UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-21341
OCWEN FINANCIAL CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0039856
- ------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
The Forum, Suite 1000
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1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401
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(Address of principal executive offices) (Zip Code)
(561) 682-8000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Number of shares of Common Stock, $.01 par value, outstanding as of May 7, 1999:
60,800,357
OCWEN FINANCIAL CORPORATION
FORM 10-Q
I N D E X
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PART I - FINANCIAL INFORMATION Page
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Item 1. Interim Consolidated Financial Statements (Unaudited)................. 3
Consolidated Statements of Financial Condition
at March 31, 1999 and December 31, 1998............................... 3
Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998.................................. 4
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 1999 and 1998.................................. 5
Consolidated Statement of Changes in Stockholders' Equity
for the three months ended March 31, 1999............................. 6
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998.................................. 7
Notes to Consolidated Financial Statements............................ 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 54
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................... 55
Signature...................................................................... 57
2
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
1999 1998
-------------- --------------
Assets:
Cash and amounts due from depository institutions ................................ $ 80,399 $ 120,805
Interest earning deposits ........................................................ 18,798 49,374
Federal funds sold ............................................................... 200,500 275,000
Securities available for sale, at fair value ..................................... 566,739 593,347
Loans available for sale, at lower of cost or market ............................. 374,094 177,847
Investment in capital stock of Federal Home Loan Bank, at cost ................... 10,825 10,825
Loan portfolio, net .............................................................. 177,511 230,312
Discount loan portfolio, net ..................................................... 893,180 1,026,511
Investments in low-income housing tax credit interests ........................... 155,273 144,164
Investment in unconsolidated entities ............................................ 84,279 86,893
Real estate owned, net ........................................................... 208,831 201,551
Investment in real estate ........................................................ 40,282 36,860
Premises and equipment, net ...................................................... 37,569 33,823
Income taxes receivable .......................................................... 31,189 34,333
Deferred tax asset ............................................................... 67,987 66,975
Excess of purchase price over net assets acquired, net ........................... 12,476 12,706
Principal, interest and dividends receivable ..................................... 14,066 18,993
Escrow advances on loans ......................................................... 99,883 88,277
Other assets ..................................................................... 56,813 99,483
-------------- --------------
$ 3,130,694 $ 3,308,079
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Deposits ...................................................................... $ 1,841,427 $ 2,175,016
Securities sold under agreements to repurchase ................................ 78,474 72,051
Obligations outstanding under lines of credit ................................. 324,760 179,285
Notes, debentures and other interest bearing obligations ...................... 223,000 225,000
Accrued interest payable ...................................................... 40,495 33,706
Accrued expenses, payables and other liabilities .............................. 48,709 61,053
-------------- --------------
Total liabilities ........................................................... 2,556,865 2,746,111
-------------- --------------
Company-obligated, mandatorily redeemable securities of subsidiary trust holding
solely junior subordinated debentures of the Company ....................... 125,000 125,000
Minority interest ................................................................ 585 592
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized; 0 shares issued
and outstanding ............................................................. -- --
Common stock, $.01 par value; 200,000,000 shares authorized; 60,800,357 shares
issued and outstanding at March 31, 1999 and December 31, 1998 .............. 608 608
Additional paid-in capital .................................................... 166,248 166,234
Retained earnings ............................................................. 266,640 257,170
Accumulated other comprehensive income, net of taxes:
Unrealized gain on securities available for sale ............................ 16,266 14,057
Net unrealized foreign currency translation loss ............................ (1,518) (1,693)
-------------- --------------
Total stockholders' equity .................................................. 448,244 436,376
-------------- --------------
$ 3,130,694 $ 3,308,079
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
For the three months ended March 31, 1999 1998
- --------------------------------------------------------------------------------- ------------ ------------
Interest income:
Federal funds sold and repurchase agreements .................................. $ 3,396 $ 1,032
Securities available for sale ................................................. 17,189 7,945
Loans available for sale ...................................................... 8,130 9,503
Loans ......................................................................... 6,165 6,262
Discount loans ................................................................ 30,003 36,797
Investment securities and other ............................................... 651 485
------------ ------------
65,534 62,024
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Interest expense:
Deposits ...................................................................... 26,828 27,845
Securities sold under agreements to repurchase ................................ 1,491 1,639
Advances from the Federal Home Loan Bank ...................................... -- 100
Obligations outstanding under lines of credit ................................. 3,724 4,520
Notes, debentures and other interest bearing obligations ...................... 6,755 6,752
------------ ------------
38,798 40,856
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Net interest income before provision for loan losses .......................... 26,736 21,168
Provision for loan losses ..................................................... 3,739 2,253
------------ ------------
Net interest income after provision for loan losses ........................... 22,997 18,915
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Non-interest income:
Servicing fees and other charges .............................................. 18,251 9,724
Gain on interest earning assets, net .......................................... 20,142 24,754
Gain on real estate owned, net ................................................ 629 1,026
Other income .................................................................. 6,553 5,877
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45,575 41,381
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Non-interest expense:
Compensation and employee benefits ............................................ 27,211 21,482
Occupancy and equipment ....................................................... 10,637 6,457
Loan expenses ................................................................. 4,128 2,298
Net operating loss on investments in real estate and
certain low-income housing tax credit interests ............................ 1,848 1,246
Amortization and write off of excess of purchase price over net assets acquired 230 371
Other operating expenses ...................................................... 8,069 2,157
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52,123 34,011
------------ ------------
Distributions on Company-obligated, mandatorily redeemable securities of
subsidiary trust holding solely junior subordinated debentures ............... 3,399 3,399
Equity in losses of investment in unconsolidated entities ....................... (1,245) --
------------ ------------
Income before income taxes .................................................... 11,805 22,886
Income tax expense .............................................................. (2,368) (573)
Minority interest in net loss of consolidated subsidiary ........................ 33 33
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Net income .................................................................... $ 9,470 $ 22,346
============ ============
Earnings per share:
Basic ......................................................................... $ 0.16 $ 0.37
============ ============
Diluted ....................................................................... $ 0.16 $ 0.36
============ ============
Weighted average common shares outstanding:
Basic ......................................................................... 60,800,357 60,708,735
============ ============
Diluted ....................................................................... 60,843,572 61,542,122
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
For the three months ended March 31, 1999 1998
- ------------------------------------------------------------------------------ -------- --------
Net income ................................................................... $ 9,470 $ 22,346
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale ......................... 4,813 5,159
Less: Reclassification adjustment ........................................ (2,604) --
-------- --------
Net change in unrealized gains on securities available for sale ........... 2,209 5,159
Unrealized foreign currency translation adjustment arising
during the period ....................................................... 175 --
-------- --------
Other comprehensive income ................................................ 2,384 5,159
-------- --------
Comprehensive income ......................................................... $ 11,854 $ 27,505
======== ========
Disclosure of reclassification adjustment:
Unrealized holding gains arising during the period on securities sold...... $ 231
Less: Adjustment for gains included in net income......................... (2,835)
--------
Net reclassification adjustment for gains recognized in other
comprehensive income in prior years...................................... $ (2,604)
========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS)
Accumulated
other
Common Stock Additional comprehensive
----------------------- paid-in Retained income,
Shares Amount capital earnings net of taxes Total
---------- ---------- ---------- ---------- ------------- ----------
Balances at December 31, 1998 ........... 60,800,357 $ 608 $ 166,234 $ 257,170 $ 12,364 $ 436,376
Net income .............................. -- -- -- 9,470 -- 9,470
Change in unearned directors'
compensation .......................... -- -- 14 -- -- 14
Other comprehensive income, net of taxes:
Change in unrealized gain on
securities available for sale ...... -- -- -- -- 2,209 2,209
Change in unrealized foreign
currency translation loss .......... -- -- -- -- 175 175
---------- ---------- ---------- ---------- ---------- ----------
Balances at March 31, 1999 .............. 60,800,357 $ 608 $ 166,248 $ 266,640 $ 14,748 $ 448,244
========== ========== ========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
6
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the three months ended March 31, 1999 1998
- ----------------------------------------------------------------------------------- --------- ---------
Cash flows from operating activities:
Net income ..................................................................... $ 9,470 $ 22,346
Adjustments to reconcile net income to net cash used in operating activities:
Net cash provided from trading activities ...................................... 16,616 24,629
Proceeds from sales of loans available for sale ................................ 100,817 166,577
Purchases of loans available for sale .......................................... (14,663) (321,716)
Origination of loans available for sale ........................................ (286,238) (182,522)
Principal payments received on loans available for sale ........................ 5,925 19,868
Premium amortization (discount accretion), net ................................. 6,609 38,309
Depreciation and amortization .................................................. 5,137 7,940
Provision for loan losses ...................................................... 3,739 2,254
Provision for real estate owned ............................................... 5,061 4,234
Gain on interest-earning assets, net .......................................... (20,142) (28,737)
Gain on real estate owned, net ................................................. (9,202) (8,763)
Loss on real estate held for investment ........................................ (50) --
Gain on sale of low-income housing tax credit interests ...................... -- (4,746)
Equity in losses of unconsolidated entities, net ............................... 1,245 --
Decrease (increase) in principal, interest and dividends receivable ............ 4,927 (5,792)
Decrease (increase) in income taxes receivable ................................. 3,144 (22,554)
Increase in deferred tax asset ................................................. (1,012) (1,558)
Increase in escrow advances .................................................... (11,606) (326)
Decrease (increase) in other assets ............................................ 26,206 (23,322)
Decrease in accrued expenses, interest payable and other liabilities ........... (5,555) (6,994)
--------- ---------
Net cash used in operating activities ............................................. (159,572) (320,873)
--------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale ........................... 633 3,658
Purchases of securities available for sale ..................................... (105,401) (242,565)
Maturities of and principal payments received on securities available for sale.. 128,598 31,738
Purchase of securities held for investment ..................................... -- (45,415)
Purchase of low-income housing tax credit interests ............................ (11,746) (8,226)
Proceeds from sales of discount loans .......................................... 143,225 240,688
Proceeds from sales of loans held for investment ............................... 29,284 --
Purchase and originations of loans held for investment,
net of undisbursed loan funds ................................................ (9,630) (33,659)
Purchase of discount loans ..................................................... (86,117) (64,774)
Proceeds from sale of real estate held for investment .......................... 4,358 --
Purchase of and capital improvements to real estate held for investment ........ (8,099) (5,028)
Principal payments received on loans held for investment ....................... 32,578 29,995
Principal payments received on discount loans .................................. 31,771 49,267
Proceeds from sales of real estate owned ....................................... 64,135 50,660
Purchase of real estate owned in connection with discount loan purchases ....... (8,160) (2,915)
Acquisition of subsidiaries .................................................... -- (8,064)
Additions to premises and equipment ............................................ (7,648) (7,847)
--------- ---------
Net cash provided (used) in investing activities .................................. 197,781 (12,487)
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(Continued on next page)
7
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
For the three months ended March 31, 1999 1998
- --------------------------------------------------------------------------------- --------- ---------
Cash flows from financing activities:
Decrease in deposits ......................................................... $(333,589) $ (49,228)
Increase in securities sold under agreements to repurchase ................... 6,423 60,169
Repayment of short-term notes ................................................ -- (163)
Proceeds from issuance of obligations under lines of credit, net of repayments 145,475 323,367
Repurchase of subordinated debentures ........................................ (2,000) --
Exercise of common stock options ............................................. -- 14,222
Repurchase of common stock options ........................................... -- (14,107)
--------- ---------
Net cash (used) provided by financing activities ................................ (183,691) 334,260
--------- ---------
Net (decrease) increase in cash and cash equivalents ............................ (145,482) 900
Cash and cash equivalents at beginning of period ................................ 445,179 151,832
--------- ---------
Cash and cash equivalents at end of period ...................................... $ 299,697 $ 152,732
========= =========
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions ............................ $ 80,399 $ 17,463
Interest earning deposits .................................................... 18,798 31,269
Federal funds sold and repurchase agreements ................................. 200,500 104,000
--------- ---------
$ 299,697 $ 152,732
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................... $ 32,009 $ 30,836
========= =========
Income taxes ............................................................... $ 802 $ 21,653
========= =========
Supplemental schedule of non-cash investing and financing activities:
Real estate owned acquired through foreclosure ............................. $ 57,093 $ 43,704
========= =========
Exchange of discount loans and loans available for sale for securities ..... $ 224,210 $ 388,949
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
8
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in conformity with the instructions to Form 10-Q and Article 10, Rule
10-01 of Regulation S-X for interim financial statements. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles ("GAAP") for complete financial statements. The
consolidated financial statements include the accounts of Ocwen Financial
Corporation ("OCN" or the "Company") and its subsidiaries. OCN owns directly and
indirectly all of the outstanding common and preferred stock of its primary
subsidiaries, Ocwen Federal Bank FSB (the "Bank"), Investors Mortgage Insurance
Holding Company ("IMI"), Ocwen UK plc ("Ocwen UK") and Ocwen Technology Xchange,
Inc. ("OTX"). OCN also owns 97.8% of Ocwen Financial Services ("OFS"), with the
remaining 2.2% owned by Admiral Home Loan ("Admiral") and reported in the
consolidated financial statements as a minority interest. All significant
intercompany transactions and balances have been eliminated in consolidation.
The Bank is a federally chartered savings bank regulated by the Office
of Thrift Supervision ("OTS").
In the opinion of management, the accompanying financial statements
contain all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the Company's financial condition at March 31, 1999 and
December 31, 1998, the results of its operations for the three months ended
March 31, 1999 and 1998, its comprehensive income for the three months ended
March 31, 1999 and 1998, its cash flows for the three months ended March 31,
1999 and 1998, and its changes in stockholders' equity for the three months
ended March 31, 1999. The results of operations and other data for the three
month period ended March 31, 1999 are not necessarily indicative of the results
that may be expected for any other interim periods or the entire year ending
December 31, 1999. The unaudited consolidated financial statements presented
herein should be read in conjunction with the audited consolidated financial
statements and related notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998. Certain reclassifications have
been made to the prior period's consolidated financial statements to conform to
the March 31, 1999 presentation.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the dates of the statements of financial condition and
revenues and expenses for the periods covered. Actual results could differ from
those estimates and assumptions.
NOTE 2 CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative and hedging activities and supersedes and
amends a number of existing standards. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial condition. The gain or loss recognition is determined on the intended
use and resulting designation of the financial instruments as follows:
o Gains or losses on derivative instruments not designated as hedging
instruments are recognized in the period of change in fair value.
o Gains or losses on derivative instruments designated as hedging the
exposure to changes in the fair value of a recognized asset, liability
or firm commitment are recognized in earnings in the period of the fair
value change, together with the offsetting fair value loss or gain on
the hedged item.
o Gains or losses on derivative instruments designated as hedging
exposure to variable cash flows arising from a forecasted transaction
are initially reported, to the extent the fair value change is offset
by the change in the forecasted cash flows, as a component of other
comprehensive income. The portion of the change in fair value in excess
of the offsetting change in forecasted cash flows is reported in
earnings in the period of the change.
9
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
o Gains or losses on derivative instruments designated as foreign
currency hedges of net investments in foreign operations are reported
in other comprehensive income as part of the foreign currency
translation adjustment.
SFAS No. 133 precludes the use of nonderivative financial instruments
as hedging instruments, except that nonderivative financial instruments
denominated in a foreign currency may be designated as a hedge of the foreign
currency exposure of an unrecognized firm commitment denominated in a foreign
currency or a net investment in a foreign operation.
Under SFAS No. 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of SFAS No. 133 should be as
of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the provisions
of SFAS No. 133. Earlier application of SFAS No. 133 is encouraged but is
permitted only as of the beginning of any fiscal quarter that begins after
issuance of SFAS No. 133. The Company has not yet adopted SFAS No. 133 nor has
it determined what the impact on the results of operations, financial position
or cash flows would be as a result of implementing SFAS No. 133.
NOTE 3 CAPITAL SECURITIES
In August 1997, Ocwen Capital Trust I ("OCT"), a wholly-owned
subsidiary of OCN, issued $125.0 million of 10 7/8% Capital Securities (the
"Capital Securities"). Proceeds from issuance of the Capital Securities were
invested in 10 7/8% Junior Subordinated Debentures issued by OCN. The Junior
Subordinated Debentures, which represent the sole assets of OCT, will mature on
August 1, 2027.
Holders of the Capital Securities are entitled to receive cumulative
cash distributions accruing from the date of original issuance and payable
semi-annually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998, at an annual rate of 10 7/8% of the liquidation amount of
$1,000 per Capital Security. Payment of distributions out of moneys held by OCT,
and payments on liquidation of OCT or the redemption of Capital Securities, are
guaranteed by the Company to the extent OCT has funds available. If the Company
does not make principal or interest payments on the Junior Subordinated
Debentures, OCT will not have sufficient funds to make distributions on the
Capital Securities, in which event the guarantee shall not apply to such
distributions until OCT has sufficient funds available.
The Company has the right to defer payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 10 consecutive semi-annual periods with respect to each deferral
period, provided that no extension period may extend beyond the stated maturity
of the Junior Subordinated Debentures. Upon the termination of any such
extension period and the payment of all amounts then due on any interest payment
date, the Company may elect to begin a new extension period. Accordingly, there
could be multiple extension periods of varying lengths throughout the term of
the Junior Subordinated Debentures. If interest payments on the Junior
Subordinated Debentures are deferred, distributions on the Capital Securities
will also be deferred and the Company may, and may not permit any subsidiary of
the Company to, (i) declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, the Company's
capital stock or (ii) make any payment of principal, interest or premium, if
any, on or repay, repurchase or redeem any debt securities that rank PARI PASSU
with or junior to the Junior Subordinated Debentures. During an extension
period, interest on the Junior Subordinated Debentures will continue to accrue
at the rate of 10 7/8% per annum, compounded semi-annually.
10
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
The Junior Subordinated Debentures are redeemable prior to maturity at
the option of the Company, subject to the receipt of any necessary prior
regulatory approval, (i) in whole or in part on or after August 1, 2007 at a
redemption price equal to 105.438% of the principal amount thereof on August 1,
2007 declining ratably on each August 1 thereafter to 100% on or after August 1,
2017, plus accrued interest thereon, or (ii) at any time, in whole (but not in
part), upon the occurrence and continuation of a special event (defined as a tax
event, regulatory capital event or an investment company event) at a redemption
price equal to the greater of (a) 100% of the principal amount thereof or (b)
the sum of the present values of the principal amount and premium payable with
respect to an optional redemption of such Junior Subordinated Debentures on
August 1, 2007, together with scheduled payments of interest from the prepayment
date to August 1, 2007, discounted to the prepayment date on a semi-annual basis
at the adjusted Treasury rate plus accrued interest thereon to the date of
prepayment. The Capital Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at maturity or
their earlier redemption, in an amount equal to the amount of the related Junior
Subordinated Debentures maturing or being redeemed and at a redemption price
equal to the redemption price of the Junior Subordinated Debentures, plus
accumulated and unpaid distributions thereon to the date of redemption.
For financial reporting purposes, OCT is treated as a subsidiary of the
Company and, accordingly, the accounts of OCT are included in the consolidated
financial statements of the Company. Intercompany transactions between OCT and
the Company, including the Junior Subordinated Debentures, are eliminated in the
consolidated financial statements of the Company. The Capital Securities are
presented as a separate caption between liabilities and stockholders' equity in
the consolidated statement of financial condition of the Company as
"Company-obligated, mandatorily redeemable securities of subsidiary trust
holding solely junior subordinated debentures of the Company". Distributions
payable on the Capital Securities are recorded as a separate caption immediately
following non-interest expense in the consolidated statement of operations of
the Company. The Company intends to continue this method of accounting going
forward.
NOTE 4 DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments for the purpose of
reducing its exposure to adverse fluctuations in interest and foreign currency
exchange rates. While these hedging instruments are subject to fluctuations in
value, such fluctuations are generally offset by the change in value of the
underlying exposures being hedged.
INTEREST RATE MANAGEMENT
In managing its interest rate risk, the Company on occasion enters into
swaps. Under swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional amount. The terms
of the swaps provide for the Company to receive a floating rate of interest
equal to the London Interbank Offered Rate ("LIBOR") and to pay fixed interest
rates. The notional amount of the outstanding swap is amortized (i.e., reduced)
monthly based upon estimated prepayment rates. The Company had no interest rate
swaps outstanding at March 31, 1999 and December 31, 1998.
The Company also enters into short sales of Eurodollar and U.S.
Treasury interest rate futures contracts as part of its overall interest rate
risk management activity. Interest rate futures contracts are commitments to
either purchase or sell designated financial instruments at a future date for a
specified price and may be settled in cash or through delivery. Eurodollar
futures contracts have been sold by the Company to hedge the maturity risk of
certain short-duration mortgage-related securities. U.S. Treasury futures have
been sold by the Company to hedge the risk of a reduction in the market value of
fixed-rate mortgage loans and certain fixed-rate mortgage-backed and related
securities available for sale in a rising interest rate environment. The Company
had no interest rate futures contracts outstanding at March 31, 1999 and
December 31, 1998.
11
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
FOREIGN CURRENCY MANAGEMENT
The Company enters into foreign currency derivatives to hedge its
equity investments in Ocwen UK and Kensington. It is the Company's policy to
periodically adjust the amount of foreign currency derivative contracts it has
entered into in response to changes in its recorded equity investment in these
foreign entities.
The Company has determined that the local currency of its foreign
subsidiary, Ocwen UK and its equity investment in Kensington, is the functional
currency. In accordance with SFAS No. 52, "Foreign Currency Translation", assets
and liabilities denominated in a foreign currency are translated into U.S.
dollars at the current rate of exchange existing at the statement of financial
condition date and revenues and expenses are translated at average monthly
rates.
The Company sells short foreign currency futures contracts ("currency
futures") to hedge its foreign currency exposure related to its equity
investment in Ocwen UK. Periodically, the Company adjusts the amount of currency
futures contracts it has entered into in response to changes in its equity
investment in Ocwen U.K. In addition, during 1998 the Company sold short foreign
currency futures contracts to further hedge its foreign currency exposure
related to its equity investment in Kensington. Under the terms of the currency
futures, the Company had the right to receive $1,547 and pay (pound)938. These
currency futures were closed during January 1999. The fair value of the currency
futures is based on quoted market prices.
The Company entered into a foreign currency swap agreement ("currency
swap") with a AAA-rated counterparty to hedge its equity investment in
Kensington. Under the terms of the currency swap, the Company will swap
(pound)27,500 for $43,546 in five years based on the exchange rate on the date
the contract became effective. The discount on the currency swap, representing
the difference between the contracted forward rate and the spot rate at the date
of inception, is amortized over the life of the currency swap on a straight-line
basis. The value of the currency swap is calculated as the notional amount of
the currency swap multiplied by the difference between the spot rate at the date
of inception and the spot rate at the financial statement date.
The resulting translation adjustments, the unamortized discount on the
currency swap and the values of the hedging financial instruments are reported
as translation adjustments and included as a component of accumulated other
comprehensive income in stockholders' equity.
The following table sets forth the terms and values of these financial
instruments at March 31, 1999, and December 31, 1998.
Notional Amount
--------------------------- Contract Unamortized
Maturity Pay Receive Rate Discount Fair Value
---------------------- --------- ------- ----------- ----------
MARCH 31, 1999:
Currency swap...................... 1999 (pound)27,500 $ 43,546 1.5835 $ 1,385 $ (765)
============= ========= ========= =========
British Pound currency futures.... 1999 (pound)43,375 69,617 1.6050 n/a 252
1999 2,125 3,469 1.6324 n/a (46)
------------- ---------
(pound)45,500 $ 73,086 $ 206
============= ========= =========
DECEMBER 31, 1998:
Currency swap...................... 2003 (pound)27,500 $ 43,546 1.5835 $ 1,562 $ (2,096)
============= ========= ========= =========
British Pound currency futures.... 1999 (pound) 938 1,547 1.6500 n/a (6)
1999 26,563 43,828 1.6500 n/a (181)
------------- --------- ---------
(pound)27,501 $ 45,375 $ (187)
============= ========= =========
12
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
Because interest rate futures and foreign currency futures contracts
are exchange traded, holders of these instruments look to the exchange for
performance under these contracts and not the entity holding the offsetting
futures contract, thereby minimizing the risk of nonperformance under these
contracts. The Company is exposed to credit loss in the event of nonperformance
by the counterparty to the interest and currency swaps and controls this risk
through credit monitoring procedures. The notional principal amount does not
represent the Company's exposure to credit loss.
On January 1, 1999, eleven of the fifteen member countries of the
European Union converted to a common currency (the "Euro"). Since such time
transactions have been conducted using either the Euro or the countries'
existing currencies. Although the United Kingdom is a member of the European
Union, it is not one of the participating countries in the Euro conversion, and
the Company currently does not have transactions or operations in any of the
participating countries. As a result, the Euro conversion had no effect on the
Company's financial condition or results of operations.
NOTE 5 REGULATORY REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions subject to Office
of Thrift Supervision ("OTS") supervision. The Bank must follow specific capital
guidelines stipulated by the OTS which involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items. An institution
that fails to comply with its regulatory capital requirements must obtain OTS
approval of a capital plan and can be subject to a capital directive and certain
restrictions on its operations. At March 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 holding gains or losses on debt securities available for sale.
o Risk-based capital consisting of core capital plus certain subordinated
debt and other capital instruments and, subject to certain limitations,
general valuation allowances on loans receivable, equal to 8.00 percent of
the value of risk-weighted assets.
At March 31, 1999, the Bank was "well-capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To be
categorized as "well-capitalized", the Bank must maintain minimum core capital,
Tier 1 risk-based capital and total risk-based capital ratios as set forth in
the table below. The Bank's capital amounts and classification are subject to
review by federal regulators about components, risk-weightings and other
factors. There are no conditions or events since March 31, 1999, that management
believes have changed the institution's category.
13
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
The following tables summarize the Bank's actual and required
regulatory capital at March 31, 1999:
To Be Well
Minimum Capitalized for Commitment
for Capital Prompt Corrective Capital
Actual Adequacy Purposes Action Provisions Requirements
---------------------- --------------------- ---------------------- ------------
Ratio Amount Ratio Amount Ratio Amount Ratio
------ ----------- ----- ----------- ----- ----------- ------------
Stockholders' equity, and ratio to total assets.. 10.86% $ 251,189
Net unrealized gain on certain available for
sale securities................................ (417)
Excess mortgage servicing rights................. (354)
-----------
Tangible capital, and ratio to adjusted total
assets......................................... 10.83% $ 250,418 1.50% $ 34,686
=========== ===========
Tier 1 (core) capital, and ratio to adjusted
total assets................................... 10.83% $ 250,418 3.00% $ 69,372 5.00% $ 115,620 9.00%
=========== ===========
Low-level recourse deduction..................... (11,661)
-----------
Tier 1 capital, and ratio to risk-weighted
assets......................................... 12.83% $ 238,757 6.00% $ 111,666
=========== ===========
Allowance for loan and lease losses.............. 23,307
Subordinated debentures.......................... 98,000
-----------
Tier 2 capital................................... 121,307
-----------
Total risk-based capital, and ratio to
risk-weighted assets........................... 19.35% $ 360,064 8.00% $ 148,888 10.00% $ 186,110 13.00%
=========== =========== ===========
Total regulatory assets.......................... $ 2,313,167
===========
Adjusted total assets............................ $ 2,312,396
===========
Risk-weighted assets............................. $ 1,861,101
===========
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
distributions 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 recently published amendments to its capital distribution
regulation which became effective April 1, 1999. Under the revised regulation,
the Bank is required to file either an application or a notice with the OTS at
least 30 days prior to making a capital distribution. The OTS may deny the
Bank's application or disapprove its notice if the OTS determines that (a) the
Bank will be "undercapitalized", "significantly undercapitalized" or "critically
under capitalized", as defined in the OTS capital regulations, following the
capital distribution, (b) the proposed capital distribution raises safety and
soundness concerns or (c) the proposed capital distribution violates a
prohibition contained in any statute, regulation, agreement between the Bank and
the OTS or a condition imposed on the Bank in an application or notice approved
by the OTS.
14
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
In addition to these OTS regulations governing capital distributions,
the indenture governing the $98,000 of 12% subordinated debentures (the
"Debentures") due 2005 and issued by the Bank on June 12, 1995 in the original
amount of $100,000, limits the declaration or payment of dividends and the
purchase or redemption of common or preferred stock in the aggregate to the sum
of 50% of consolidated net income and 100% of all capital contributions and
proceeds from the issuance or sale (other than to a subsidiary) of common
stock, since the date the Debentures were issued.
Following an examination by the OTS in late 1996 and early 1997, the
Bank committed to the OTS to maintain a core capital (leverage) ratio and a
total risk-based capital ratio of at least 9% and 13%, respectively. The Bank
continues to be in compliance with this commitment as well as the regulatory
capital requirements of general applicability (as indicated above). Based on
discussions with the OTS, the Bank believes that this commitment does not affect
its status as a "well-capitalized" institution, assuming the Bank's continued
compliance with the regulatory capital requirements to be maintained by it
pursuant to such commitment.
NOTE 6 COMMITMENTS AND CONTINGENCIES
At March 31, 1999, the Company had commitments to (i) purchase and
originate $42,017 of subprime loans secured by single family residential
properties, subject to the borrower meeting certain conditions, (ii) fund
$14,261 of loans secured by multi-family residential buildings, and (iii) fund
$2,304 of loans secured by office buildings. In addition, the Company through
the Bank had commitments under outstanding letters of credit in the amount of
$35,382 at March 31, 1999. The Company, through its investment in subordinate
securities and subprime residuals, which had a carrying value of $221,181 at
March 31, 1999, supports senior classes of securities.
NOTE 7 BUSINESS SEGMENT REPORTING
Operating segments are defined as components of an enterprise that (a)
engage in business activities from which it may earn revenues and incur
expenses, (b) whose operating results are regularly reviewed by the enterprise's
chief operating decision maker to make decisions about resources to be allocated
to the segment and assess its performance, and (c) for which discrete financial
information is available. An operating segment may engage in business activities
for which it has yet to earn revenues. The Company conducts a variety of
business activities within the following segments:
15
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
========================================================================================================================
Net Interest Non-Interest Non-Interest Net (Loss) Total
At or for the three months ended March 31, 1999 Income Income Expense Income Assets
- ----------------------------------------------- ------------ ------------ ------------ ----------- -----------
Discount loans:
Single family residential loans ......... $ 6,882 $ 9,571 $ 4,046 $ 4,098 $ 473,860
Commercial real estate loans ............ 7,082 7,635 6,097 2,964 734,301
----------- ----------- ----------- ----------- -----------
13,964 17,206 10,143 7,062 1,208,161
----------- ----------- ----------- ----------- -----------
Mortgage loan servicing:
Domestic ................................ 1,193 13,761 9,482 3,352 71,914
Foreign (UK) ............................ 80 4,926 2,535 1,705 5,133
----------- ----------- ----------- ----------- -----------
1,273 18,687 12,017 5,057 77,047
----------- ----------- ----------- ----------- -----------
Investment in low-income housing tax credits (2,360) 624 3,269 1,392 214,794
Commercial real estate lending ............. 1,574 724 405 2,087 63,188
OTX ........................................ 6 392 3,403 (1,891) 23,481
Subprime single family residential lending:
Domestic ................................ 4,330 1,616 6,779 (614) 216,005
Foreign (UK) ............................ 7,082 668 7,343 (1,682) 385,591
----------- ----------- ----------- ----------- -----------
11,412 2,284 14,122 (2,296) 601,596
----------- ----------- ----------- ----------- -----------
Investment securities ...................... 5,279 (101) 1,608 1,973 353,614
Other ...................................... 1,832 2,023 4,083 (1,647) 420,056
----------- ----------- ----------- ----------- -----------
32,980 41,839 49,050 11,737 2,961,937
Unallocated ................................ (6,244) 3,736 3,073 (2,267) 168,757
----------- ----------- ----------- ----------- -----------
$ 26,736 $ 45,575 $ 52,123 $ 9,470 $ 3,130,694
=========== =========== =========== =========== ===========
16
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS AND BRITISH POUNDS IN THOUSANDS, EXCEPT SHARE DATA)
========================================================================================================================
Net Interest Non-Interest Non-Interest Net (Loss) Total
At or for the three months ended March 31, 1998 Income Income Expense Income Assets
- ----------------------------------------------- ------------ ------------ ------------ ----------- -----------
Discount loans:
Single family residential loans ......... $ 6,855 $ 20,296 $ 3,740 $ 13,631 $ 682,965
Commercial real estate loans ............ 10,918 4,904 4,311 4,743 841,906
----------- ----------- ----------- ----------- -----------
17,773 25,200 8,051 18,374 1,524,871
----------- ----------- ----------- ----------- -----------
Mortgage loan servicing:
Domestic ................................ 1,068 9,219 7,865 1,484 15,515
Foreign (UK) ............................ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
1,068 9,219 7,865 1,484 15,515
----------- ----------- ----------- ----------- -----------
Investment in low-income housing tax credits (2,491) 4,746 1,646 5,376 178,259
Commercial real estate lending ............. 1,092 (27) 736 (250) 227,966
OTX ........................................ -- 205 1,307 (705) 18,399
Subprime single family residential lending:
Domestic ................................ 3,632 7,486 9,770 511 272,341
Foreign (UK) ............................ -- -- -- -- 45,417
----------- ----------- ----------- ----------- -----------
3,632 7,486 9,770 511 317,758
----------- ----------- ----------- ----------- -----------
Investment securities ...................... 699 (6,062) 1,522 (5,139) 782,843
Other ...................................... 2,127 937 2,642 (224) 238,697
----------- ----------- ----------- ----------- -----------
23,900 41,704 33,539 19,427 3,304,308
Unallocated ................................ (2,732) (323) 472 2,919 116,834
----------- ----------- ----------- ----------- -----------
$ 21,168 $ 41,381 $ 34,011 $ 22,346 $ 3,421,142
=========== =========== =========== =========== ===========
Other consists primarily of individually insignificant business
activities, including the Company's historical loan portfolio of conventional
single family residential loans, small commercial loan originations, unsecured
collections, the operations of OCC and equity in earnings of investment in OAC.
Unallocated amounts represent amounts not allocated to the operating segments
and are primarily comprised of consolidated tax effects not attributed to
individual units.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
GENERAL
The Company's primary business activities currently consist of its
single family residential, multi-family residential and commercial discount loan
acquisition and resolution activities, commercial real estate lending, subprime
single family residential lending, mortgage loans serviced for others, the
development of loan servicing technology and software for the mortgage and real
estate industries, investments in a wide variety of mortgage-related securities
and investments in low-income housing tax credit interests.
The Company is a registered savings and loan holding company subject to
regulation by the OTS. The Bank is subject to regulation by the OTS, as its
chartering authority, and by the Federal Deposit Insurance Corporation ("FDIC")
as a result of its membership in the Savings Association Insurance Fund ("SAIF")
administered by the FDIC, which insures the Bank's deposits up to the maximum
extent permitted by law. The Bank is also subject to certain regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board") and
currently is a member of the Federal Home Loan Bank ("FHLB") of New York, one of
the 12 regional banks which comprise the FHLB System.
The consistency of the operating results of the Company can be
significantly affected by inter-period variations in: (i) the amount of assets
acquired, particularly discount loans; (ii) the amount of resolutions of
discount loans, particularly large multi-family residential and commercial real
estate loans; (iii) the amount of multi-family residential and commercial real
estate loans which mature or are prepaid, particularly loans with terms pursuant
to which the Company participates in the profits of the underlying real estate;
(iv) sales by the Company of loans and securities; and (v) the volume and
frequency of the Company's securitization of loans. Additionally, the results
for the first quarter of 1998 do not include the operations of Ocwen UK, which
was acquired in April 1998.
The Company continuously evaluates opportunities to expand its business
in order to enhance shareholder value. To that end, the Company has, like many
other companies in the financial services industry, from time to time considered
and explored a variety of potential material transactions and participated in
discussions regarding such transactions with third parties, and the Company will
likely continue to do so in the future. The Company cannot predict whether or
when any such transaction may be consummated or the form that such a transaction
may take.
The following discussion of the Company's consolidated financial
condition, results of operations, capital resources and liquidity should be read
in conjunction with the Interim Consolidated Financial Statements and related
Notes included in Item 1 hereof.
RECENT DEVELOPMENTS
On April 16, 1999, the Company announced that it has proposed to the
Board of Directors of Ocwen Asset Investment Corporation (NYSE: OAC) a possible
business combination between the two companies. Under the Company's proposal, a
newly-formed subsidiary of OCN would merge into OAC in a taxable transaction,
and each outstanding share of common stock of OAC (other than those owned by OCN
or its subsidiaries) would be converted into 0.57 shares of common stock of OCN.
The proposal requires the payment of OAC's final 1998 dividend, which was
deferred by OAC's Board of Directors and is expected to be approximately $15.5
million, or $0.82 per share, prior to consummation of the proposed merger. OCN's
proposal is subject to, among other things, the satisfactory negotiation of
final terms of an acquisition agreement. Consummation of OCN's proposal would be
subject to approval by the OAC shareholders. There can be no assurance that the
parties will agree to final terms or that any business combination will be
concluded.
On April 16, 1999, the Company announced that its Board of Directors
has authorized the repurchase of up to six million of its issued and outstanding
shares of common stock. No repurchases of such shares have been closed since the
announcement to date.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
SELECTED CONSOLIDATED FINANCIAL INFORMATION March 31, December 31,
1999 1998 Change
----------- ----------- -----------
BALANCE SHEET DATA (Dollars in thousands)
Total assets ................................................................ $ 3,130,694 $ 3,308,079 (5)%
Securities available for sale, at fair value ................................ 566,739 593,347 (4)
Loans available for sale, at lower of cost or market ........................ 374,094 177,847 110
Loan portfolio, net ......................................................... 177,511 230,312 (23)
Discount loan portfolio, net ................................................ 893,180 1,026,511 (13)
Investment in low-income housing tax credit interests ....................... 155,273 144,164 8
Investment in unconsolidated entities ....................................... 84,279 86,893 (3)
Real estate owned, net ...................................................... 208,831 201,551 4
Total liabilities ........................................................... 2,556,865 2,746,111 (7)
Deposits .................................................................... 1,841,427 2,175,016 (15)
Obligations outstanding under lines of credit ............................... 324,760 179,285 81
Notes and debentures ........................................................ 223,000 225,000 (1)
Capital securities .......................................................... 125,000 125,000 --
Stockholders' equity ........................................................ 448,244 436,376 3
At or For the Three Months Ended March 31,
--------------------------------------------
1999 1998 Change
----------- ----------- -----------
OPERATIONS DATA (Dollars in thousands)
Net interest income ......................................................... $ 26,736 $ 21,168 26%
Provision for loan losses ................................................... 3,739 2,253 66
Non-interest income ......................................................... 45,575 41,381 10
Non-interest expense ........................................................ 52,123 34,011 53
Equity in losses earnings of investment in unconsolidated entities .......... (1,245) -- --
Income tax expense .......................................................... 2,368 573 313
Net income .................................................................. 9,470 22,346 (58)
PER COMMON SHARE
Earnings per share:
Basic .................................................................... $ 0.16 $ 0.37 (57)
Diluted .................................................................. 0.16 0.36 (56)
Stock price:
High ..................................................................... $ 11.6250 $ 30.7500 (62)
Low ...................................................................... 7.7500 22.2500 (65)
Close .................................................................... 8.8125 27.7500 (68)
KEY RATIOS
Annualized return on average assets ......................................... 1.19% 2.77% (57)
Annualized return on average equity ......................................... 8.62 20.75 (59)
Efficiency ratio(1) ......................................................... 74.34 54.37 37
Core (leverage) capital ratio ............................................... 10.83 10.24 6
Risk-based capital ratio .................................................... 19.35 17.99 8
(1) The efficiency ratio represents non-interest expense divided by the sum
of net interest income before provision for loan losses, non-interest
income and equity in losses of investment in unconsolidated entities.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
RESULTS OF OPERATIONS: THREE MONTHS ENDED MARCH 31, 1999 VERSUS THREE MONTHS
ENDED MARCH 31, 1998
SEGMENT PROFITABILITY. The following table presents the contribution by
business segment to the Company's net income for the periods indicated.
Three Months Ended March 31,
--------------------------------
Increase
1999 1998 (Decrease)
-------- -------- --------
Discount loans: (Dollars in thousands)
Single family residential loans ......... $ 4,098 $ 13,631 $ (9,533)
Commercial real estate loans ............ 2,964 4,743 (1,779)
-------- -------- --------
7,062 18,374 (11,312)
-------- -------- --------
Mortgage loan servicing:
Domestic ................................ 3,352 1,484 1,868
Foreign (UK) ............................ 1,705 -- 1,705
-------- -------- --------
5,057 1,484 3,573
-------- -------- --------
Investment in low-income housing tax credits 1,392 5,376 (3,984)
Commercial real estate lending ............. 2,087 (250) 2,337
OTX ........................................ (1,891) (705) (1,186)
Subprime single family residential lending:
Domestic ................................ (614) 511 (1,125)
Foreign (UK) ............................ (1,682) -- (1,682)
-------- -------- --------
(2,296) 511 (2,807)
-------- -------- --------
Investment securities ...................... 1,973 (5,139) 7,112
Other ...................................... (1,647) (224) (1,423)
-------- -------- --------
11,737 19,427 (7,690)
Unallocated ................................ (2,267) 2,919 (5,186)
-------- -------- --------
Net income .............................. $ 9,470 $ 22,346 $(12,876)
======== ======== ========
o SINGLE FAMILY RESIDENTIAL DISCOUNT LOANS. In the first quarter of 1999, OCN
completed one securitization of single family residential loans with an
aggregate unpaid principal balance of $137.3 million and recorded a total
gain of $13.9 million. Of this amount, $12.0 million was a cash gain, and
$1.9 million was non-cash. In the 1998 first quarter, the Company completed
one securitization of single family residential loans with an aggregate
unpaid principal balance of $227.5 million, which accounted for a total
gain of $16.7 million, of which $0.8 million was a cash gain and $15.9
million was a non-cash gain. The higher cash component of the gain in the
1999 securitization reflected lower subordination levels, compared to the
1998 transaction, which in turn reflected the better credit profile of the
mortgages collateralizing the transaction. All of these mortgages were
reperforming at the time of the securitization, whereas the 1998
transaction consisted entirely of loans acquired from HUD, the majority of
which remained in forbearance at the time of securitization.
o INVESTMENT IN LOW-INCOME HOUSING TAX CREDITS. The $4.0 million decrease in
net income for the first quarter of 1999 reflected a $4.7 million gain on
the sale of tax credit interests in the first quarter of 1998. There were
no such sales in the first quarter of 1999. Net operating losses from tax
credit properties in service amounted to $1.9 million and $1.2 million
during the first quarter of 1999 and 1998, respectively.
o SUBPRIME SINGLE-FAMILY RESIDENTIAL LENDING. In the fourth quarter of 1998,
the Company closed its domestic retail branch network, wrote down the
related assets and goodwill, and centralized its remaining operations in
West Palm Beach. In 1999, the Company closed its domestic wholesale branch
network, resulting in a 1999 first quarter pre-tax charge of $1.6 million.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The domestic segment lost $614,000 in the first quarter of 1999, compared
to net income of $511,000 in the first quarter of 1998.
In the first quarter of 1999, the Company securitized loans (domestic)
aggregating $86.9 million and recorded a total gain on sale of $2.7 million
and a non-cash gain of $4.4 million. This resulted in a net loss for the
domestic subprime segment, excluding non-cash securitization gains, of $4.3
million in the first quarter of 1999, compared to a net loss of $9.1
million in the first quarter of 1998, after applying the effective tax rate
for each period to the securitization gains.
OCN lost $1.7 million in the first quarter of 1999 in its foreign (UK)
subprime single family residential lending business as a result of a
$900,000 loss related to the Company's investment in Kensington Mortgage
Company and a loss of $800,000 related to Ocwen UK.
o MORTGAGE LOAN SERVICING. The $3.6 million increase in net income from
mortgage loan servicing reflects an 88% increase in servicing fees as
compared to the first quarter of 1998, due to a 71% increase in the average
unpaid principal balance of loans serviced for others ($10.44 billion in
the first quarter of 1999 compared to $6.12 billion in the first quarter of
1998).
o OTX. Recently, OTX introduced its RealTrans(SM) software, an update to its
e-commerce solution for ordering mortgage and real estate products and
services via the Internet, which links banks, brokers, appraisers, agents,
title insurers, attorneys and other ancillary service providers to
facilitate the closing of mortgage and real estate transactions.
The losses recorded by OTX reflect the continued investment in the
development of this business.
o INVESTMENT SECURITIES. The $5.1 million loss on investment securities
during the first quarter of 1998 was primarily due to an $8.5 million
impairment loss on the Company's portfolio of AAA-rated agency
interest-only securities ("IOs"). The Company discontinued this investment
activity and sold the IOs during the second quarter of 1998.
NET INTEREST INCOME. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received from its interest-earning assets and the interest
expense paid on its interest-bearing liabilities. Net interest income is
determined by an institution's net interest spread (i.e., the difference between
the yield earned on its interest-earning assets and the rates paid on its
interest-bearing liabilities), the relative amount of interest-earning assets
and interest-bearing liabilities and the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities.
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resultant average yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest rate spread
and net interest margin. Information is based on daily balances during the
indicated periods.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Three months ended March 31,
----------------------------------------------------------------------------
1999 1998
-------------------------------------- ------------------------------------
Average Annualized Average Annualized
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- ----------- ---------- ----------- ---------- ----------
AVERAGE ASSETS: (Dollars in thousands)
Federal funds sold and repurchase agreements... $ 285,701 $ 3,396 4.75% $ 76,885 $ 1,032 5.37%
Securities available for sale (1).............. 491,701 17,189 13.98 529,180 7,945 6.01
Loans available for sale (2)................... 274,817 8,130 11.83 339,394 9,503 11.20
Loan portfolio (2)............................. 217,364 6,165 11.35 281,215 6,262 8.91
Discount loan portfolio........................ 970,437 30,003 12.37 1,379,114 36,797 10.67
Investment securities and other................ 35,957 651 7.24 25,623 485 7.57
----------- ----------- ----------- ----------
Total interest-earning assets, interest income. 2,275,977 65,534 11.52 2,631,411 62,024 9.43
----------- ----------
Non-interest earning cash...................... 114,821 19,755
Allowance for loan losses...................... (24,903) (25,910)
Investments in low-income housing
tax credit interests........................ 147,201 131,699
Investment in unconsolidated entities.......... 86,286 22,067
Real estate owned, net......................... 213,783 171,952
Investment in real estate...................... 40,268 77,565
Other assets................................... 322,094 196,487
----------- -----------
Total assets................................ $ 3,175,527 $ 3,225,026
=========== ===========
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits............... $ 64,209 640 3.99% $ 32,912 356 4.33%
Savings deposits............................... 1,566 9 2.30 1,735 10 2.31
Certificates of deposit........................ 1,733,722 26,179 6.04 1,790,973 27,479 6.14
----------- ---------- ----------- ----------
Total interest-bearing deposits............. 1,799,497 26,828 5.96 1,825,620 27,845 6.10
Securities sold under agreements to repurchase. 77,271 1,491 7.72 114,633 1,639 5.72
Federal Home Loan Bank advances................ -- -- -- 7,481 100 5.35
Obligations outstanding under lines of credit.. 242,458 3,724 6.14 284,210 4,520 6.36
Notes, debentures and other.................... 225,000 6,755 12.01 226,880 6,752 11.90
----------- ---------- ----------- ----------
Total interest-bearing liabilities,
interest expense .......................... 2,344,226 38,798 6.62 2,458,824 40,856 6.65
---------- ----------
Non-interest bearing deposits.................. 31,960 23,532
Escrow deposits................................ 195,125 111,094
Other liabilities.............................. 39,541 75,895
----------- -----------
Total liabilities........................... 2,604,008 2,669,345
Capital securities............................. 125,000 125,000
Stockholders' equity........................... 439,675 430,681
----------- -----------
Total liabilities and stockholders' equity.. $ 3,175,527 $ 3,225,026
=========== ===========
Net interest income before provision for
loan losses................................. $ 26,736 $ 21,168
========== ==========
Net interest rate spread....................... 4.90% 2.78%
Net interest margin............................ 4.70% 3.22%
Ratio of interest-earning assets to
interest-bearing liabilities................ 97% 107%
(1) Excludes effect of unrealized gains or losses on securities available
for sale.
(2) The average balances of loans available for sale and loan portfolio
include non-performing loans, interest on which is recognized on a cash
basis.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior rate), (ii) changes
in rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
1999 vs. 1998
For the three months ended March 31, ----------------------------------------------
Increase (decrease) due to
----------------------------------------------
Rate Volume Total
----------- ----------- -----------
Interest-earning assets: (Dollars in thousands)
Federal funds sold and repurchase agreements............. $ (131) $ 2,495 $ 2,364
Securities available for sale............................ 9,845 (601) 9,244
Loans available for sale................................. 514 (1,887) (1,373)
Loan portfolio........................................... 1,502 (1,599) (97)
Discount loan portfolio.................................. 5,236 (12,030) (6,794)
Investment securities and other.......................... (22) 188 166
----------- ----------- -----------
Total interest-earning assets.......................... 16,944 (13,434) 3,510
----------- ----------- -----------
Interest-bearing liabilities:
Interest-bearing demand deposits......................... (30) 314 284
Savings deposits......................................... -- (1) (1)
Certificate of deposit................................... (431) (869) (1,300)
----------- ----------- -----------
Total interest-bearing deposits........................ (461) (556) (1,017)
Securities sold under agreements to repurchase........... 476 (624) (148)
Federal Home Loan Bank advances.......................... (50) (50) (100)
Obligations outstanding under lines of credit............ (796) -- (796)
Notes, debentures and other interest-bearing obligations. 59 (56) 3
----------- ----------- -----------
Total interest-bearing liabilities..................... (772) (1,286) (2,058)
----------- ----------- -----------
Increase in net interest income............................. $ 17,716 $ (12,148) $ 5,568
=========== =========== ===========
The Company's net interest income before provision for loan losses of
$26.7 million increased $5.6 million or 21% during the three months ended March
31, 1999 as compared to the same period in the prior year. The increase in net
interest income reflects a $3.5 million increase in interest income and a $2.1
million decrease in interest expense due to an increase in the net interest
spread and a decrease in average interest-bearing liabilities offset by a
decreae in average interest-earning assets. The net interest spread increased
212 basis points during the three months ended March 31, 1999 as a result of a
209 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 net impact of these rate changes resulted in a $17.7 million
increase in net interest income. Average interest-earning assets decreased by
$355.4 million or 14% during the three months ended March 31, 1999 and reduced
interest income by $13.4 million, while average interest-bearing liabilities
decreased $114.6 million or 5% and reduced interest expense by $1.3 million. The
net impact of these volume changes resulted in a decrease of $12.1 million to
net interest income. The decrease in average interest-earning assets was
primarily due to a $408.7 million decrease in the average balance of discount
loans, a $64.6 million decrease in the average balance of loans available for
sale and a $63.9 million decrease in loan portfolio, offset by a $208.8 million
increase in the average balance of federal funds sold and repurchase agreements.
The decrease in average interest-bearing liabilities was primarily due to a
$41.8 million decrease in the average balance of obligations outstanding under
lines of credit, $37.4 million decrease in the average balance of securities
sold under agreements to repurchase and a $26.1 million decrease in the average
balance of deposits.
Interest income on the discount loan portfolio decreased by $6.8
million or 18% in the three months ended March 31, 1999, primarily as a result
of a $408.7 million or 30% decrease in the average balance of the discount loan
portfolio which was offset by a 170 basis point increase in the weighted average
yield earned. The yield on the discount loan portfolio is likely to fluctuate
from period to period as a result of the timing of resolutions, particularly the
resolution of large multi-family residential and commercial real estate loans,
and the mix of the overall portfolio between performing and nonperforming loans.
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Interest income on loans available for sale decreased $1.4 million or
14% during the first quarter of 1999 as compared to the same period in 1998
primarily as a result of a $64.6 million decrease in the average balance offset
by a 63 basis point increase in the weighted average yield earned. The decline
in the average balance reflects the closure of domestic branch networks, as well
as the acquisition of $292.8 million of loans from the U.S. operations of
Cityscape Financial Corp. during the first quarter of 1998.
Interest income on securities available for sale increased by $9.2
million or 116% during the first quarter of 1999 as compared to the same period
in 1998 primarily as a result of a 797 basis point increase in the weighted
average yield earned which was offset by a $37.5 million or 7% decline in the
average balance of securities available for sale. For the first quarter of 1999,
securities available for sale were comprised of AAA-rated collateralized
mortgage obligations, which had an average balance of $291.2 million and an
average yield of 5.91%, and subordinate and residual securities retained in
connection with securitization activities, which had an average balance of
$200.5 million and an average yield of 25.71%. In the first quarter of 1998,
OCN's securities available for sale included AAA-rated agency interest-only
securities ("IOs"), which had an average balance of $197.1 million during that
period. The average yield on the IOs was adversely affected by declining
interest rates and the resulting increase in prepayment speeds. During the
second quarter of 1998, OCN discontinued this investment activity and sold its
entire portfolio of IOs.
The 244 basis point increase in the average yield on the loan portfolio
during the first quarter of 1999 was primarily due to $780,000 of additional
interest received in connection with the repayment of multi-family construction
loans.
Interest expense on deposits decreased $1.0 million primarily due to a
$57.3 million or 3% decrease in the average balance of certificates of deposits.
Interest expense on obligations outstanding under lines of credit
decreased $796,000 primarily due to a $41.8 million decline in the average
balance. Lines of credit are used primarily to fund the acquisition and
origination of subprime single family loans at OFS and Ocwen UK. The decline in
the average balance of the lines of credit during the first quarter of 1999 is
consistent with the decline in the average balance of loans available for sale
during the same period. For additional information regarding lines of credit,
see "Changes in Financial Condition - Obligations Outstanding Under Lines of
Credit" and "Liquidity, Commitments and Off-Balance Sheet Risks."
PROVISIONS FOR LOAN LOSSES. Provisions for losses on loans are charged
to operations to maintain an allowance for losses on each of the loan portfolio
and the discount loan portfolio at a level which management considers adequate
based upon an evaluation of known and inherent risks in such loan portfolios.
Management's periodic evaluation is based upon portfolio composition, asset
classifications, historical loss experience, current economic conditions and
trends, collateral values and other relevant factors.
The following table sets forth the components of the Company's
provision for loan losses for the periods indicated.
Increase
For the three months ended March 31, 1999 1998 (Decrease)
- --------------------------------------------------------------- ----------- ----------- -----------
(Dollars in thousands)
Discount loans................................................ $ 4,689 $ 1,923 $ 2,766
Loan portfolio................................................ (950) 330 (1,280)
----------- ----------- -----------
Total....................................................... $ 3,739 $ 2,253 $ 1,486
=========== =========== ===========
During the three months ended March 31, 1999, the Company strengthened
its allowance for loan losses. At March 31, 1999, OCN had allowances for losses
of $23.9 million and $4.0 million on its discount loan and loan portfolios,
respectively, which amounted to 2.6% and 2.2% of the respective balances. OCN
maintained reserves of 2.0% and 2.1% on its discount loan and loan portfolios,
respectively, at December 31, 1998. The negative provision for loan portfolio
losses in the first quarter of 1999 reflected a decline in the gross loan
portfolio (primarily in commercial real estate mezzanine financing) of
approximately $53.8 million during that period. Overall, the Company's aggregate
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
allowance for losses on real estate owned and the loan portfolios remained
essentially unchanged at March 31, 1999 as compared to December 31, 1998.
Although management utilizes its best judgment in providing for
possible loan losses, there can be no assurance that the Company will not change
its provisions for possible loan losses in subsequent periods to a higher level
from that recorded to date in 1999. Changing economic and business conditions,
fluctuations in local markets for real estate, future changes in non-performing
asset trends, large upward movements in market interest rates or other reasons
could affect the Company's future provisions for loan losses. For further
discussion and analysis regarding the provisions for loan losses, see "Changes
in Financial Condition Allowances for Losses."
NON-INTEREST INCOME. The following table sets forth the principal
components of the Company's non-interest income during the periods indicated.
Increase
For the three months ended March 31, 1999 1998 (Decrease)
- ------------------------------------------------------------- ----------- ----------- -----------
(Dollars in thousands)
Servicing fees and other charges............................. $ 18,251 $ 9,724 $ 8,527
Gains on interest-earning assets, net........................ 20,142 24,754 (4,612)
Gain on real estate owned, net............................... 629 1,026 (397)
Other income................................................. 6,553 5,877 676
----------- ----------- -----------
Total................................................... $ 45,575 $ 41,381 $ 4,194
=========== =========== ===========
The increase in servicing fees and other charges of $8.5 million, or
88%, reflects an increase in loan servicing and related fees as a result of an
increase in the average balance of loans serviced for others. The unpaid
principal balance of loans serviced for others averaged $10.44 billion and $6.12
billion during the three months ended March 31, 1999 and 1998, respectively. The
increase in the average balance of loans serviced for others was primarily
related to subprime loans and resulted from servicing retained in connection
with the securitizations of loans and the acquisition of UK's servicing business
by Ocwen UK in April 1998.
The Company expects to complete construction of its national servicing
center in Orlando, Florida in the third quarter of 1999 as scheduled.
The following table sets forth the Company's loans serviced for others
at March 31, 1999.
----------------------- ----------------------- ----------------------- --------------------
Discount Loans Subprime Loans (1) Other Loans Total
----------------------- ----------------------- ----------------------- --------------------
No. of No. of No. of No. of
Amount Loans Amount Loans Amount Loans Amount Loans
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------
(Dollars in thousands)
Loans securitized .............. $ 1,116,435 17,923 $ 1,753,726 30,447 $ -- -- $ 2,870,161 48,370
Loans serviced for third
parties ...................... 1,488,797 19,734 4,840,481 77,483 933,499 790 7,262,777 98,007
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------
$ 2,605,232 37,657 $ 6,594,207 107,930 $ 933,499 790 $10,132,938 146,377
=========== =========== =========== =========== =========== =========== =========== ========
(1) Includes 35,704 loans with an unpaid principal balance of $771.9
million ((pound)479.1 million) which were serviced by Ocwen UK.
Gain on interest-earning assets for the first quarter of 1999 of $20.1
million was primarily comprised of $16.6 million of securitization gains, as
presented in the table below, and $4.4 million of gains on the sale of
commercial subordinate securities available for sale. Gain on interest-earning
assets, net, for the first quarter of 1998 of $24.8 million was primarily
comprised of $24.6 million of securitization gains, as presented in the table
below, a $2.0 million gain recognized on the sale of small commercial discount
loans and a $2.3 million gain recognized on the sale of certain REMIC residual
securities, offset by an $8.5 million impairment loss on the portfolio of IOs
which reflected a decline in fair value deemed other than temporary.
Gains on interest-earning assets (as well as other assets, such as real
estate owned, as discussed below) generally are dependent on various factors
which are not necessarily within the control of the Company, including market
and economic conditions. As a result, there can be no assurance that the gains
on sale of interest-earning assets
25
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
(and other assets) reported by the Company in prior periods will be reported in
future periods or that there will not be substantial inter-period variations in
the results from such activities.
The following table sets forth the Company's net gains recognized in
connection with the securitization of loans during the periods indicated:
Book Value
Loans Securitized Of Securities
- ------------------------------------------------------------------------------ Retained
No. of (Non-cash Cash
Type of Loans Principal Loans Net Gain Gain) Gain (Loss)
- -------------------------------------------- ----------- ----------- ----------- ----------- ----------
(Dollars in thousands)
For the three months ended March 31, 1999:
Single family discount (1)............... $ 137,266 1,694 $ 13,899 $ 1,907 $ 11,992
Single family subprime................... 86,944 811 2,717 4,432 (1,715)
----------- ----------- ----------- ----------- ----------
$ 224,210 2,505 $ 16,616 $ 6,339 $ 10,277
=========== =========== =========== =========== ==========
For the three months ended March 31, 1998:
Single family discount................... $ 227,549 3,777 $ 16,698 $ 15,917 $ 781
Single family subprime................... 161,400 1,439 7,932 9,862 (1,930)
----------- ----------- ----------- ----------- ----------
$ 388,949 5,216 $ 24,630 $ 25,779 $ (1,149)
=========== =========== =========== =========== ==========
(1) Includes 384 loans with an unpaid principal balance of $24.9 million
securitized from the loan portfolio.
The following table sets forth the results of the Company's investment
in real estate owned (which does not include investments in real estate), which
were primarily related to the discount loan portfolio, during the periods
indicated:
For the three months ended March 31, 1999 1998
- ------------------------------------------------ ---------- ----------
(Dollars in thousands)
Gains on sales.................................. $ 9,202 $ 8,763
Provision for loss in fair value................ (5,061) (4,234)
Rental income (carrying costs), net............. (3,512) (3,503)
---------- ----------
Gain on real estate owned, net................ $ 629 $ 1,026
========== ==========
For additional information relating to the Company's real estate owned,
see "Changes in Financial Condition-Real Estate Owned."
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
NON-INTEREST EXPENSE. Non-interest expense increased $18.1 million in
the first quarter of 1999 as compared to the first quarter of 1998, of which
$11.0 million and $2.1 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 periods indicated.
Increase
For the three months ended March 31, 1999 1998 (Decrease)
- ---------------------------------------------------------------------- ------------ ------------ ------------
(Dollars in thousands)
Compensation and employee benefits.................................... $ 27,211 $ 21,482 $ 5,729
Occupancy and equipment............................................... 10,637 6,457 4,180
Loan expenses......................................................... 4,128 2,298 1,830
Net operating loss on investments in real estate and certain
low-income housing tax credit interests............................. 1,848 1,246 602
Amortization of goodwill ............................................. 230 371 (141)
Other operating expenses.............................................. 8,069 2,157 5,912
------------ ------------ ------------
Total.............................................................. $ 52,123 $ 34,011 $ 18,112
============ ============ ============
The increase in compensation and employee benefits during the three
months ended March 31, 1999 reflects an increase in the average number of
employees from 1,147 during the three months ended March 31, 1998 to 1,620
during the three months ended March 31, 1999. Compensation and employee benefit
expense for the first quarter of 1999 includes $5.1 million related to Ocwen UK
with an average number of 395 employees.
The $4.2 million increase in occupancy and equipment expenses during
the three months ended March 31, 1999 was primarily due to an increase in
technology costs, rent expense and furniture and fixtures. Occupancy and
equipment expense for the first quarter of 1999 included $2.1 million related to
Ocwen UK.
The $1.8 million increase in loan expenses in the first quarter of 1999
is primarily related to $1.3 million incurred by Ocwen UK, of which $1.0 million
represented broker fees.
The $5.9 million increase in other operating expenses during the first
quarter of 1999 was due primarily to a $1.2 million increase in advertising and
a $1.3 million increase in professional fees, primarily consulting.
EQUITY IN LOSSES OF INVESTMENTS IN UNCONSOLIDATED ENTITIES. During the
first quarter of 1999, the Company recorded equity in the losses of its
investments in OAC and Ocwen Partnership L.P. ("OPLP"), OAC's operating
partnership subsidiary, of $64,000 and $154,000, respectively. The Company
owned, through IMI, 1,540,000 or 8.12% of the outstanding common stock of OAC at
March 31, 1999. The Company also owned, through IMI, 1,808,733 or 8.71% of the
total partnership units of OPLP outstanding at March 31, 1999. 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%.
During the first quarter of 1999, the Company recorded equity in the
losses of its investment in Kensington of $1.1 million, including $609,000 of
goodwill amortization. At March 31, 1999, the Company owned 36.07% of the total
outstanding common stock of Kensington, a leading originator of non-conforming
residential mortgages in the UK.
See "Changes in Financial Condition - Investment in Unconsolidated
Entities".
INCOME TAX EXPENSE. Income tax expense amounted to $2.4 million and
$573,000 during the first quarter of 1999 and 1998, respectively. OCN's income
tax provision for the first quarter of 1999 reflected an expected tax rate of
19.8% for 1999. OCN's expected income tax rate is less than its statutory income
tax rate primarily due to tax credits of $4.5 million and $4.7 million for the
first quarter of 1999 and 1998, respectively, resulting from its investment in
certain low-income housing tax credit interests. Additionally, 1998 tax expense
was reduced as a result of the utilization of $8.6 million of net operating tax
loss carryforwards. See "Changes in Financial Condition-Investments in Low
Income Housing Tax Credit Interests".
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
CHANGES IN FINANCIAL CONDITION
SECURITIES AVAILABLE FOR SALE. At March 31, 1999, securities available
for sale amounted to $566.7 million or 18% of the Company's total assets as
compared to $593.3 million or 18% of total assets at December 31, 1998.
Securities available for sale are carried at fair value with unrealized gains or
losses reported as a separate component of stockholders' equity net of deferred
taxes. Unrealized losses on securities that reflect a decline in value which is
other than temporary are charged to earnings. Securities available for sale at
March 31, 1999 included an aggregate of $25.2 million of net unrealized gains
($29.2 million of gross gains and $4.0 million of gross losses) as compared to
$21.7 million of unrealized gains ($22.0 million of gross gains and $335,000 of
gross losses) at December 31, 1998.
The following table sets forth the carrying value (which represents
fair value) of the Company's securities available for sale at the dates
indicated.
Increase (Decrease)
March 31, December 31, ----------------------
1999 1998 Dollars Percent
--------- ------------ --------- ---------
Mortgage-related securities: (Dollars in thousands)
Single-family residential:
CMOs (AAA-rated) .................. $ 322,944 $ 344,199 $ (21,255) (6)%
Subordinates:
BB-rated .......................... 8,255 8,517 (262) (3)
B-rated ........................... 6,912 6,344 568 9
Unrated ........................... 38,878 40,595 (1,717) (4)
Subprime residuals:
AAA-rated ......................... 5,646 6,931 (1,285) (19)
BBB-rated ......................... 17,080 17,593 (513) (3)
Unrated ........................... 162,433 152,951 9,482 6
--------- --------- --------- ---------
562,148 577,130 (14,982) (3)
--------- --------- --------- ---------
Multi-family residential and commercial:
Interest-only:
AAA-rated ......................... 257 154 103 11
BB-rated .......................... 5 2 3 150
B-rated ........................... -- -- -- --
Unrated ........................... -- -- -- --
Subordinates:
B-rated ........................... 4,219 8,813 (4,594) (52)
Unrated ........................... 110 7,248 (7,138) (98)
--------- --------- --------- ---------
4,591 16,217 (11,626) (72)
--------- --------- --------- ---------
Total ............................. $ 566,739 $ 593,347 $ (26,608) (4)
========= ========= ========= =========
The Company's securities available for sale decreased by $26.6 million
or 4% during the first quarter of 1999, due primarily to $128.6 million of
maturities and principal repayments and $7.3 million of net premium amortization
which was offset by $99.1 million of purchases and $6.3 million of subordinates
and residual securities acquired in connection with the Company's
securitizations of loans.
At March 31, 1999, the fair value of the Company's investment in
subordinate and residual interests amounted to $243.5 million ($218.9 million of
amortized cost) or 43% of total securities available for sale and supported
senior classes of securities having an outstanding principal balance of $3.89
billion. Because of their subordinate position, subordinated and residual
classes of mortgage-related securities provide protection to and involve more
risk than the senior classes. Specifically, when cash flow is impaired, debt
service goes first to the holders of senior classes. In addition, incoming cash
flows may be held in a reserve fund to meet any future repayments until the
holders of senior classes have been paid and, when appropriate, until a
specified level of funds has been contributed to the reserve fund. Further,
residual interests exhibit considerably more price volatility than mortgages or
ordinary mortgage pass-through securities, due in part to the uncertain cash
flows that result from changes in the prepayment rates of the underlying
mortgages. Lastly, subordinate and residual interests involve substantially more
credit risk than the senior classes of the mortgage-related securities to which
such interests relate and generally are not as liquid as the senior classes.
The Company generally retains subordinate and residual securities,
which are certificated, related to its securitization of loans. Subordinate and
residual interests in mortgage-related securities provide credit support to the
28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
more senior classes of the mortgage-related securities. Principal from the
underlying mortgage loans generally is allocated first to the senior classes,
with the most senior class having a priority right to the cash flow from the
mortgage loans until its payment requirements are satisfied. To the extent that
there are defaults and unrecoverable losses on the underlying mortgage loans,
resulting in reduced cash flows, the most subordinate security will be the first
to bear this loss. Because subordinate and residual interests generally have no
credit support, to the extent there are realized losses on the mortgage loans
comprising the mortgage collateral for such securities, the Company may not
recover the full amount or, indeed, any of its initial investment in such
subordinate and residual interests. The Company generally retains the most
subordinate classes of the securities from the securitization and therefore will
be the first to bear any credit losses.
The Company determines the present value of anticipated cash flows at
the time each securitization transaction closes, utilizing valuation assumptions
appropriate for each particular transaction. The significant valuation
assumptions include the anticipated prepayment speeds and the anticipated credit
losses related to the underlying mortgages. In order to determine the present
value of this estimated excess cash flow, the Company currently applies a
discount rate of 18% to the projected cash flows on the unrated classes of
securities. The annual prepayment rate of the securitized loans is a function of
full and partial prepayments and defaults. The Company makes assumptions as to
the prepayment rates of the underlying loans, which the Company believes are
reasonable, in estimating fair values of the subordinate securities and residual
securities retained. During 1998 and the first quarter of 1999, the Company
utilized proprietary prepayment curves generated by the Company (reaching an
approximate range of annualized rates of 30%-40%). In its estimates of annual
loss rates, the Company utilizes assumptions that it believes are reasonable.
The Company estimates annual losses of between 0.22% and 2.06% of the underlying
loans.
Subordinate and residual interests are affected by the rate and timing
of payments of principal (including prepayments, repurchase, defaults and
liquidations) on the mortgage loans underlying a series of mortgage-related
securities. The rate of principal payments may vary significantly over time
depending on a variety of factors, such as the level of prevailing mortgage loan
interest rates and economic, demographic, tax, legal and other factors.
Prepayments on the mortgage loans underlying a series of mortgage-related
securities are generally allocated to the more senior classes of
mortgage-related securities. Although in the absence of defaults or interest
shortfalls all subordinates receive interest, amounts otherwise allocable to
residuals generally are used to make payments on more senior classes or to fund
a reserve account for the protection of senior classes until
overcollateralization or the balance in the reserve account reaches a specified
level. In periods of declining interest rates, rates of prepayments on mortgage
loans generally increase, and if the rate of prepayments is faster than
anticipated, then the yield on subordinates will be positively affected and the
yield on residuals will be negatively affected.
The credit risk of mortgage related securities is affected by the
nature of the underlying mortgage loans. In this regard, the risk of loss on
securities backed by commercial and multi-family loans and single-family
residential loans made to borrowers who, because of prior credit problems, the
absence of a credit history or other factors, are unable or unwilling to qualify
as borrowers under guidelines established by the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA") for
purchases of loans by such agencies, generally involve more risk than securities
backed by single-family residential loans which conform to the requirements
established by FHLMC and FNMA for their purchase by such agencies.
The Company adjusts its securities portfolio to market value at the end
of each month based upon the lower of dealer quotations or internal values,
subject to an internal review process. For those securities which do not have an
available market quotation, the Company will request market values and
underlying assumptions from the various securities dealers that underwrote, are
currently financing the securities, or have had prior experience with the type
of security to be valued. When quotations are obtained from two or more dealers,
the average dealer quote will be utilized.
The Company periodically assesses the carrying value of its subordinate
securities and residual securities retained as well as the servicing assets for
impairment. There can be no assurance that the Company's estimates used to
determine the gain on securitized loan sales, subordinate securities and
residual securities retained and servicing asset valuations will remain
appropriate for the life of each securitization. If actual loan prepayments or
defaults exceed the Company's estimates, the carrying value of the Company's
subordinate securities and residual securities retained and/or servicing assets
may be decreased or the Company may increase its allowance for possible credit
losses on loans sold
29
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
through a charge against earnings during the period management recognized the
disparity. Other factors may also result in a write down of the Company's
subordinate securities and residual securities retained in subsequent periods.
It is intended that any securities retained by the Bank resulting from
the securititization of assets held by it directly will be distributed to the
Company as a dividend, subject to the Bank's ability to declare such dividends
under applicable limitations. During the first quarter of 1999, a subordinate
security with a fair value of $3.5 million was distributed by the Bank to the
Company in the form of a dividend. At March 31, 1999, the Bank held two
subordinate securities with an aggregate fair value of $11.8 million ($11.7
million of amortized cost).
30
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following tables detail the Company's securities available for sale
portfolio at March 31, 1999, and its estimates of expected yields on such
securities, taking into consideration expected prepayment and loss rates
together with other factors.
Subordi- Yield to
Class Size nation/OC Maturity At:
Issue Rating ------------------ Interest Level At: ----------------
Securitization (Issuer) Security Date Rating Agencies Issuance 3/31/99 Percentage 3/31/99 Purchase 3/31/99
------------------------- ------- ---- ------ -------- -------- -------- ---------- ------- -------- -------
SINGLE-FAMILY RESIDENTIAL (Dollars In thousands)
Subordinates:
BCF 1996 R1(5).......... B3 Oct-96 NR (a),(b) $ 70,773 $ 50,553 50.00% None% 15.70% 14.50
BCF 1997 R1(5).......... B4 Mar-97 NR (b),(c) 21,784 13,521 49.71 None 13.46 (3.77)
BCF 97 R2 (5)........... B4 Jun-97 Ba2, BB (b),(c) 6,358 6,048 73.54 7.57 9.58 12.01
B5 B2,B 6,264 5,958 73.54 4.31 10.74 15.16
B6 NR 13,883 7,900 73.54 None 15.98 3.99
BCF 1997 R3 (5)......... B4 Dec-97 NR (b),(d) 69,582 57,940 50.24 None 15.84 5.25
ORMBS 1998 R1 (6)....... B4 Mar-98 NR (b),(d) 101,774 94,449 50.34 None 20.50 9.50
ORMBS 1998 R2 (6)....... B4A Jun-98 Ba2 (b) 1,056 1,043 100.00 6.96 13.22 14.10
B4F Ba2 937 917 100.00 7.68 19.23 12.01
B5A B2 880 869 100.00 5.56 23.78 21.89
B5F B2 937 917 100.00 5.79 11.78 18.18
B6A NR 3,696 3,480 100.00 None 16.72 40.83
B6F NR 3,345 3,088 100.00 None 19.50 18.50
ORMBS 1998 R3 (6)....... B4 Sep-98 Ba2, BB (b),(d) 11,765 11,651 85.87 13.62 11.71 11.65
B5 B2, B 9,151 9,062 85.87 10.03 16.54 11.51
B6 NR 26,145 25,294 85.87 None 18.00 11.39
ORMBS 1999 RI (6)...... B5A Mar-99 B2, B (b),(d) 1,630 1,630 100.00 5.89 17.73 17.73
B5F B2, B 1,843 1,843 100.00 5.00 17.74 17.74
B6A NR 3,586 3,586 100.00 None 18.00 18.00
B6F NR 4,299 4,299 100.00 None 18.00 18.00
Subprime residuals:
SBMS 1996 3 (1)......... R Jun-96 NR (a),(b) 130,062 44,059 100.00 11.00 15.52 2.16
MLM1 1996 1 (2)......... R Sep-96 NR (a),(b) 81,142 29,150 100.00 15.07 15.16 5.19
MS 1997 1 (3)........... X1 Jun-97 NR (a),(b) 17,727 12,976 100.00 3.07 21.47 13.57
X2 87,118 47,439 100.00 5.51 20.38 10.90
1997 OFS 2 (4).......... X Sep-97 NR (a),(b) 102,201 63,035 100.00 5.06 19.65 10.26
1997 OFS 3 (4).......... X Dec-97 NR (a),(b) 208,784 147,806 100.00 4.24 19.59 15.52
1998 OFS 1 (4).......... X Mar-98 NR (b),(d) 161,400 126,187 100.00 2.43 18.00 15.77
1998 OFS 2 (4).......... X Jun-98 NR (a),(b) 382,715 275,274 100.00 3.93 19.46 5.54
1998 OFS 3 (4).......... X Sep-98 NR (a),(d) 261,649 243,681 100.00 2.25 18.00 19.06
1998 OFS 4 (4).......... X Dec-98 NR (a),(b) 349,000 344,537 100.00 1.15 18.00 25.39
(c)
OML 1 (7)............... R Jun-98 NR (a),(d) 368,742 282,013 100.00 RF 20.72 48.04
$9,184
OML 2 (7)............... DAC-IO Nov-98 Aaa,AAA (b),(c) 114,819 112,146 100.00 RF 28.50 22.42
$18,208
B Baa2, 17,593 17,080 100.00 12.50 11.89
BBB
R NR 195,832 172,286 100.00 36.50 19.83
S NR 6,639 6,313 100.00 25.30 27.06
MULTI-FAMILY AND COMMERCIAL
Subordinates:
BCF 1997 C1 (5)......... F Dec-97 B (c) 3,210 3,210 100.00 N/A 10.35 11.88
G NR 12,197 12,202 100.00 15.00 20.80
FNMA 1995 M2 (9) ....... M Jun-95 NR (c) 100,275 10,901 100.00 None N/A N/A
BFB & T 1994 (10) ...... C Nov-94 B (d) 4,040 4,040 100.00 N/A N/A N/A
Interest-only:
BCF 1997 C1 (5)......... XI Dec-97 NR (c) 67,350 31,631 100.00 N/A 6.93 52.05
X2 NR 35,359 24,486 100.00 8.53 35.95
E-IO BB 10,271 10,271 100.00 7.00 35.53
CSFS 1996-1R
(ITT 94-P1) (8) ........ 4B2 Oct-96 NR (b),(c) 1,046 225 100.00 None N/A N/A
ISSUERS:
(1) Salomon Brothers Mortgage Securities VII (6) Ocwen Residential MBS Corporation RATING AGENCIES:
(2) Merrill Lynch Mortgage Investors, Inc. (7) Ocwen Mortgage Loans (a) S&P
(3) Morgan Stanley ABS Capital I, Inc. (8) Credit Suisse First Boston (ITT Federal (b) Moody's
(4) Ocwen Mortgage Loan Asset Backed Certificates Bank, FSB) (c) Fitch
(5) BlackRock Capital Finance L.P. (9) Federal National Mortgage Association (d) DCR
(10) Berkley Federal Bank & Trust
- --------------------------------------------------------------------------------------------------------------------
N/A - Not Available RF - Reserve funds are actual cash reserves
31
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Weighted Weighted Total Actual Life Actual Life
Average Average Delinquency to Date to Date Collateral Balance
Coupon At LTV/DSCR At CPR At Losses Product Type At ------------------
Securitization (Issuer) Security 3/31/99 At 3/31/99 3/31/99 3/31/99 3/31/99 3/31/99 Issuance 3/31/99
- ----------------------- -------- --------- ---------- ----------- ----------- ----------- --------------- --------- -------
SINGLE-FAMILY RESIDENTIAL (Dollars in thousands)
Subordinates:
BCF 1996 R1 (5)......... B3 10.06% 101.54% 13.89% 12.91% $ 17,326 98% Fixed, 2% ARM 505,613 338,215
BCF 1997 R1 (5)......... B4 10.08 114.27 24.80 12.15 7,689 97% Fixed, 3% ARM 177,823 132,434
BCF 97 R2 (5)........... B4 8.28 85.46 26.02 11.83 4,489 26% Fixed, 74%ARM 251,790 183,386
B5
B6
BCF 1997 R3 (5)......... B4 9.65 110.88 22.72 8.99 9,932 98% Fixed, 2% ARM 579,851 497,841
ORMBS 1998 R1 (6)....... B4 8.97 90.78 20.77 5.82 5,613 98% Fixed, 2% ARM 565,411 533,567
ORMBS 1998 R2 (6)....... B4A 9.23 92.72 26.27 10.03 504 44% Fixed, 56%ARM 123,917 110,677
B4F
B5A
B5F
B6A
B6F
ORMBS 1998 R3 (6)....... B4 8.97 119.54 27.32 4.58 414 98% Fixed, 2% ARM 261,452 257,693
B5
B6
ORMBS 1999 R1 (6)....... B5A 9.03 86.41 -- -- -- 56% Fixed 44% ARM 147,101 147,101
B5F
B6A
B6F
Subprime residuals:
SBMS 1996 3 (1)......... R 11.16 69.98 19.73 32.13 2,497 55% Fixed, 45%ARM 130,062 44,059
MLM1 1996 1 (2)......... R 11.38 73.16 26.18 33.20 1,287 32% Fixed, 68%ARM 81,142 29,150
MS 1997 1 (3)........... X1 10.58 74.29 15.70 26.58 680 22% Fixed, 78%ARM 17,727 12,976
X2 10.49 73.97 87,118 47,439
1997 OFS 2 (4).......... X 10.27 74.37 15.26 27.10 372 17% Fixed, 83%ARM 102,201 63,035
1997 OFS 3 (4).......... X 10.16 77.72 16.67 23.68 277 17% Fixed, 83%ARM 208,784 147,806
1998 OFS 1 (4).......... X 10.36 77.26 16.21 21.45 434 14% Fixed, 86%ARM 161,400 126,187
1998 OFS 2 (4).......... X 10.79 73.65 12.09 35.13 251 38% Fixed, 62%ARM 382,715 275,274
1998 OFS 3 (4).......... X 10.40 75.60 14.04 12.76 78 27% Fixed, 73%ARM 261,649 243,681
1998 OFS 4 (4).......... X 10.50 75.77 9.38 4.53 -- 40% Fixed, 60%ARM 349,000 344,537
OML 1 (7)............... R 13.68 N/A 24.49 23.63 78 100% UK Subprime 368,742 282,013
OML 2 (7)............... DAC-IO 12.49 N/A 37.16 24.04 429 100% UK Subprime 195,832 172,286
B
R
S
MULTI-FAMILY AND COMMERCIAL
Subordinates:
BCF 1997 C1 (5)......... F 10.34 2.01 13.31 N/A -- 19% Multi-family, 128,387 82,164
18% Hotel, 15%
Industrial
G
FNMA 1995 M2 (9)........ M 9.50 1.34 -- 9.99 -- 100% 216,797 142,789
Multi-family
BFB&T 1994 1 (10)....... C N/A N/A N/A N/A N/A 100% Multi-family 42,441 42,441
Interest-only:
BCF 1997 C1 (5)......... XI 10.34 2.01 13.31 N/A -- 19% Multi-family, 128,387 82,164
X2 18% Hotel, 15%
E-IO Industrial
CSFB 1996 1R
(ITT 94-P1) (8) ...... 4B2 7.13 N/A 2.16 N/A 155 100% 1-Year CMT 393,785 34,908
32
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the principal amount of mortgage loans
by the geographic location of the property securing the mortgages that underly
the Company's securities available for sale portfolio at March 31, 1999.
Description California Texas Florida New York Maryland Other (1) Total
----------- ---------- ----- ------- -------- -------- ---------- ----------
(Dollars in thousands)
Single family residential...... $650,389 $256,539 $229,745 $164,429 $160,548 $1,575,371 $3,037,021
Multi-family and commercial... 96,643 2,704 29,802 53,519 9,741 158,526 350,935
-------- -------- -------- -------- -------- ---------- ----------
Total......................... $747,032 $259,243 $259,547 $217,948 $170,289 $1,733,897 $3,387,956
======== ======== ======== ======== ======== ========== ==========
Percentage (2)................ 22.0% 7.7% 7.7% 6.4% 5.0% 51.2% 100.0%
======== ======== ======== ======== ======== ========== ==========
(1) No other individual state makes up more than 5% of the total.
(2) Based on a percentage of the total unpaid principal balance of the
underlying loans.
The following table summarizes information relating to the Company's
mortgage-related securities available for sale at March 31, 1999.
ANTICIPATED
UNLEVERAGED ANTICIPATED
ORIGINAL YIELD TO WEIGHTED
ANTICIPATED MATURITY AVERAGE
AMORTIZED PERCENT YIELD TO AT REMAINING
RATING/DESCRIPTION COST FAIR VALUE OWNED MATURITY 3/31/99(1) COUPON LIFE (2)
- -------------------------------- ----------- ------------ ---------- ------------ ------------ -------- ----------
(Dollars in thousands)
SINGLE-FAMILY RESIDENTIAL:
BB-rated subordinates...... $ 8,613 $ 8,255 84.32% 14.33% 11.65% 6.75% 11.47
B-rated subordinates....... 6,934 6,912 86.13 16.37 13.86 6.85 6.76
Unrated subordinates....... 36,724 38,878 55.28 14.26 10.70 8.06 1.58
AAA-rated subprime
residuals.................. 5,736 5,646 100.00 28.50 22.32 2.50 1.58
BBB-rated subprime
residuals.................. 15,000 17,080 100.00 2.50 11.89 8.29 3.34
Unrated subprime residuals. 141,847 162,433 100.00 21.57 19.52 -- 5.19
MULTI-FAMILY AND COMMERCIAL:
AAA-rated interest-only.... 63 257 100.00 -- 28.65 0.32 1.89
BB-rated interest only..... -- 5 26.00 26.00 35.53 2.30 2.15
B-rated subordinates....... 3,730 4,219 51.20 11.05 11.88 10.65 6.98
Unrated subordinates....... 254 110 51.20 21.62 20.80 9.81 7.60
(1) Changes in the March 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 March 31, 1999 book
value.
The following table sets forth the property types of the Company's
commercial mortgage-backed securities at March 31, 1999, based upon the
principal amount.
Percentage
Property type Invested
--------------------------------- -------------
Multi-family..................... 70.50%
Lodging.......................... 6.70
Warehouse........................ 5.57
Mixed use........................ 4.96
Office........................... 4.58
Retail........................... 3.35
Self-storage..................... 1.00
Other............................ 3.34
------------
Total............................ 100.00%
============
33
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
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:
_ _
| |
| |
| |
| ( 1 - Final Aggregate Balance ACTUAL ) ( 12 ) |
| ( --------------------------------- ) X ( ---------------- ) |
| ( Final Aggregate Balance SCHEDULED ) ( Months in Period ) |
Actual Life-to-Date CPR = 100 X | |
|_ _|
FINAL AGGREGATE BALANCE - Represents the sum of (actual or scheduled)
loan balances at the end of the period.
ACTUAL LIFE-TO-DATE LOSSES - Represents cumulative losses of the
original collateral at the indicated date.
CLASS SIZE - Represents the percentage size of a particular class
relative to the total outstanding balance of all classes. Class Size for
subprime residuals is equal to the Collateral Balance at the respective date.
COLLATERAL BALANCE - Represents, in the case of residuals, the unpaid
principal balance of the collateral of the entire securities at the indicated
date and, in the case of subordinates, the outstanding principal balance of the
security at the indicated date.
ISSUE DATE - Represents the date on which the indicated securities were
issued.
OVER-COLLATERIZATION LEVEL - For residual interests 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 extent not consumed by
losses on more highly rated bonds, OC is remitted to the residual holders.
RATING - Refers to the credit rating designated by the rating agency
for each securitization transaction. Classes designated "A" have a superior
claim on payment to those rated "B", which are superior to those rated "C."
Additionally, multiple letters have a superior claim to designations with fewer
letters. Thus, for example, "BBB" is superior to "BB," which in turn is superior
to "B." The lower class designations in any securitization will receive interest
payments subsequent to senior classes and will experience losses prior to any
senior class. The lowest potential class designation is not rated ("NR") which,
if included in a securitization, will always receive interest last and
experience losses first. 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. Principal only ("PO") securities
receive excess principal payments after the principal has been made on all
classes of bonds based on their respective payment schedules. There is no
interest associated with PO securities and they are sold at a discount. The
return on PO securities is earned through the receipt of the payments and the
collection of the discounted amount.
SECURITIZATION - Series description.
SECURITY - Represents the name of the class associated with each
securitization held by the Company. This has no relationship to a formal rating
but is for identification purposes (although the names are usually in
alphabetical or numeric order from the highest rated to the lowest rated).
SUBORDINATION LEVEL - Represents the credit support for each
mortgage-backed security by indicating the percentage of outstanding bonds whose
right to receive payment is subordinate to the referenced security. The
subordinate classes must experience a complete loss before any additional losses
would affect the particular referenced security.
TOTAL DELINQUENCY - Represents the total unpaid principal balance of
loans more than 30 days delinquent at the indicated date as a percentage of the
unpaid principal balance of the collateral at such date.
WEIGHTED AVERAGE COUPON - Represents the interest rate of the
underlying mortgage loans weighted by the unpaid principal balance of the
underlying mortgage loans at the respective date.
WEIGHTED AVERAGE DSCR - Represents debt service coverage ratio, which
is calculated by dividing cash flow available for debt service by debt service
and applies to the multi-family and commercial securities.
WEIGHTED AVERAGE LTV - Represents the ratio of the loan amount to the
value of the underlying collateral and applies to the single-family residential
securities.
34
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
YIELD TO MATURITY -Yield to maturity represents a measure of the
average rate of return that is earned on a security if held to maturity.
LOANS AVAILABLE FOR SALE. The Company's loans available for sale at
March 31, 1999, which are carried at the lower of cost or fair value, increased
by $196.2 million or 110% from December 31, 1998, and consist primarily of
single family residential loans to subprime borrowers. The Company generally
intends to sell or securitize its single family residential loans to subprime
borrowers and, as a result, all of such loans were classified as available for
sale at March 31, 1999 and December 31, 1998. The Company's single family
residential lending activities to subprime borrowers is conducted by OFS and
Ocwen UK.
The following table sets forth the composition of the Company's loans
available for sale by type of loan at the dates indicated.
March 31, December 31,
1999 1998
------------ -------------
(Dollars in thousands)
Single family residential loans........ $ 373,863 $ 177,578
Consumer loans......................... 231 269
------------ -------------
$ 374,094 $ 177,847
============ =============
The following table sets forth the activity in the Company's net loans
available for sale during the periods indicated.
For the three months ended March 31, 1999 1998
- ---------------------------------------------------------------------- ----------- -----------
(Dollars in thousands)
Balance at beginning of period........................................ $ 177,847 $ 177,041
Purchases: (1) (2)
Single family residential.......................................... 14,663 321,720
Originations: (1)
Single family residential.......................................... 298,803 182,522
Sales (3)............................................................. (101,465) (166,159)
Increase (decrease) in lower of cost or market reserve................ (645) (327)
Principal repayments, net of capitalized interest..................... (10,290) (21,003)
Transfer to real estate owned......................................... (4,819) (688)
----------- -----------
Net increase (decrease) in loans................................... 196,247 316,065
----------- -----------
Balance at end of period.............................................. $ 374,094 $ 493,106
=========== ===========
(1) During the three months ended March 31, 1999 and 1998, the Company
purchased and originated $300.9 million and $479.8 million,
respectively, of single family residential loans to subprime borrowers.
(2) Purchases of single family residential loans during the three months
ended March 31, 1998 include $292.8 million purchased from the U.S.
operations of Cityscape Financial Corp.
(3) Included in sales for the three months ended March 31,1999, is the
securitization of 811 domestic subprime single family loans with an
aggregate unpaid principal balance of $86.9 million. Included in sales
for the three months ended March 31, 1998 is the securitization of
1,439 domestic subprime single family loans with an aggregate unpaid
principal balance of $161.4 million.
The loans available for sale portfolio is secured by mortgages on
properties geographically located throughout the United States and the United
Kingdom. The following table sets forth the five states or countries in which
the largest amount of properties securing the Company's loans available for sale
were located at March 31, 1999:
35
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Single-family
Consumer Residential Total
----------- ------------- -----------
(Dollars in thousands)
UK.................... $ -- $ 235,795 $ 235,795
California............ -- 30,271 30,271
Florida............... 111 20,764 20,875
Illinois.............. -- 10,622 10,622
New Jersey............ -- 10,575 10,575
Other(1).............. 120 65,836 65,956
----------- ------------- -----------
Total................. $ 231 $ 373,863 $ 374,094
=========== ============= ===========
(1) Consists of properties located in 40 other states, none of which
aggregated over $10.5 million in any one state.
The following table presents a summary of the Company's non-performing
loans (loans which were past due 90 days or more) in the loans available for
sale portfolio at the dates indicated:
March 31, December 31,
1999 1998
------------- -------------
(Dollars in thousands)
Non-performing loans:
Single-family (1)................... 34,515 39,415
Consumer............................ 6 9
------------- -------------
$ 34,521 $ 39,424
============= =============
Non-performing loans as a percentage of:
Total loans available for sale...... 9.23% 22.17%
Total assets........................ 1.10% 1.19%
(1) Includes $10.7 million ((pound)6.6 million) and $7.2 million
((pound)5.4 million) of non-performing loans related to Ocwen UK at
March 31, 1999 and December 31, 1998, respectively.
Non-performing loans consist primarily of subprime single-family
residential loans reflecting the higher risks of default associated with such
loans. Although subprime loans generally have higher levels of default than
prime loans, the Company believes that the borrower's equity in the security
property and the Company's expertise in the area of resolution mitigates the
higher default risk.
DISCOUNT LOAN PORTFOLIO. At March 31, 1999, the Company's net discount
loan portfolio amounted to $893.2 million or 29% of the Company's total assets.
The following table sets forth the composition of the Company's discount loan
portfolio by type of loan at the dates indicated.
March 31, December 31,
1999 1998
------------ ------------
(Dollars in thousands)
Single family residential loans...................... $ 434,442 $ 597,100
Multi-family residential loans....................... 240,974 244,172
Commercial real estate loans (1)..................... 430,940 449,010
Other loans.......................................... 16,873 10,144
------------ ------------
Total discount loans.............................. 1,123,229 1,300,426
Unaccreted discount (2).............................. (206,181) (252,513)
------------ ------------
917,048 1,047,913
Allowance for loan losses............................ (23,868) (21,402)
------------ ------------
Discount loans, net (3)........................... $ 893,180 $ 1,026,511
============ ============
36
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
(1) The balance at March 31, 1999 consisted of $126.2 million of loans
secured by office buildings, $100.2 million of loans secured by hotels,
$26.5 million of loans secured by retail properties or shopping centers
and $178.0 million of loans secured by other properties. The balance at
December 31, 1998, consisted of $154.1 million of loans secured by
office buildings, $100.4 million of loans secured by hotels, $21.2
million of loans secured by retail properties or shopping centers and
$173.3 million of loans secured by other properties.
(2) The balance at March 31, 1999 consisted of $118.4 million on single
family residential loans, $19.3 million on multi-family residential
loans, $67.2 million on commercial real estate loans and $1.3 million
on other loans. The balance at December 31, 1998 consisted of $161.6
million on single family residential loans, $20.8 million on
multi-family residential loans, $69.8 million on commercial real estate
loans and $300,000 on other loans.
(3) The discount loan portfolio at March 31, 1999 included $11.3 million of
charged-off unsecured credit card receivables which were acquired at a
discount. Collections are accounted for under the cost recovery method
and resulted in the recognition of $204,000 of (interest) income during
the first quarter of 1999.
The discount loan portfolio is secured by mortgages on properties
geographically located throughout the United States. The following table sets
forth the five states in which the largest amount of properties securing the
Company's discount loans were located at March 31, 1999.
Commercial
Single-family Multi-family Real Estate
Residential Residential and Other Total
------------- ------------- ------------- -------------
(Dollars in thousands)
California.................... $ 39,050 $ 22,046 $ 106,650 $ 167,746
Illinois...................... 12,959 94,867 -- 107,826
Michigan...................... 5,822 64,743 26,397 96,962
New York...................... 31,798 7,047 52,477 91,322
New Jersey.................... 44,416 859 9,456 54,731
Other (1)..................... 181,874 32,126 184,461 398,461
------------- ------------- ------------- -------------
Total..................... $ 315,919 $ 221,688 $ 379,441 $ 917,048
============= ============= ============= =============
(1) Consists of properties located in 45 other states, none of which
aggregated over $45.9 million in any one state.
37
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following tables set forth the activity in the Company's net
discount loan portfolio during the periods indicated.
Three months ended March 31
------------------------------------------------------
1999 1998
------------------------ ------------------------
No. of No. of
Balance Loans Balance Loans
----------- --------- ----------- ---------
(Dollars in thousands)
Balance at beginning of period, net..... $ 1,026,511 8,100 $ 1,434,176 12,980
Acquisitions(1)......................... 104,957 565 90,550 572
Resolutions and repayments (2).......... (49,063) (223) (75,526) (497)
Loans transferred to real estate owned.. (70,694) (702) (64,803) (687)
Sales(3)................................ (162,397) (1,698) (240,363) (3,797)
Decrease in discount.................... 46,332 -- 23,586 --
(Increase) decrease in allowance........ (2,466) -- 4,003 --
----------- --------- ----------- ---------
Balance at end of period, net........... $ 893,180 6,042 $ 1,171,623 8,571
=========== ========= =========== =========
(1) During the three months ended March 31, 1999, acquisitions consisted
primarily of $40.9 million of single family residential loans, $32.7
million of multi-family residential loans, $24.8 million of commercial
real estate loans and $6.6 million of other loans. For the three months
ended March 31, 1998, acquisitions consisted primarily of $41.4 million
of single family residential loans, $3.0 million of multi-family
residential loans, $41.2 million of commercial real estate loans and
$5.0 million of other loans.
(2) Resolutions and repayments consists of loans which were resolved in a
manner which resulted in partial or full repayment of the loan to the
Company, as well as principal payments on loans which have been brought
current in accordance with their original or modified terms (whether
pursuant to forbearance agreements or otherwise) or on other loans
which have not been resolved.
(3) Included in sales for the three months ended March 31, 1999 is the
securitization of 1,310 discount single family residential mortgage
loans with an aggregate unpaid principal balance of $112.4 million.
Included in sales for the three months ended March 31, 1998 is the
securitization of 3,777 discount single family residential mortgage
loans with an aggregate unpaid principal balance of $227.5 million.
The following table sets forth certain information relating to the
payment status of loans in the Company's discount loan portfolio at the dates
indicated.
March 31, 1999 December 31, 1998
----------------------- ----------------------
Principal % of Principal % of
Amount Loans Amount Loans
---------- ------- ---------- -------
Loans without Forbearance Agreements: (Dollars in thousands)
Current....................................... $ 555,682 49.47% $ 578,269 44.47%
Past due 31 to 89 days........................ 29,530 2.63 35,555 2.73
Past due 90 days or more...................... 390,317 34.75 509,838 39.21
Acquired and servicing not yet transferred.... 44,848 3.99 57,048 4.39
---------- ------- ---------- -------
Subtotal.................................... 1,020,377 90.84 1,180,710 90.80
---------- ------- ---------- -------
Loans with Forbearance Agreements:
Current....................................... 611 0.05 1,180 0.09
Past due 31 to 89 days........................ 3,223 0.29 4,046 0.31
Past due 90 days or more (1).................. 99,018 8.82 114,490 8.80
---------- ------- ---------- -------
Subtotal.................................... 102,852 9.16 119,716 9.20
---------- ------- ---------- -------
Total............................................ $1,123,229 100.00% $1,300,426 100.00%
========== ======= ========== =======
38
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
(1) Includes $95.6 million of loans which were less than 90 days past due
under the terms of the forbearance agreements at March 31, 1999, of
which $72.1 million were current and $23.5 million were past due 31 to
89 days. Includes $110.1 million of loans which were less than 90 days
past due under the terms of the forbearance agreements at December 31,
1998, of which $77.9 million were current and $32.2 million were past
due 31 to 89 days.
For discussion and analysis regarding the allowance for loan losses on
discount loans, see "Changes in Financial Condition - Allowance for Losses"
below.
LOAN PORTFOLIO. The following table sets forth the composition of the
Company's loan portfolio by type of loan at the dates indicated.
March 31, December 31,
1999 1998
------------ ------------
(Dollars in thousands)
Single family residential loans......................... $ 3,058 $ 30,361
Multi-family residential loans:
Permanent............................................ 38,030 53,311
Construction......................................... 17,173 22,288
------------ ------------
55,203 75,599
------------ ------------
Commercial real estate and land loans:
Hotel:
Permanent.......................................... 29,599 29,735
Construction....................................... 6,484 6,896
Office buildings..................................... 93,261 93,068
Land................................................. 2,266 2,266
Other................................................ -- 6,762
------------ ------------
Total.............................................. 131,610 138,727
------------ ------------
Consumer................................................ 118 132
------------ ------------
Total loans........................................ 189,989 244,819
Undisbursed loan funds.................................. (6,506) (7,099)
Unaccreted discount..................................... (2,002) (2,480)
Allowance for loan losses............................... (3,970) (4,928)
------------ ------------
Loans, net......................................... $ 177,511 $ 230,312
============ ============
The loan portfolio is secured by mortgages on properties geographically
located throughout the United States. The following table sets forth the five
states in which the largest amount of properties securing the Company's loan
portfolio were located at March 31, 1999.
Single-family Multi-family Commercial
Residential Residential Real Estate Consumer Total
------------- ------------ ----------- -------- -----------
(Dollars in thousands)
New York....... $ 307 $ 9,659 $ 24,370 $ 46 $ 34,382
Florida........ -- -- 20,727 -- 20,727
Virginia....... -- -- 15,996 -- 15,996
Illinois....... 55 -- 11,916 -- 11,971
California..... 21 6,346 4,521 -- 10,888
Other (1)...... 2,675 39,198 54,080 72 96,025
------------ ------------ ---------- -------- -----------
Total.......... $ 3,058 $ 55,203 $ 131,610 $ 118 $ 189,989
============ ============ ========== ======== ===========
(1) Consists of properties located in 22 other states, none of which
aggregated over $10.7 million in any one state.
39
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the activity in the Company's gross loan
portfolio during the periods indicated.
For the three months ended March 31, 1999 1998
--------- ---------
(Dollars in thousands)
Balance at beginning of period ....................... $ 244,819 $ 294,925
Originations:
Multi-family residential loans .................... 2,467 13,771
Commercial real estate loans and land loans ....... 5,100 18,985
Commercial non-mortgage and consumer loans ........ -- --
--------- ---------
Total loans originated .......................... 7,567 32,756
--------- ---------
Sales (1)............................................. (28,880) --
Principal repayments, net of capitalized interest .... (31,051) (22,609)
Loans and transfer to real estate owned .............. (2,466) --
--------- ---------
Net increase (decrease) in loans ................ (54,830) 10,147
--------- ---------
Balance at end of period (2).......................... $ 189,989 $ 305,072
========= =========
(1) Included in sales for the three months ended March 31, 1999 is the
securitization of 384 single family residential mortgage loans with an
aggregate unpaid principal balance of $24.9 million.
(2) The decline in the balance of the gross loan portfolio at March 31,
1999, as compared to March 31, 1998, is primarily due to repayments of
commercial real estate loans (primarily hotel) and multifamily
residential loans, as well as the sale of single family residential
loans.
The following table presents a summary of the Company's non-performing
loans (loans which are past due 90 days or more) in the loan portfolio and
significant ratios at the dates indicated:
March 31, December 31,
1999 1998
-------------- -------------
(Dollars in thousands)
Nonperforming loans (1)
Single family residential loans ................ $ 461 $ 1,169
Multi-family residential loans ................. 13,280 7,392
Commercial real estate and other ............... 5,599 488
-------------- -------------
$ 19,340 $ 9,049
============== =============
Nonperforming loans as a percentage of:
Total loans (2) ................................ 10.54% 3.85%
Total assets ................................... 0.62% 0.27%
Allowance for loan losses as a percentage of:
Total loans (2) ................................ 2.16% 2.07%
Nonperforming loans ............................ 20.53% 54.46%
(1) The Company did not have any loans which were accruing interest and
were past due 90 days or more at the dates indicated.
(2) Total loans is net of undisbursed loan proceeds.
ALLOWANCES FOR LOSSES. The Company uses an internal asset review system
to identify problem assets. The Company's determination of the level and the
allocation of the allowance for loan losses and, correspondingly, the provisions
for such losses, is based on various judgments, assumptions and projections
regarding a number of factors, including, but not limited to, asset risk
classifications, current and forecasted economic and market conditions, loan
portfolio composition, historical loan loss experience and industry experience.
The allowance for loan losses is adjusted monthly to reflect management's
current assessment of the effect of these factors on estimated inherent loan
losses. While management uses all information available to it to estimate losses
on loans, future changes to the allowance may become necessary based on changes
in economic and market conditions. The OTS, as part of its examination process,
periodically reviews the adequacy of the Company's allowance for loan losses.
Such agency may require the company to recognize changes to the allowance based
on its judgment about information available to it at the time of examination.
40
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the allocation of the Company's
allowance for loan losses at the dates indicated by loan category and the
percentage of loans in each category to total loans in the respective portfolios
at the dates indicated:
March 31, 1999 December 31, 1998
---------------------------------- -----------------------------------
Gross Gross
Loan Loan
Allowance Balance Percent Allowance Balance Percent
--------- ------- ------- --------- ------- -------
(Dollars in thousands)
Loan portfolio:
Single family................ $ 38 $ 3,058 1.6% $ 215 $ 30,361 12.4%
Multi-family................. 2,122 55,203 29.1 2,714 75,599 30.9
Commercial real estate....... 1,810 131,610 69.3 1,999 138,727 56.7
Consumer..................... -- 118 -- -- 132 --
-------- ---------- -------- -------- ---------- -----
$ 3,970 $ 189,989 100.0% $ 4,928 $ 244,819 100.0%
======== ========== ======== ======== ========== =====
Discount loan portfolio:
Single family................ $ 11,533 $ 434,442 38.7% $ 10,307 $ 597,100 45.9%
Multi-family................. 2,297 240,974 21.4 2,457 244,172 18.8
Commercial real estate....... 9,964 430,940 38.4 8,607 449,010 34.5
Other........................ 74 16,873 1.5 31 10,144 0.8
-------- ---------- -------- -------- ---------- -----
$ 23,868 $1,123,229 100.0% $ 21,402 $1,300,426 100.0%
======== ========== ======== ======== ========== =====
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
The following table summarizes activity in the allowance for loan
losses related to the Company's loan portfolio and discount loan portfolio
during the three months ended March 31, 1999.
Balance Balance
December 31, March 31,
1998 Additions Charge-offs Recoveries 1999
------------ --------- ----------- ---------- ---------
(Dollars in thousands)
Loan portfolio:
Single family................... $ 215 $ (169) $ (8) $ -- $ 38
Multi-family.................... 2,714 (592) -- -- 2,122
Commercial real estate.......... 1,999 (189) -- -- 1,810
Consumer........................ -- -- -- -- --
---------- ---------- ---------- ---------- ----------
$ 4,928 $ (950) $ (8) $ -- $ 3,970
========== ========== ========== ========== ==========
Discount loans:
Single family................... $ 10,307 $ 2,038 $ (965) $ 153 $ 11,533
Multi-family.................... 2,457 (62) (98) -- 2,297
Commercial...................... 8,607 2,660 (1,303) -- 9,964
Other........................... 31 53 (10) -- 74
---------- ---------- ---------- ---------- ----------
$ 21,402 $ 4,689 $ (2,376) $ 153 $ 23,868
========== ========== ========== ========== ==========
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. In 1993, the
Company commenced a program to invest in multi-family residential projects which
have been allocated low income housing tax credits under Section 42 of the
Internal Revenue Code by a state tax credit allocating agency.
41
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The carrying value of the Company's investments in low-income housing
tax credit interests are as follows at the dates indicated.
March 31, December 31,
1999 1998
----------- -----------
(Dollars in thousands)
Investments solely as a limited partner made prior to May 18, 1995............. $ 19,068 $ 19,607
Investments solely as a limited partner made on or after May 18, 1995.......... 61,473 56,299
Investments both as a limited and, through subsidiaries, as a general partner.. 74,732 68,258
----------- -----------
$ 155,273 $ 144,164
=========== ===========
Investments by the Company in low-income housing tax credit interests
made on or after May 18, 1995, in which the Company invests solely as a limited
partner, are accounted for using the equity method in accordance with the
consensus of the Emerging Issues Task Force as recorded in Issue Number 94-1.
Limited partnership investments made prior to May 18, 1995, are accounted for
under the effective yield method as a reduction of income tax expense.
Low-income housing tax credit partnerships in which the Company invests both as
a limited and, through a subsidiary, as general partner are presented on a
consolidated basis.
INVESTMENT IN UNCONSOLIDATED ENTITIES. The Company's investments in
unconsolidated entities was comprised of the following at the dates indicated.
Ownership Carrying Value
--------------------------------------------- -----------------------------------------
Entity Shares/Units % March 31, 1999 December 31, 1998
- ----------------------- -------------------------- ----------------- ---------------- ------------------
(Dollars in thousands)
OAC................. 1,540,000 8.12% $ 16,204 $ 16,268
OPLP................ 1,808,733 8.71% 22,666 22,820
Kensington.......... 549,993 36.07% 44,075 46,586
Other............... various various 1,334 1,219
---------------- ----------------
$ 84,279 $ 86,893
================ ================
Other consists primarily of the Company's joint venture investment,
which consisted of a 10% interest in BCFL, a limited liability company formed by
the Bank and BlackRock in January 1997 to acquire discount multi-family
residential loans from HUD.
During the first quarter of 1999, the Company recorded equity in the
losses of its investments in OAC and OPLP of $64,000 and $154,000, respectively.
At March 31, 1999 and December 31, 1998, the Company's investment in OAC stock
was pledged as collateral on obligations outstanding under a line of credit.
The Company's investment in Kensington includes the excess of the
purchase price over the net investment in the amount of $33.9 million
((pound)20.6 million) at March 31, 1999, as compared to $34.5 million
((pound)20.9 million) at December 31, 1998. During the first quarter of 1999,
the Company recorded equity in the losses of its investment in Kensington of
$1.1 million, including $609,000 amortization of excess cost over purchase
price.
REAL ESTATE OWNED. Properties acquired through foreclosure are valued
at the lower of the adjusted cost basis of the loan or fair value less estimated
costs of disposal of the property at the date of foreclosure. Properties
included in the Company's real estate owned are periodically re-evaluated to
determine that they are being carried at the lower of cost or fair value less
estimated costs to dispose. Rental income related to properties is reported as
earned. Holding and maintenance costs related to properties are recorded as
period costs as incurred. Decreases in market value of foreclosed real estate
subsequent to foreclosure are recognized as a valuation allowance on a property
specific basis. Subsequent increases in the market value of the foreclosed real
estate are reflected as reductions in the valuation allowance, but not below
zero. Such changes in the valuation allowance are charged or credited to income.
42
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth certain information relating to the
Company's real estate owned at the dates indicated:
March 31, December 31,
1999 1998
----------- -----------
(Dollars in thousands)
Discount loan portfolio:
Single family residential................................ $ 83,478 $ 94,641
Multi-family residential................................. 18,075 20,130
Commercial real estate................................... 99,683 82,591
----------- -----------
Total.................................................. 201,236 197,362
Loan portfolio.............................................. 2,556 227
Loans available for sale portfolio.......................... 5,039 3,962
----------- -----------
$ 208,831 $ 201,551
=========== ===========
The following table sets forth the activity in the valuation allowance
on real estate owned for the periods indicated.
For the three months ended March 31, 1999 1998
- ------------------------------------------------------------- ----------- -----------
(Dollars in thousands)
Balance at beginning of period (1).......................... $ 15,325 $ 12,346
Provision for loss in fair value............................ 5,061 4,234
Charge-offs and sales....................................... (6,841) (3,338)
----------- -----------
Balance at end of period (1)................................ $ 13,545 $ 13,242
=========== ===========
(1) The valuation allowance as a percentage of total real estate owned was
6.49% at March 31, 1999 as compared to 7.60% at December 31, 1998.
The following table sets forth the activity in real estate owned during
the periods indicated.
Three months ended March 31,
---------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
No. of No. of
Amount Properties Amount Properties
---------- ---------- ---------- ----------
(Dollars in thousands)
Balance at beginning of period...... $ 201,551 1,999 $ 167,265 1,505
Properties acquired through
foreclosure or deed-in-lieu thereof:
Discount loans................. 70,694 702 64,803 687
Loans available for sale....... 4,819 56 688 7
Loan portfolio................. 2,466 2 -- --
Less discount transferred...... (20,885) -- (21,788) --
---------- ---------- ---------- ----------
57,094 760 43,703 694
---------- ---------- ---------- ----------
Acquired in connection with
acquisitions of discount loans... 12,842 146 3,605 53
Less discount transferred........... (4,682) -- (690) --
---------- ---------- ---------- ----------
8,160 146 2,915 53
---------- ---------- ---------- ----------
Sales............................... (59,754) (1,032) (40,294) (610)
Decrease (increase) in allowance.... 1,780 -- (896) --
---------- ------------- ---------- -------------
Balance at end of period(1)......... $ 208,831 1,873 $ 172,693 1,642
========== ============= ========== =============
(1) The increase in real estate owned at March 31, 1999, as compared to
March 31, 1998, is primarily the result of commercial real estate
properties acquired through foreclosures on discount loans.
43
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the amount of time that the Company had
held its real estate owned at the dates indicated.
March 31, 1999 December 31, 1998
-------------------------- --------------------------
Amount % Amount %
------------- ------ ------------- -------
(Dollars in thousands)
One to two months................................... $ 33,309 16.0% $ 38,444 19.1%
Three to four months................................ 40,211 19.3 79,264 39.3
Five to six months.................................. 67,752 32.4 27,115 13.4
Seven to twelve months.............................. 37,306 17.8 26,122 13.0
Over twelve months.................................. 30,253 14.5 30,606 15.2
------------- ------ ------------- -------
$ 208,831 100.0% $ 201,551 100.0%
============= ====== ============= =======
The following table sets forth certain geographical information by type
of property at March 31, 1999 related to the Company's real estate owned.
Multi-family Residential
Single family Residential and Commercial Total
--------------------------- --------------------------- ---------------------------
No. of No. of No. of
Amount Properties Amount Properties Amount Properties
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
Florida.................. $ 4,699 90 $ 53,654 10 $ 58,353 100
California............... 19,579 282 6,674 6 26,253 288
Maryland................. 7,039 126 15,229 3 22,268 129
Connecticut.............. 6,238 110 12,920 2 19,158 112
Georgia.................. 1,262 20 14,697 2 15,959 22
Other (1)................ 50,014 1,188 16,826 34 66,840 1,222
------------ ------------ ------------ ------------ ------------ ------------
Total................. $ 88,831 1,816 $ 120,000 57 $ 208,831 1,873
============ ============ ============ ============ ============ ============
(1) Consists of properties located in 43 other states, none of which
aggregated over $9.3 million in any one state.
DEPOSITS. Deposits decreased $333.6 million or 15% during the first
quarter of 1999. The decrease in deposits during the first quarter of 1999 was
primarily the result of a $205.3 million decrease in brokered deposits obtained
through national investment banking firms which solicit deposits from their
customers, a $107.6 million decrease in deposits obtained through direct
solicitation and marketing efforts to regional and local investment banking
firms, institutional investors and high net worth individuals and a $20.1
million decrease in escrow deposits, offset by a $1.7 million increase in
checking and money funds. Brokered deposits obtained through national investment
banking firms amounted to $1.28 billion at March 31, 1999, as compared to $1.48
billion at December 31,1998. Deposits obtained through direct solicitation and
marketing amounted to $269.9 million at March 31, 1999, as compared to $377.4
million at December 31, 1998. At March 31, 1999, the Company had $109.0 million
of certificates of deposit in amounts of $100,000 or more, including $28.9
million of deposits of states and political subdivisions in the U.S. which are
secured or collateralized as required under state law. See "- Liquidity,
Commitments and Off-Balance Sheet Risks" below.
44
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
NOTES AND DEBENTURES. Notes and debentures outstanding at the dates
indicated, mature as follows.
March 31, December 31,
1999 1998
--------------- ---------------
2003: (Dollars in thousands)
11.875% Notes due October 1......................... $ 125,000 $ 125,000
2005:
12% Subordinated Debentures due June 15 (1)......... 98,000 100,000
--------------- ---------------
$ 223,000 $ 225,000
=============== ===============
(1) During the first quarter of 1999, the Company repurchased $2.0 million
of its Debentures at par.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit amounted to $324.8 million at March 31, 1999, an increase
of $145.5 million from December 31, 1998, primarily as a result of new
borrowings to fund the acquisition and origination of subprime single family
loans at OFS and Ocwen UK. Borrowings under lines of credit generally have a
one-year term and interest rates which float in accordance with a designated
prime rate. For additional information regarding lines of credit, see
"Liquidity, Commitments and Off-Balance Sheet Risks."
COMPANY-OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY. In August
1997, Ocwen Capital Trust I issued $125.0 million of 10 7/8% Capital Securities.
Proceeds from issuance of the Capital Securities were invested in 10 7/8% Junior
Subordinated Debentures issued by the Company. The Junior Subordinated
Debentures, which represent the sole assets of the Trust, will mature on August
1, 2027. Intercompany transactions between Ocwen Capital Trust I and the
Company, including the Junior Subordinated Debentures, are eliminated in the
consolidated financial statements of the Company.
For the three months ended March 31, 1998 and 1999, the Company
recorded $3.4 million of distributions to holders of the Capital Securities. See
Note 3 to the Interim Consolidated Financial Statements included in Item 1
hereof.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $11.9 million or
3% during the three months ended March 31, 1999. The increase in stockholders'
equity during this period was primarily attributable to net income of $9.5
million and an increase of $2.2 million in the unrealized gain on securities
available for sale. See the Consolidated Statements of Changes in Stockholders'
Equity in the Interim Consolidated Financial Statements included in Item 1
hereof.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. It is the objective of the
Company to attempt to control risks associated with interest rate movements. In
general, management's strategy is to match asset and liability balances within
maturity categories to limit the Company's exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time. The Company's asset and liability management strategy is formulated and
monitored by the Asset/Liability Committee, which is composed of officers of the
Company, in accordance with policies approved by the Board of Directors of the
Company. The Asset/Liability Committee meets regularly to review, among other
things, the sensitivity of the Company's assets and liabilities to interest rate
changes, the book and market values of assets and liabilities, unrealized gains
and losses, including those attributable to hedging transactions, purchase and
sale activity, and maturities of investments and borrowings. The Asset/Liability
Committee also approves and establishes pricing and funding decisions with
respect to overall asset and liability composition.
The Asset/Liability Committee is authorized to utilize a wide variety
of off-balance sheet financial techniques to assist it in the management of
interest rate risk. These techniques include interest rate exchange or swap
agreements, Eurodollar and U.S. Treasury interest rate futures contracts and
foreign currency swap agreements.
45
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
INTEREST RATE RISK MANAGEMENT. Under interest rate swap agreements, the
parties exchange the difference between fixed-rate and floating-rate interest
payments on a specified principal amount (referred to as the "notional amount")
for a specified period without the exchange of the underlying principal amount.
Interest rate exchange agreements are utilized by the Company to protect against
the decrease in value of a fixed-rate asset or the increase in borrowing cost
from a short-term, fixed-rate liability, such as reverse repurchase agreements,
in an increasing interest-rate environment. At March 31, 1999, the Company had
no outstanding interest rate exchange agreement. Interest rate exchange
agreements had the effect of decreasing the Company's net interest income by
$38,000 during the three months ended March 31, 1998.
The Company also enters into interest rate futures contracts, which are
commitments to either purchase or sell designated financial instruments at a
future date for a specified price and may be settled in cash or through
delivery. Eurodollar futures contracts have been sold by the Company to hedge
the repricing or maturity risk of certain short duration mortgage-related
securities, and U.S. Treasury futures contracts have been sold by the Company to
offset declines in the market value of its fixed-rate loans and certain
fixed-rate mortgage-backed and related securities available for sale in the
event of an increasing interest rate environment. The Company had no outstanding
interest rate futures and Eurodollar futures contracts at March 31, 1999.
Futures contracts had the effect of decreasing the Company's net interest income
by $49,000 during the three months ended March 31, 1998. See Note 4 to the
Interim Consolidated Financial Statements included in Item 1 hereof.
The Asset/Liability Committee's methods for evaluating interest rate
risk include an analysis of the Company's interest rate sensitivity "gap", which
is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities. A gap is considered
negative when the amount of interest-rate sensitive liabilities exceeds
interest-rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to affect net
interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market rates or conditions, changes in interest rates may affect net interest
income positively or negatively even if an institution were perfectly matched in
each maturity category.
The following table sets forth the estimated maturity or repricing of
the Company's interest-earning assets and interest-bearing liabilities at March
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) fixed-rate loans reflect scheduled contractual amortization, with
no estimated prepayments, (v) NOW and money market checking deposits and savings
deposits, which do not have contractual maturities, reflect estimated levels of
attrition, which are based on detailed studies of each such category of deposit
by the Company, and (vi) escrow deposits and other non-interest bearing checking
accounts, which amounted to $214.1 million at March 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.
46
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
March 31, 1999
-------------------------------------------------------------------------
Within Four to More than Three
Three Twelve One Year to Years
Months Months Three Years and Over Total
---------- ---------- ----------- ---------- ----------
Rate-Sensitive Assets: (Dollars in thousands)
Interest-earning deposits.................... $ 18,798 $ -- $ -- $ -- $ 18,798
Federal funds sold........................... 200,500 -- -- -- 200,500
Securities available for sale................ 130,872 197,922 110,580 127,365 566,739
Loans available for sale (1)................. 8,508 172,284 42,639 150,663 374,094
Investment securities, net................... -- -- -- 10,825 10,825
Loan portfolio, net (1)...................... 56,590 59,400 48,026 13,495 177,511
Discount loan portfolio, net................. 80,023 297,755 247,814 267,588 893,180
---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets................ 495,291 727,361 449,059 569,936 2,241,647
---------- ---------- ---------- ---------- ----------
Rate-Sensitive Liabilities:
NOW and money market checking deposits....... 10,956 3,842 7,625 14,318 36,741
Savings deposits............................. 76 204 403 795 1,478
Certificates of deposit...................... 311,718 418,466 642,391 216,579 1,589,154
---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits............ 322,750 422,512 650,419 231,692 1,627,373
Securities sold under agreements to repurchase 78,474 -- -- -- 78,474
Obligations outstanding under lines of credit 324,760 -- -- -- 324,760
Notes and debentures......................... -- -- -- 223,000 223,000
---------- ---------- ---------- ---------- ----------
Total rate-sensitive liabilities........... 725,984 422,512 650,419 454,692 2,253,607
Interest rate sensitivity gap before
off-balance sheet financial instruments... (230,693) 304,849 (201,360) 115,244 (11,960)
Off-Balance Sheet Financial Instruments:
Futures contracts............................ -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Interest rate sensitivity gap................... $ (230,693) $ 304,849 $ (201,360) $ 115,244 $ (11,960)
============ ============ ============= ============ ============
Cumulative interest rate sensitivity gap........ $ (230,693) $ 74,156 $ (127,204) $ (11,960)
============ ============ ============ ============
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets.... (10.29)% 3.31% (5.67)% (0.51)%
====== ==== ===== ======
(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 minimum NPV Ratio for each of the seven rate shock scenarios
and the corresponding limits approved by the Board of Directors of the Bank, is
as follows at March 31, 1999.
47
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Rate Shock Board Limits Current
(in basis points) (minimum NPV Ratios) NPV Ratios
- ------------------------------------------ ------------------------------ --------------------
+300 5.00% 15.73%
+200 6.00 16.59
+100 7.00 17.23
0 8.00 17.74
-100 7.00 18.32
-200 6.00 18.78
-300 5.00 19.30
The Asset/Liability Committee also regularly reviews interest rate risk
by forecasting the impact of alternative interest rate environments on net
interest income and NPV, and evaluating such impacts against the maximum
potential changes in net interest income and NPV that is authorized by the Board
of Directors of the Bank. The following table quantifies the potential changes
in net interest income and NPV should interest rates go up or down (shocked) 300
basis points, assuming the yield curves of the rate shocks will be parallel to
each other. The cash flows associated with the loan portfolios and securities
available for sale are calculated based on prepayment and default rates that
vary by asset. Projected losses, as well as prepayments, are generated based
upon the actual experience with the subject pool, as well as similar, more
seasoned pools. To the extent available, loan characteristics such as
loan-to-value ratio, interest rate, credit history, prepayment penalty terms and
product types are used to produce the projected loss and prepayment assumptions
that are included in the cash flow projections of the securities. When interest
rates are shocked, these projected loss and prepayment assumptions are further
adjusted. For example, under current market conditions, a 100 basis point
decline in the market interest rate is estimated to result in a 200 basis point
increase in the prepayment rate of a typical subprime residential loan. Most
commercial and multi-family loans are not subject to prepayments as a result of
prepayment penalties and contractual terms which prohibit prepayments during
specified periods. However, for those commercial and multi-family loans where
prepayments are not currently precluded by contract, declines in interest rates
are associated with steep increases in prepayment speeds in computing cash
flows. A risk premium is then calculated for each asset, which, when added to
the interest rate being modeled, results in a matrix of discount rates that are
applied to the cash flows computed by the model. The base interest rate scenario
assumes interest rates at March 31, 1999. Actual results could differ
significantly from those estimated in the table.
Estimated Changes in
Change in interest Rates -----------------------------------------------------
(Rate shock in basis points) Net Interest NPV
- ------------------------------------------ ------------------------------ --------------------
+300 4.67% (16.41)%
+200 3.11 (9.93)
+100 1.56 (4.60)
0 -- --
-100 (1.56) 5.19
-200 (3.11) 9.66
-300 (4.67) 14.69
Management of the Company believes that the assumptions used by it to
evaluate the vulnerability of the Company's operations to changes in interest
rates approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities and the
estimated effects of changes in interest rates on the Company's net interest
income and NPV could vary substantially if different assumptions are used or
actual experience differs from the historical experience on which they are
based.
FOREIGN CURRENCY EXCHANGE RATE RISK MANAGEMENT. The Company uses
foreign currency derivatives to hedge its equity investment in Ocwen UK and
Kensington ("net investment hedges"). The Company's exposure to foreign currency
exchange rates exists with the British Pound versus the U.S. dollar. It is the
Company's policy to periodically adjust the amount of foreign currency
derivative contracts it has entered into in response to changes in its recorded
equity investment in these foreign entities.
During 1998, the Company entered into a foreign currency swap with a
AAA-rated counterparty to hedge its equity investment in Kensington. Under the
terms of the agreement, the Company will swap (pound)27.5 million for $43.5
48
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
million in five years based on the exchange rate on the date the contract became
effective. On August 6, 1998, the Company also sold short foreign currency
futures contracts to further hedge its foreign currency exposure related to its
equity investment in Kensington. Under the terms of the currency futures, the
Company had the right to receive $410,000 and pay (pound)250,000. These futures
were closed during January 1999.
The Company sells short foreign currency futures to hedge its foreign
currency exposure related to its equity investment in Ocwen UK. During the first
quarter of 1999, the Company increased its derivative hedging instruments to
include its foreign currency exposure resulting from the unrealized gain on
securities available for sale related to Ocwen UK. Under the terms of the
currency futures, at March 31, 1999 the Company had the right to receive $73.1
million and pay (pound)45.5 million. At December 31, 1998, the Company had the
right to receive $43.8 million and pay (pound)26.6 million. The value of the
currency futures is based on quoted market prices. See Note 4 to the Interim
Consolidated Financial Statements included in Item 1 hereof.
The Company's net investment hedges and related foreign currency equity
investments and net exposures as of March 31, 1999 and December 31, 1998 were as
follows:
Equity Investment Net Hedges Net Exposure
------------------- -------------------------- ------------------
(Dollars in thousands)
MARCH 31, 1999:
Ocwen UK (1)............... $ 72,747 $ 73,086 $ (339)
Kensington................. $ 44,075 $ 43,546 $ 529
DECEMBER 31, 1998:
Ocwen UK................... $ 53,820 $ 43,828 $ 9,992
Kensington................. $ 46,586 $ 45,093 $ 1,493
(1) The unrealized gain on securities available for sale amounted to
$20,005 at March 31, 1999.
The net exposures are subject to gain or loss if foreign currency
exchange rates fluctuate.
LIQUIDITY, COMMITMENTS AND OFF-BALANCE SHEET RISKS
Liquidity is a measurement of the Company's ability to meet potential
cash requirements, including ongoing commitments to fund deposit withdrawals,
repay borrowings, fund investment, loan acquisition and lending activities and
for other general business purposes. The primary sources of funds for liquidity
consist of deposits, FHLB advances, reverse repurchase agreements, lines of
credit and maturities and principal payments on loans and securities and
proceeds from sales thereof. An additional source of asset liquidity is the
ability to securitize assets such as discount loans and subprime loans.
Sources of liquidity include certificates of deposit obtained primarily
from wholesale sources. At March 31, 1999, the Company had $1.60 billion of
certificates of deposit, including $1.54 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 March 31, 1999 and 2000 and thereafter, amounted to
$770.5 million, $335.8 million and $491.0 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 March 31, 1999, the
Company was eligible to borrow up to an aggregate of $569.0 million from the
FHLB of New York (subject to the availability of acceptable collateral) and had
$31.7 million of single family residential loans and $5.5 million of
multi-family residential loans which could be pledged as security for such
advances. At the same date, the Company had contractual relationships with 12
brokerage firms and the FHLB of New York pursuant to which it could obtain funds
from reverse repurchase agreements. At March 31, 1999, the Company had
unrestricted cash and equivalents of $286.0 million (including $274.3 million
held at the Bank), $322.9 million of short
49
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
duration CMOs (all of which were held by the Bank), and $73.8 million of
subordinate and residual mortgages that could be used to secure additional
borrowings. At present, the Company has no outstanding FHLB advances.
The Company's lines of credit obtained through its subsidiaries to
finance its subprime lending are as follows:
Balance
Amount of Committed Outstanding at
Entity Facility Amount 3/31/99 Maturity Date Interest Rate
- ------------------ ----------- ---------------------- -------------- ------------- --------------------------------
(Dollars in thousands)
OFS (1)........ $ 200,000 $ 100,000 $ 82,856 July 2001 Libor + 75 - 150 basis points
200,000 100,000 4,284 April 1999 Libor + 60 - 150 basis points
50,000 50,000 21,325 May 1999 Libor + 112 basis points
Ocwen UK (1)... 201,412 201,412 83,304 Nov. 1999 Libor + 80 basis point
(2)... 161,130 161,130 130,474 April 1999 Libor + 87.5 basis points
IMI (3)........ Lesser of $15,000
or 60% of market
value of collateral N/A 2,517 N/A Libor + 150 basis points
----------
Total.......... $ 324,760
==========
(1) These lines are used to fund mortgage loan originations and are
generally advanced at a rate of 80% to 90% of the principal balance of
the mortgage loan and are secured by such mortgage loans.
(2) Line was subsequently extended to April 2000.
(3) Line is collateralized by the shares held by the Company in OAC.
OFS's terms of the line of credit agreements contain, among other
provisions, requirements for maintaining certain profitability, defined levels
of net worth and debt-to-equity ratios. At March 31, 1999 and December 31, 1998,
OFS failed to comply with the maintenance of profitability covenant for one of
its credit lines. OFS obtained the lender's agreement waiving the requirement of
this covenant for the three months ended March 31, 1999 and the year ended
December 31, 1998.
The Company believes that its existing sources of liquidity, including
internally generated funds, will be adequate to fund planned activities for the
foreseeable future, although there can be no assurances in this regard.
Moreover, the Company continues to evaluate other sources of liquidity, such as
lines of credit from unaffiliated parties, which will enhance the management of
its liquidity and the costs thereof.
The Company's operating activities used cash flows of $159.6 million
and $320.9 million during the three months ended March 31, 1999 and 1998,
respectively. During the foregoing periods, cash flows from operating activities
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 increase in net cash flows used by operating activities
during the first quarter of 1999 as compared to 1998 was due primarily to a
decline in purchases of loans available for sale.
The Company's investing activities provided cash flows totaling $197.8
million and used cash flows of $12.5 million during the three months ended March
31, 1999 and 1998, respectively. During the foregoing periods, cash flows from
investing activities were provided primarily by principal payments on and sales
of discount loans and loans held for investment, maturities and principal
payments on securities available for sale and proceeds from sales of real estate
owned. Cash flows from investing activities were primarily utilized to purchase
and originate discount loans and loans held for investment and purchase
securities available for sale. The increase in net cash provided by investing
activities during the first quarter of 1999 as compared to 1998 was due
primarily to a decline in purchases of securities available for sale and an
increase in maturities of and principal payments on such securities, offset by a
decline in proceeds from sales of discount loans.
The Company's financing activities used cash flows of $183.7 million
and provided cash flows totaling $334.3 million during the three months ended
March 31, 1999 and 1998, respectively. During the foregoing periods, cash flows
50
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
from financing activities were primarily related to changes in deposits and
obligations outstanding under lines of credit.
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. Monetary penalties
may be imposed for failure to meet applicable liquidity requirements. The Bank's
liquidity, as measured for regulatory purposes, amounted to 14.6% at March 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 Company and the OTS to
dividend subordinate and residual mortgage-related securities resulting from
securitization activities conducted by the Bank, which had an aggregate fair
value of $11.8 million at March 31, 1999, the Bank may be limited in its ability
to pay cash dividends to the Company. See "Regulatory Capital Requirements". In
addition to the foregoing OTS limitations, there are certain contractual
restrictions on the Bank's ability to pay dividends as set forth in the
indenture governing the Bank's $98.0 million of 12% Debentures. See Note 5 to
the Interim Consolidated Financial Statements included in Item 2 hereof. Taking
into account such limitations and restrictions, the Bank could dividend to the
Company approximately $24.0 million as of March 31, 1999. At March 31, 1999, the
Bank held two subordinate securities with an aggregate fair value of $11.8
million. Future cash dividends also depend on future operating results of the
Bank.
At March 31, 1999, the Company had $58.7 million of unfunded
commitments related to the purchase and origination of loans. Management of the
Company believes that the Company has adequate resources to fund all of its
commitments to the extent required and that substantially all of such
commitments will be funded during 1999. See Note 6 to the Interim Consolidated
Financial Statements included in Item 1 hereof.
In addition to commitments to extend credit, the Company is party to
various off-balance sheet financial instruments in the normal course of business
to manage its interest rate and foreign currency rate risk. See "Asset and
Liability Management" above and Note 4 to the Interim Consolidated Financial
Statements included in Item 1 hereof.
The Company conducts business with a variety of financial institutions
and other companies in the normal course of business, including counterparties
to its off-balance sheet financial instruments. The Company is subject to
potential financial loss if the counterparty is unable to complete an agreed
upon transaction. The Company seeks to limit counterparty risk through financial
analysis, dollar limits and other monitoring procedures.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured institutions such as the Bank are required to
maintain minimum levels of regulatory capital. These standards generally must be
as stringent as the comparable capital requirements imposed on national banks.
In addition to regulatory capital requirements of general applicability, a
federally-chartered savings association such as the Bank may be required to meet
individual minimum capital requirements established by the OTS on a case-by-case
basis upon a determination that a savings association's capital is or may become
inadequate in view of its circumstances.
Following an examination in late 1996 and early 1997, the Bank
committed to the OTS to maintain a core capital (leverage) ratio and a total
risk-based capital ratio of at least 9% and 13%, respectively. The Bank
continues to be in compliance with this commitment as well as the regulatory
capital requirements of general applicability, as indicated in Note 8 to the
Interim Consolidated Financial Statements included in Item 1. Based on
discussions with the OTS, the Bank believes that this commitment does not affect
its status as a "well-capitalized" institution, assuming the Bank's continued
compliance with the regulatory capital requirements required to be maintained by
it pursuant to such commitment.
Although the above individual regulatory capital requirements have been
agreed to by the OTS, there can be no assurance that in the future the OTS will
agree to a decrease in such requirements or will not seek to increase such
requirements or will not impose these or other individual regulatory capital
requirements in a manner which affects the Bank's status as a "well-capitalized"
institution under applicable laws and regulations.
51
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
RECENT ACCOUNTING DEVELOPMENTS
For information relating to the effects on the Company of the adoption
of recent accounting standards see Note 1 to the Interim Consolidated Financial
Statements in Item 1 hereof.
YEAR 2000 DATE CONVERSION
The Company is in the process of establishing the readiness of its
computer systems and applications for the year 2000 with no effect on customers
or disruption to business operations. The Company has established a project plan
to achieve year 2000 readiness of its mission critical and non-mission critical
systems, including hardware infrastructure and software applications. The
project plan has a budget of approximately $2.0 million and is divided into six
phases: identification, evaluation, remediation, validation, risk assessment and
contingency planning. The addition of risk assessment and contingency planning
efforts to the overall project plan accounts for the difference between the $2.0
million budget and the estimate of $1.5 million for achieving year 2000
compliance included in the Company's 10-Q for the quarter ended June 30, 1998.
During 1998, the Company substantially completed the systems identification and
evaluation phases of the project as well as remediation and validation of its
mission critical systems.
As of March 31, 1999, the Company had expended approximately 73% of
budgeted manhours and incurred costs of approximately $1.3 million, which
included approximately $140,000 for Year 2000 testing tools, additional
hardware, and outside consulting assistance, while the remainder consisted of
labor and overhead expense from within the Company.
In its systems evaluation and validation efforts, the Company has
employed automated testing tools that are designed to meet guidelines
established by the Federal Financial Institution Examination Council (FFIEC) as
required by the OTS. All new application development will include year 2000
readiness validation prior to implementation, followed by such end-to-end
testing as necessary. During 1999 the Company is focusing on any remaining
validation tasks, including remediation and validation of its non-mission
critical systems and end-to-end testing with third parties. During the second
and third quarters of 1999, the Company plans to participate in the Mortgage
Banker Association Year 2000 Inter-System Readiness Test with other mortgage
industry leaders as a means of coordinating critical end-to-end validation.
As part of the identification and evaluation phases of the project, the
Company documented critical operating functions within each business unit, as
well as strategic third-party and vendor relationships. These efforts also are
serving as the basis of the Company's year 2000 risk assessment and contingency
planning efforts. The Company has retained a business continuity expert to
prepare contingency plans and assist with the testing and validation of these
plans. Until the risk assessment phase is completed, the Company will not know
the full extent of the risks associated with year 2000 readiness, including an
analysis of the most reasonably likely worst case year 2000 scenario. The
Company expects to complete its year 2000 risk assessment and contingency
planning efforts during the first half of 1999.
52
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT, AND CERTAIN STATEMENTS
CONTAINED IN FUTURE FILINGS BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "COMMISSION"), IN THE COMPANY'S PRESS RELEASES OR IN THE
COMPANY'S OTHER PUBLIC OR SHAREHOLDER COMMUNICATIONS MAY NOT BE BASED ON
HISTORICAL FACTS AND ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS,
WHICH ARE BASED ON VARIOUS ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY'S
CONTROL), MAY BE IDENTIFIED BY REFERENCE TO A FUTURE PERIOD(S) OR BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "ANTICIPATE," "BELIEVE," "COMMITMENT,"
"CONSIDER," "CONTINUE," "COULD," "ENCOURAGE," "ESTIMATE," "EXPECT," "FORESEE,"
"INTEND," "IN THE EVENT OF," "MAY," "PLAN," "PRESENT," "PROPOSE," "PROSPECT,"
"UPDATE," "WHETHER," "WILL," "WOULD," FUTURE OR CONDITIONAL VERB TENSES, SIMILAR
TERMS, VARIATIONS ON SUCH TERMS OR NEGATIVES OF SUCH TERMS. ALTHOUGH THE COMPANY
BELIEVES THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, IT CAN GIVE NO
ASSURANCE THAT THOSE RESULTS OR EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH STATEMENTS DUE TO RISKS,
UNCERTAINTIES AND CHANGES WITH RESPECT TO A VARIETY OF FACTORS, INCLUDING, BUT
NOT LIMITED TO, INTERNATIONAL, NATIONAL, REGIONAL OR LOCAL ECONOMIC ENVIRONMENTS
(PARTICULARLY IN THE MARKET AREAS WHERE THE COMPANY OPERATES), GOVERNMENT FISCAL
AND MONETARY POLICIES (PARTICULARLY IN THE MARKET AREAS WHERE THE COMPANY
OPERATES), PREVAILING INTEREST OR CURRENCY EXCHANGE RATES, EFFECTIVENESS OF
INTEREST RATE, CURRENCY AND OTHER HEDGING STRATEGIES, LAWS AND REGULATIONS
AFFECTING FINANCIAL INSTITUTIONS, REAL ESTATE INVESTMENT TRUSTS, INVESTMENT
COMPANIES AND REAL ESTATE (INCLUDING REGULATORY FEES, CAPITAL REQUIREMENTS,
INCOME AND PROPERTY TAXATION, ACCESS FOR DISABLED PERSONS AND ENVIRONMENTAL
COMPLIANCE), UNCERTAINTY OF FOREIGN LAWS, COMPETITIVE PRODUCTS, PRICING AND
CONDITIONS (INCLUDING FROM COMPETITORS THAT HAVE SIGNIFICANTLY GREATER RESOURCES
THAN THE COMPANY), CREDIT, PREPAYMENT, BASIS, DEFAULT, SUBORDINATION AND
ASSET/LIABILITY RISKS, LOAN SERVICING EFFECTIVENESS, ABILITY TO IDENTIFY
ACQUISITIONS AND INVESTMENT OPPORTUNITIES MEETING THE COMPANY'S INVESTMENT
STRATEGY, COURSE OF NEGOTIATIONS AND ABILITY TO REACH AGREEMENT WITH RESPECT TO
MATERIAL TERMS OF ANY PARTICULAR TRANSACTION, SATISFACTORY DUE DILIGENCE
RESULTS, SATISFACTION OR FULFILLMENT OF AGREED UPON TERMS AND CONDITIONS OF
CLOSING OR PERFORMANCE, TIMING OF TRANSACTION CLOSINGS, RECENT EFFORTS TO
REFOCUS ON CORE BUSINESSES AND INCREASE LIQUIDITY, DISPOSITIONS AND WINDING DOWN
OF DISCONTINUED BUSINESSES, ACQUISITIONS AND INTEGRATION OF ACQUIRED BUSINESSES,
SOFTWARE INTEGRATION, DEVELOPMENT AND LICENSING, AVAILABILITY OF AND COSTS
ASSOCIATED WITH OBTAINING ADEQUATE AND TIMELY SOURCES OF LIQUIDITY, DEPENDENCE
ON EXISTING SOURCES OF FUNDING, ABILITY TO REPAY OR REFINANCE INDEBTEDNESS (AT
MATURITY OR UPON ACCELERATION), TO MEET COLLATERAL CALLS BY LENDERS (UPON
RE-VALUATION OF THE UNDERLYING ASSETS OR OTHERWISE), TO GENERATE REVENUES
SUFFICIENT TO MEET DEBT SERVICE PAYMENTS AND OTHER OPERATING EXPENSES AND TO
SECURITIZE WHOLE LOANS, TAXABLE INCOME EXCEEDING CASH FLOW, AVAILABILITY OF
DISCOUNT LOANS FOR PURCHASE, SIZE OF, NATURE OF AND YIELDS AVAILABLE WITH
RESPECT TO THE SECONDARY MARKET FOR MORTGAGE LOANS AND FINANCIAL, SECURITIES AND
SECURITIZATION MARKETS IN GENERAL, ALLOWANCES FOR LOAN LOSSES, CHANGES IN REAL
ESTATE CONDITIONS (INCLUDING LIQUIDITY, VALUATION, REVENUES, RENTAL RATES,
OCCUPANCY LEVELS AND COMPETING PROPERTIES), ADEQUACY OF INSURANCE COVERAGE IN
THE EVENT OF A LOSS, KNOWN OR UNKNOWN ENVIRONMENTAL CONDITIONS, YEAR 2000
COMPLIANCE, OTHER FACTORS GENERALLY UNDERSTOOD TO AFFECT THE REAL ESTATE
ACQUISITION, MORTGAGE AND LEASING MARKETS, SECURITIES INVESTMENTS AND RAPID
GROWTH COMPANIES, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S
REPORTS AND FILINGS WITH THE COMMISSION, INCLUDING ITS REGISTRATION STATEMENTS
ON FORMS S-1 AND S-3 AND PERIODIC REPORTS ON FORMS 10-Q, 8-K AND 10-K. SPECIFIC
REFERENCE IS MADE TO EXHIBIT 99. 1, INCLUDED WITH THE COMPANY'S ANNUAL REPORT
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND FILED WITH THE SEC, FOR A
DESCRIPTION OF MATERIAL RISKS FACED BY THE COMPANY AND ITS SECURITIES HOLDERS.
GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
SUCH STATEMENTS. THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY
OBLIGATION, TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS THAT MAY BE MADE TO
ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATED OR
UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
53
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item appears under the caption "Asset and
Liability Management" included in Item 2 hereof and Note 4 to the Interim
Consolidated Financial Statements included in Item 1 hereof, and is incorporated
herein by reference.
54
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (2)
4.0 Form of Certificate of Common Stock (1)
4.1 Form of Indenture between the Company and Bank One, Columbus, NA as
Trustee (1)
4.2 Form of Note due 2003 (included in Exhibit 4.1) (1)
4.3 Certificate of Trust of Ocwen Capital Trust I (3)
4.4 Amended and Restated Declaration of Trust of Ocwen Capital Trust I
(3)
4.5 Form of Capital Security of Ocwen Capital Trust I (4)
4.6 Form of Indenture relating to 10 7/8% Junior Subordinated
Debentures due 2027 of the Company (3)
4.7 Form of 10 7/8% Junior Subordinated Debentures due 2027 of the
Company (4)
4.8 Form of Guarantee of the Company relating to the Capital Securities
of Ocwen Capital Trust I (3)
4.9 Form of Indenture between the Company and The Bank of New York as
Trustee (5)
4.10 Form of Subordinated Debentures due 2005 (6)
10.1 Ocwen Financial Corporation 1991 Non-Qualified Stock Option Plan,
as amended (6)
10.2 Annual Incentive Plan (1)
10.3 Ocwen Financial Corporation 1996 Stock Plan for Directors, as
amended (7)
10.4 Ocwen Financial Corporation 1998 Annual Incentive Plan (7)
10.5 Ocwen Financial Corporation Long-Term Incentive Plan (7)
10.6 Loan Facility Agreement between Ocwen Limited, Greenwich
International, LTD, and Ocwen Financial Corporation (8)
27.1 Financial Data Schedule-For the three months ended March 31, 1999
- ----------------------
(1) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-1,
(File No. 333-5153), as amended, declared effective by the Commission
on September 25, 1996.
(2) Incorporated by reference to the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.
(3) Incorporated by reference to the similarly identified exhibit filed in
connection with the Registrant's Registration Statement on Form S-1
(File No. 333-28889), as amended, declared effective by the Commission
on August 6, 1997.
(4) Incorporated by reference to similarly described exhibit included with
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(5) Incorporated by reference to the similarly described exhibit filed in
connection with Amendment No. 2 to Offering Circular on Form OC (on
Form S-1) filed on June 7, 1995.
(6) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-8,
File No. 333-44999, effective when filed with the Commission on January
28, 1998.
(7) Incorporated by reference to the similarly described exhibit to the
Registrant's Definitive Proxy Statement with respect to the Company's
1998 Annual Meeting as filed with the Commission on March 31, 1998.
(8) Incorporated by reference to the similarly described exhibit included
with the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.
55
(b) Reports on Form 8-K.
(1) A Form 8-K was filed by the Company on April 16, 1999 which
contained a news release announcing its proposed combination
with Ocwen Asset Investment Corp. and share repurchase
program.
(2) A Form 8-K was filed by the Company on May 6, 1999 which
contained a news release announcing its financial results for
the three months ended March 31, 1999.
56
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Ocwen Financial Corporation
By: /s/ Mark S. Zeidman
--------------------------------------------
Mark S. Zeidman,
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as its principal financial officer)
Date: May 17, 1999
57
9 0000873860 OCWEN FINANCIAL CORP. 1,000 USD 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 80,399 18,798 200,500 0 566,739 10,825 10,825 1,444,785 27,838 3,130,694 1,841,427 403,234 89,204 223,000 0 0 608 447,636 3,130,694 44,298 17,840 3,396 65,534 26,828 38,798 26,736 3,739 4,394 55,522 11,805 11,805 0 0 9,470 0.16 0.16 11.52 489,335 0 0 0 26,330 2,384 153 27,838 27,838 0 0 TAG 9-03(7) INCLUDES LOANS AVAILABLE FOR SALE OF $374,094, LOAN PORTFOLIO OF $177,511, AND DISCOUNT LOAN PORTFOLIO OF $893,180. TAG 9-03(7)(2) INCLUDES ALLOWANCE FOR LOAN LOSSES ON LOAN PORTFOLIO OF $3,970 AND ON THE DISCOUNT LOAN PORTFOLIO OF $23,868. TAG 9-03(13) INCLUDES SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE OF $78,474 AND OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT OF $324,760. TAG 9-04(1) INCLUDES INTEREST INCOME ON LOANS AVAILABLE FOR SALE OF $8,130, ON LOAN PORTFOLIO OF $6,165, AND ON DISCOUNT LOANS OF $30,003. TAG 9-04(14) INCLUDES NON-INTEREST EXPENSE OF $52,123 AND DISTRIBUTIONS ON COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY OF $3,399.