of funds
certificates of deposit obtained through national investment banking firms which
obtain funds from their customers for deposit with the Company ("brokered
deposits") and, to a lesser extent, certificates of deposit obtained from
customers of regional and local investment banking firms and direct solicitation
efforts by the Company of institutional investors and high net worth
individuals. The Company believes that the effective cost of brokered and other
wholesale deposits, as well as other non-branch dependent sources of funds, such
as securities sold under agreements to repurchase ("reverse repurchase
agreements") and advances from the Federal Home Loan Bank ("FHLB") of New
6
<PAGE>
York, generally is more attractive to the Company than deposits obtained through
branch offices after the general and administrative costs associated with
operating a branch office network are taken into account. However, such funding
sources, when compared to retail deposits attracted through a branch network,
are generally more sensitive to changes in interest rates and volatility in the
capital markets and their availability and terms are more likely to be subject
to competitive pressures. In addition, such funding sources may be more
sensitive to significant changes in the financial condition of the Company.
There are also regulatory limitations on an insured institution's ability to
solicit and obtain brokered deposits in certain circumstances, which currently
are not applicable to the Bank because of its status as a "well capitalized"
institution under applicable laws and regulations. See "Regulation and
Regulatory Capital Requirements" above. As a result of the Company's reliance on
brokered and other wholesale deposits, significant changes in prevailing
interest rates, in the availability of alternative investments for individual
and institutional investors or in the Company's financial condition, among other
factors, could have a much more significant affect on the Company's liquidity
and results of operations than might be the case with an institution that
attracted a greater portion of its funds from retail or core deposits obtained
through a branch network.
RISKS ASSOCIATED WITH CURRENT SOURCES OF LIQUIDITY AND ADDITIONAL FINANCING
FOR GROWTH
CURRENT SOURCES OF LIQUIDITY. The Company's primary sources of funds for
liquidity consist of deposits, FHLB advances, reverse repurchase agreements,
lines of credit and maturities and principal payments on loans and securities
and proceeds from sales thereof. An additional significant source of asset
liquidity stems from the Company's ability to securitize assets such as discount
loans and subprime loans. The Company believes that its existing sources of
liquidity will be adequate to fund planned activities for the foreseeable
future, although there can be no assurances in this regard. Moreover, the
Company continues to evaluate other sources of liquidity, such as lines of
credit from unaffiliated parties, which will enhance the Company's ability to
increase its liquidity position. The inability of the Company to maintain
adequate sources of liquidity, including as a result of the failure to extend or
replace existing lines of credit or as a result of the factors described under
"Risks Related to Reliance on Brokered and Other Wholesale Deposits" above or
"Risks of Securitization" below, could have a material adverse effect on the
Company's business, financial condition or results of operations.
ADDITIONAL FINANCING FOR GROWTH. The Company's ability to enter into and
exit from certain business lines as opportunities emerge depends to a
significant degree on its ability to obtain additional indebtedness, obtain
additional equity capital or have access to other sources of capital (e.g.,
through partnering, joint venturing or other economic or contractual
relationships). The Company has no commitments for borrowings in addition to
those under its current debt securities and lines of credit, no commitments for
future sales of equity capital and no commitments to provide access to other
sources of capital. There can be no assurance that the Company will be
successful in consummating future financing transactions, if any, on terms
satisfactory to the Company, if at all. Factors which could affect the Company's
access to the capital markets or other economic or contractual relationships, or
the conditions under which the Company could obtain additional financing,
involve the perception in the capital markets and the financial services
industry of the Company's business, results of operations, leverage, financial
condition and business prospects. Each of these factors is to a large extent
subject to economic, financial and competitive factors beyond the Company's
control. In addition, covenants under the Company's current debt securities and
lines of credit do, and future ones may, significantly restrict the Company's
ability to incur additional indebtedness, to issue Preferred Stock and to enter
into certain other contractual relationships.
RISKS ASSOCIATED WITH HOLDING COMPANY STRUCTURE
As a holding company, the ability of the Company to pay dividends, to pay
indebtedness and to conduct its financial operating activities directly or in
non-banking subsidiaries will depend significantly on the receipt of dividends
or other distributions from the Bank, as well as any cash reserves and other
liquid assets held by the Company, any proceeds from securities offerings or
other borrowings and any dividends from non-banking subsidiaries of the Company.
The ability of the Bank to pay dividends or make other distributions to the
Company generally is dependent on the Bank's compliance with applicable
regulatory capital requirements and regulatory restrictions. The Bank and OAC
are also subject to contractual restrictions on their ability to pay dividends
under their respective debt indentures.
The Bank's ability to make capital distributions as a Tier 1 association
pursuant to the OTS capital distribution regulation are limited by the
regulatory capital levels which it has committed to the OTS it would maintain,
commencing on June 30, 1997. As a result of a verbal agreement between the Bank
and the OTS to dividend subordinate and residual mortgage-related securities
7
<PAGE>
resulting from securitization activities conducted by the Bank, the Bank has
been limited in its ability to pay cash dividends to the Company.
In addition, the right of the Company to participate in any distribution
of assets of any subsidiary, including the Bank, upon such subsidiary's
liquidation or reorganization or otherwise, will be subject to the prior claims
of creditors of that subsidiary, except to the extent that any claims of the
Company as a creditor of such subsidiary may be recognized as such.
RISKS OF SECURITIZATION
The Company has historically generated a significant amount of revenues,
earnings and cash flows from its pooling and selling through securitizations of
mortgages and other loans originated or purchased by the Company. Adverse
changes in the secondary market for such loans could impair the Company's
ability to originate or sell mortgages and other loans on a favorable or timely
basis. Accordingly, such impairments could have an adverse effect upon the
Company's business and results of operations. Market and other considerations,
including rating agency requirements, could also affect the timing of such
transactions. Any delay in the sale of loans beyond the reporting period in
which such sale is anticipated to take place may adversely affect the Company's
reported earnings for such reporting period. In addition, the Company retains
some degree of credit risk on substantially all loans sold. During the period of
time that loans are held pending sale, the Company is at risk for loan
delinquencies and defaults and the risk that the rapid increase in interest
rates would result in a decline in the value of loans to potential purchasers.
Following the sale of loans through a securitization, the Company's direct risk
with respect to loan delinquency or default on such loan is limited to those
circumstances in which it is required to repurchase such loan due to a breach of
a representation or warranty in connection with the securitization.
COMPETITION
The businesses in which the Company is engaged generally are highly
competitive. The acquisition of discounted loans is particularly competitive, as
acquisitions of such loans are often based on competitive bidding. Although many
of the Company's competitors have access to greater capital and have other
advantages, the Company believes that it has a competitive advantage relative to
many of its competitors as a result of its experience in managing and resolving
discount loans, its investment in the computer systems, technology and other
resources which are necessary to conduct this business, its reputation and the
strategic relationships and contacts which it has developed in connection with
these activities. The Company also encounters significant competition in
connection with its other lending activities, its investment activities, its
deposit-gathering activities, its servicing activities and its information
technology activities. Many of the Company's competitors are significantly
larger than the Company and have access to greater capital and other resources.
In addition, many of the Company's competitors are not subject to the same
extensive federal regulation that govern federally-insured institutions such as
the Bank and their holding companies. As a result, many of the Company's
competitors have advantages over the Company
IMPORTANCE OF THE CHIEF EXECUTIVE OFFICER
William C. Erbey, Chairman and Chief Executive Officer of the Company, has
had, and will continue to have, a significant role in the development and
management of the Company's business. The loss of his services could have an
adverse effect on the Company. The Company and Mr. Erbey are not parties to an
employment agreement, and the Company currently does not maintain key man life
insurance relating to Mr. Erbey or any of its other officers.
CONTROL OF CURRENT SHAREHOLDERS
As of March 15, 2000, the Company's directors and executive officers and
their affiliates in the aggregate beneficially owned or controlled 45.0% of the
outstanding Common Stock of the Company, including 27.5% owned or controlled by
William C. Erbey, Chairman and Chief Executive Officer of the Company, and 13.8%
owned or controlled by Barry N. Wish, currently a director and formerly the
Chairman of the Company. As a result, these shareholders, acting together, would
be able effectively to decisively influence if not control virtually all matters
requiring approval by the shareholders of the Company, including amendment of
the Company's Articles of Incorporation, the approval of mergers or similar
transactions and the election of all directors.
8
<PAGE>
SOFTWARE PRODUCT DEVELOPMENT; TECHNOLOGICAL CHANGE
The Company's wholly-owned subsidiary, Ocwen Technology Xchange, Inc.
("OTX"), licenses the Company's mortgage loan servicing resolution and work flow
technology to third parties in the mortgage and real estate industries. The
products offered by OTX have resulted from the enhancement of software products
acquired through the Company's purchases of Amos, Inc., a developer of
residential mortgage loan servicing software, DTS Communications, Inc., a real
estate technology company, and Synergy Software, LLC, a developer of commercial
and multi-family mortgage servicing software, with the Company's own proprietary
technology. While the Company believes it has developed products attractive to
the mortgage and real estate industries, the computer software industry is
subject to rapid technological change, changing customer requirements, frequent
new product introductions and evolving industry standards that may render
existing products and services obsolete. There can be no assurance that OTX will
not experience future difficulties that could delay or prevent the successful
development, introduction and marketing of its products, or that its products
and product enhancements will meet the requirements of the marketplace and
achieve market acceptance. If OTX is unable to develop and introduce products of
acceptable quality in a timely manner in response to changing market conditions
or customer requirements, the Company's business, operating results and
financial condition could be adversely affected.
DEPENDENCE ON PROPRIETARY INFORMATION
The Company's success is in part dependent upon its proprietary
information and technology. The Company relies on a combination of copyright,
trade secret and contract protection to establish and protect its proprietary
rights in its products and technology. The Company generally enters into
confidentiality agreements with its management and technical staff and limits
access to and distribution of its proprietary information. There can be no
assurance that the steps taken by the Company in this regard will be adequate to
deter misappropriation of its proprietary rights or information or independent
third party development of substantially similar products and technology.
Although the Company believes that its products and technology do not infringe
any proprietary rights of others, the growing use of copyrights and patents to
protect proprietary rights has increased the risk that third parties will
increasingly assert claims of infringement in the future.
9
<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 CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 153,459
<INT-BEARING-DEPOSITS> 116,399
<FED-FUNDS-SOLD> 112,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 587,518
<INVESTMENTS-CARRYING> 10,965
<INVESTMENTS-MARKET> 10,965
<LOANS> 1,220,951
<ALLOWANCE> 26,935
<TOTAL-ASSETS> 3,309,313
<DEPOSITS> 1,842,286
<SHORT-TERM> 376,746
<LIABILITIES-OTHER> 153,266
<LONG-TERM> 317,573
0
0
<COMMON> 686
<OTHER-SE> 508,756
<TOTAL-LIABILITIES-AND-EQUITY> 3,309,313
<INTEREST-LOAN> 179,365
<INTEREST-INVEST> 64,784
<INTEREST-OTHER> 8,942
<INTEREST-TOTAL> 253,224
<INTEREST-DEPOSIT> 98,370
<INTEREST-EXPENSE> 155,542
<INTEREST-INCOME-NET> 97,682
<LOAN-LOSSES> 6,710
<SECURITIES-GAINS> 53,727
<EXPENSE-OTHER> 209,256
<INCOME-PRETAX> 14,819
<INCOME-PRE-EXTRAORDINARY> 12,849
<EXTRAORDINARY> 6,983
<CHANGES> 0
<NET-INCOME> 19,832
<EPS-BASIC> .31
<EPS-DILUTED> .31
<YIELD-ACTUAL> 11.41
<LOANS-NON> 679,660
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,330
<CHARGE-OFFS> 8,060
<RECOVERIES> 397
<ALLOWANCE-CLOSE> 26,935
<ALLOWANCE-DOMESTIC> 26,935
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>
TAG 9-03(7) INCLUDES LOANS AVAILABLE FOR SALE OF $45,213, LOAN PORTFOLIO OF
$157,408, DISCOUNT LOAN PORTFOLIO OF $913,229 AND MATCH FUNDED LOANS OF $105,101
<F2>
TAG 9-03(7)(2) INCLUDES ALLOWANCE FOR LOAN LOSSES ON LOAN PORTFOLIO OF $7,259,
ON THE DISCOUNT LOAN PORTFOLIO OF $19,181 AND ON MATCH FUNDED LOANS OF $495.
<F3>
TAG 9-03(13) INCLUDES SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE OF $47,365,
ON OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT OF $187,866 AND ON BONDS-MATCH
FUNDED AGREEMENTS OF $141,515.
<F4>
TAG 9-04(1) INCLUDES INTEREST INCOME ON LOANS AVAILABLE FOR SALE OF $25,724,
LOAN PORTFOLIO OF $28,683, AND DISCOUNT LOANS OF $121,854 AND ON MATCH FUNDED
LOANS OF $3,104.
<F5>
TAG 9-04(14) INCLUDES NON-INTEREST EXPENSE OF $196,145, DISTRIBUTIONS ON COMPANY
OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY
JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY OF $13,111.
</FN>
</TABLE>
