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 June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-13219
Ocwen Financial Corporation
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(Exact name of registrant as specified in its charter)
Florida 65-0039856
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401
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(Address of principal executive offices) (Zip Code)
(561) 682-8000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Number of shares of Common Stock, $.01 par value, outstanding as of August 11,
2003: 66,862,467 shares
OCWEN FINANCIAL CORPORATION
FORM 10-Q
I N D E X
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PART I - FINANCIAL INFORMATION Page
----
Item 1. Interim Consolidated Financial Statements (Unaudited).............. 3
Consolidated Statements of Financial Condition at
June 30, 2003 and December 31, 2002................................ 3
Consolidated Statements of Operations for the three and
six months ended June 30, 2003 and 2002............................ 4
Consolidated Statements of Comprehensive Loss for the
three and six months ended June 30, 2003 and 2002.................. 5
Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 2003...................... 6
Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002....................................... 7
Notes to Consolidated Financial Statements......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 60
Item 4. Controls and Procedures............................................ 63
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 65
Item 4. Submission of Matters to Vote of Security Holders.................. 65
Item 6. Exhibits and Reports on Form 8-K................................... 65
Signature................................................................... 67
2
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited)
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
June 30, December 31,
2003 2002
----------- -----------
Assets
Cash and amounts due from depository institutions ....................................... $ 65,836 $ 76,598
Interest earning deposits ............................................................... 124,164 30,649
Federal funds sold and repurchase agreements ............................................ 70,000 85,000
Trading securities, at fair value:
Collateralized mortgage obligations (AAA-rated) and U.S. Treasury securities ......... 8,829 21,556
Subordinates, residuals and other securities ......................................... 43,007 37,339
Investments in real estate .............................................................. 55,453 58,676
Affordable housing properties ........................................................... 12,182 15,319
Loans, net .............................................................................. 35,922 76,857
Match funded assets ..................................................................... 152,968 167,744
Real estate owned, net .................................................................. 53,781 62,039
Premises and equipment, net ............................................................. 42,373 44,268
Advances on loans and loans serviced for others ......................................... 304,690 266,356
Mortgage servicing rights ............................................................... 180,789 171,611
Receivables ............................................................................. 77,099 78,944
Other assets ............................................................................ 35,842 29,286
----------- -----------
Total assets .......................................................................... $ 1,262,935 $ 1,222,242
=========== ===========
Liabilities and Stockholders' Equity Liabilities
Deposits .............................................................................. $ 391,371 $ 425,970
Escrow deposits on loans and loans serviced for others ................................ 105,395 84,986
Bonds - match funded agreements ....................................................... 130,110 147,071
Lines of credit and other secured borrowings .......................................... 161,398 82,746
Notes and debentures .................................................................. 76,540 76,975
Accrued interest payable .............................................................. 6,527 7,435
Accrued expenses, payables and other liabilities ...................................... 29,151 28,314
----------- -----------
Total liabilities .................................................................... 900,492 853,497
----------- -----------
Minority interest in subsidiaries ....................................................... 1,442 1,778
Company obligated, mandatorily redeemable securities of subsidiary trust holding
solely junior subordinated debentures of the Company .................................. 56,249 56,249
Commitments and Contingencies (Note 8)
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; 66,866,974 and 67,339,773
shares issued and outstanding at June 30, 2003 and December 31, 2002, respectively ... 669 673
Additional paid-in capital ............................................................. 222,274 224,454
Retained earnings ...................................................................... 81,340 85,637
Accumulated other comprehensive income (loss), net of taxes
Net unrealized foreign currency translation gain (loss) .............................. 469 (46)
----------- -----------
Total stockholders' equity ......................................................... 304,752 310,718
----------- -----------
Total liabilities and stockholders' equity ...................................... $ 1,262,935 $ 1,222,242
=========== ===========
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)
Three Months Six Months
---------------------------- ----------------------------
For the periods ended June 30, 2003 2002 2003 2002
- -------------------------------------------------------------------- ------------ ------------ ------------ ------------
Net interest expense
Income ........................................................... $ 6,998 $ 8,806 $ 13,755 $ 21,520
Expense .......................................................... 9,405 14,714 18,731 31,110
------------ ------------ ------------ ------------
Net interest expense before provision for loan losses .......... (2,407) (5,908) (4,976) (9,590)
Provision for loan losses ........................................ (3,251) 10,732 (3,085) 11,411
------------ ------------ ------------ ------------
Net interest income (expense) after provision for loan losses .. 844 (16,640) (1,891) (21,001)
------------ ------------ ------------ ------------
Non-interest income
Servicing and other fees ......................................... 37,130 35,848 74,778 71,574
Gain (loss) on interest earning assets, net ...................... 27 (996) 27 (2,773)
Gain (loss) on trading and match funded securities, net .......... 3,188 161 2,765 2,953
Gain (loss) on real estate owned, net ............................ (279) (11,858) (23) (15,970)
Gain (loss) on other non-interest earning assets, net ............ 180 (93) 474 (841)
Net operating gains (losses) on investments in real estate ....... (4,595) (13,993) (3,702) (9,339)
Gain (loss) on repurchase of debt ................................ (4) 1,070 (4) 1,074
Other income ..................................................... 4,036 2,368 8,038 7,400
------------ ------------ ------------ ------------
Non-interest income ............................................ 39,683 12,507 82,353 54,078
------------ ------------ ------------ ------------
Non-interest expense
Compensation and employee benefits ............................... 17,130 19,708 34,838 40,781
Occupancy and equipment .......................................... 2,685 3,331 5,515 6,045
Technology and communication costs ............................... 4,497 6,009 8,994 11,061
Loan expenses .................................................... 3,465 3,436 7,000 7,371
Net operating losses on investments in affordable housing
properties ..................................................... 226 6,228 883 21,910
Professional services and regulatory fees ........................ 4,060 3,172 19,344 7,768
Other operating expenses ......................................... 2,554 2,615 4,851 4,602
------------ ------------ ------------ ------------
Non-interest expense ........................................... 34,617 44,499 81,425 99,538
------------ ------------ ------------ ------------
Distributions on Company-obligated, mandatorily redeemable
securities of subsidiary trust holding solely junior
subordinated debentures of the Company 1,529 1,566 3,058 3,229
------------ ------------ ------------ ------------
Income (loss) before minority interest, income taxes and effect
of change in accounting principle .............................. 4,381 (50,198) (4,021) (69,690)
Minority interest in net loss of subsidiaries ...................... (73) -- (336) --
Income tax expense ................................................. 305 -- 612 1,166
------------ ------------ ------------ ------------
Net income (loss) before effect of change in accounting
principle ...................................................... 4,149 (50,198) (4,297) (70,856)
Effect of change in accounting principle, net of taxes ............. -- -- -- 16,166
------------ ------------ ------------ ------------
Net income (loss) .............................................. $ 4,149 $ (50,198) $ (4,297) $ (54,690)
============ ============ ============ ============
Earnings (loss) per share
Basic
Net loss before effect of change in accounting principle ....... $ 0.06 $ (0.75) $ (0.06) $ (1.05)
Effect of change in accounting principle, net of taxes ......... -- -- -- .24
------------ ------------ ------------ ------------
Net income (loss) ........................................... $ 0.06 $ (0.75) $ (0.06) $ (0.81)
============ ============ ============ ============
Diluted
Net income (loss) before effect of change in accounting
principle ...................................................... $ 0.06 $ (0.75) $ (0.06) $ (1.05)
Effect of change in accounting principle, net of taxes ......... -- -- -- .24
------------ ------------ ------------ ------------
Net income (loss) ........................................... $ 0.06 $ (0.75) $ (0.06) $ (0.81)
============ ============ ============ ============
Weighted average common shares outstanding
Basic ........................................................ 67,240,155 67,317,005 67,289,694 67,305,747
Diluted ...................................................... 68,372,204 67,317,005 67,289,964 67,305,747
The accompanying notes are an integral part of
these consolidated financial statements.
4
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Three Months Six Months
------------------- --------------------
For the periods ended June 30, 2003 2002 2003 2002
- -------------------------------------------------- -------- -------- -------- --------
Net income (loss) ............................... $ 4,149 $(50,198) $ (4,297) $(54,690)
Other comprehensive income (loss), net of taxes:
Change in unrealized foreign currency translation
adjustment arising during the period (1) ...... 297 161 515 1
-------- -------- -------- --------
Comprehensive income (loss) ..................... $ 4,446 $(50,037) $ (3,782) $(54,689)
======== ======== ======== ========
(1) Net of tax benefit (expense) of $(149) and $(95) for the three months ended
June 30, 2003 and 2002, respectively, and $52 and $15 for the six months
ended June 30, 2003 and 2002, respectively.
The accompanying notes are an integral part of
these consolidated financial statements.
5
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(Dollars in thousands)
Accumulated
Other
Common Stock Additional Comprehensive
------------------------- Paid-in Retained Income (loss),
Shares Amount Capital Earnings Net of Taxes Total
---------- ----------- ----------- ----------- ------------- -----------
Balances at December 31, 2002 .......... 67,339,773 $ 673 $ 224,454 $ 85,637 $ (46) $ 310,718
Net loss ............................... -- -- -- (4,297) -- (4,297)
Repurchase of common stock ............. (494,500) (4) (2,231) -- -- (2,235)
Directors' compensation ................ 19,085 -- 36 -- -- 36
Exercise of common stock options ....... 2,616 -- 15 -- -- 15
Other comprehensive loss, net of taxes
Change in unrealized foreign currency
translation loss ................. -- -- -- -- 515 515
---------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 2003 .............. 66,866,974 $ 669 $ 222,274 $ 81,340 $ 469 $ 304,752
========== =========== =========== =========== =========== ===========
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 six months ended June 30, 2003 2002
- --------------------------------------------------------------------------------------------- ----------- -----------
Cash flows from operating activities
Net loss .................................................................................... $ (4,297) $ (54,690)
Adjustments to reconcile net loss to net cash provided (used) by operating activities
Net cash provided by trading activities ................................................... 17,917 103,679
Premium amortization on securities, net ................................................... 733 574
Depreciation and amortization ............................................................. 50,052 26,836
Provision for loan losses ................................................................. (3,085) 11,411
Provision for losses on real estate owned ................................................. 483 19,076
(Gain) loss on interest-earning assets, net ............................................... (27) 2,773
(Gain) loss on trading and match funded securities ........................................ (2,765) (2,953)
(Gain) loss on sale of other non-interest earning assets .................................. (474) 841
Provisions for losses on affordable housing properties .................................... 432 21,294
Impairment charges on investments in real estate .......................................... 5,526 15,317
(Gain) loss on sale of real estate owned, net ............................................. (92) (2,563)
(Gain) loss on repurchase of long-term debt ............................................... 4 (1,074)
Effect of change in accounting principle before taxes ..................................... -- (15,000)
(Increase) decrease in advances and match funded advances on loans and loans serviced for
others .................................................................................. (38,403) 29,974
(Increase) decrease in receivables and other assets, net .................................. (3,736) 9,070
Increase (decrease) in accrued expenses, interest payable and other liabilities ........... (88) (1,743)
----------- -----------
Net cash provided by operating activities ................................................... 22,180 162,822
----------- -----------
Cash flows from investing activities
Principal payments received on match funded loans ......................................... 5,656 9,971
Investment in affordable housing properties ............................................... -- (3,288)
Proceeds from sales of affordable housing properties ...................................... 2,340 11,524
Purchase of mortgage servicing rights ..................................................... (52,583) (56,997)
Proceeds from sales of loans .............................................................. 24,047 45,394
Proceeds from sale of real estate held for sale ........................................... -- 4,779
Proceeds from sales of real estate held for investment .................................... 96 47,686
Purchase, originations and funded commitments of loans, net of undisbursed loan funds ..... (6,225) (8,334)
Capital improvements to real estate held for investment ................................... (2,961) (7,627)
Principal payments received on loans ...................................................... 27,166 15,157
Proceeds from sale of real estate owned ................................................... 9,094 18,741
Capital improvements to real estate owned ................................................. (1,058) (1,592)
Additions to premises and equipment ....................................................... (4,837) (9,112)
----------- -----------
Net cash provided by investing activities ................................................... 735 66,302
----------- -----------
The accompanying notes are an integral part of
these consolidated financial statements.
7
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
For the six months ended June 30, 2003 2002
- ----------------------------------------------------------------------------------------- ----------- -----------
Cash flows from financing activities
Decrease in deposits and escrow deposits on loans and loans serviced for others ....... (14,190) (199,807)
Proceeds from (repayment of) securities sold under agreements to repurchase ........... -- (12,588)
Proceeds from (repayment of) lines of credit and other secured borrowings, net ........ 78,652 (15,421)
Proceeds from (repayment of) bonds-match funded agreements, net ....................... (16,961) (11,220)
Repurchase of Capital Securities ...................................................... -- (3,796)
Repurchase of common stock ............................................................ (2,235) --
Repurchase of notes and subordinated debentures ....................................... (439) (728)
Repayment of other interest bearing obligations, net .................................. -- (1,997)
Exercise of stock options ............................................................. 11 152
----------- -----------
Net cash provided (used) by financing activities ........................................ 44,838 (245,405)
----------- -----------
Net increase in cash and cash equivalents ............................................... 67,753 (16,281)
Cash and cash equivalents at beginning of period ........................................ 192,247 260,655
----------- -----------
Cash and cash equivalents at end of period .............................................. $ 260,000 $ 244,374
=========== ===========
Reconciliation of cash and cash equivalents at end of period
Cash and amounts due from depository institutions ..................................... $ 65,836 $ 34,213
Interest-earning deposits ............................................................. 124,164 122,161
Federal funds sold and repurchase agreements .......................................... 70,000 88,000
----------- -----------
$ 260,000 $ 244,374
=========== ===========
Supplemental disclosure of cash flow information
Interest paid ......................................................................... $ 19,639 $ 35,152
=========== ===========
Income tax (payments) refunds ......................................................... $ (585) $ 32
=========== ===========
Supplemental schedule of non-cash investing and financing activities
Real estate owned acquired through foreclosure ........................................ $ 128 $ 7,572
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
8
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared in conformity with the instructions to Form 10-Q and Article
10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they do not include all of the information and footnotes required by U.S.
generally accepted accounting principles ("GAAP") for complete financial
statements. Ocwen Financial Corporation's ("OCN") interim consolidated financial
statements include the accounts of OCN 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 Technology Xchange, Inc. ("OTX"), Ocwen Asset
Investment Corp. ("OAC") and Ocwen Financial Solutions, Private Limited
("India"). OCN also owns 70% of Global Servicing Solutions, LLC ("GSS") with the
remaining 30% held by Merrill Lynch. As of December 31, 2002, OCN owned 99.6% of
Ocwen Financial Services, Inc. ("OFS"), with the remaining 0.4% owned by the
shareholders of Admiral Home Loan. As part of the arbitration settlement with
the former owners of Admiral Home Loan on April 24, 2003, OCN gained title to
the remaining shares of OFS which increased our ownership to 100%. See Note 8
for additional information regarding this settlement. We have eliminated all
significant intercompany transactions and balances in consolidation.
The Bank is a federally chartered savings bank regulated by the Office
of Thrift Supervision ("OTS"). OCN is a registered savings and loan holding
company under the Home Owner's Loan Act and as such is also regulated by the
OTS.
In our opinion, the accompanying unaudited financial statements contain
all adjustments, consisting only of normal recurring accruals, necessary for a
fair statement of our financial condition at June 30, 2003 and December 31,
2002, the results of our operations for the three and six months ended June 30,
2003 and 2002, our comprehensive loss for the three and six months ended June
30, 2003 and 2002, our changes in stockholders' equity for the six months ended
June 30, 2003 and our cash flows for the six months ended June 30, 2003 and
2002, respectively. The results of operations and other data for the three and
six months ended June 30, 2003 are not necessarily indicative of the results
that may be expected for any other interim periods or the entire year ending
December 31, 2003. The unaudited consolidated financial statements presented
herein should be read in conjunction with the audited consolidated financial
statements and related notes thereto included in our Annual Report on Form 10-K
for the year ended December 31, 2002. Certain reclassifications have been made
to the prior periods' interim consolidated financial statements to conform to
the June 30, 2003 presentation.
In preparing the consolidated financial statements, we are 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. Material estimates that are particularly
significant in the near or medium term relate to our determination of the
allowance for loan losses and our valuation of securities, real estate,
affordable housing properties, servicing rights, intangibles and our deferred
tax asset. Actual results could differ from those estimates and assumptions.
NOTE 2 CURRENT ACCOUNTING PRONOUNCEMENTS
We adopted the provisions of Statement of Financial Accounting Standard
("SFAS") No. 142, "Goodwill and Other Intangible Assets," effective January 1,
2002. As a result, we reversed the unamortized balance of the excess of net
assets acquired over purchase price ("negative goodwill"). This reversal
resulted in a credit to income of $18,333. The impact from the adoption of other
elements of SFAS No. 142 resulted in our recording impairment charges of $3,333
on goodwill and intangible assets originally recorded in connection with the
formation of REALSynergy, Inc. in 1999. These amounts have been reported in the
first quarter of 2002 as the effect of a change in accounting principle, net of
an income tax benefit of $1,166.
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" (EITF 94-3). The principal difference between SFAS No. 146
and EITF 94-3 relates to SFAS No. 146's requirements for recognition of a
liability for a cost associated with an exit or disposal activity. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost as generally defined in EITF 94-3 was recognized at
the date of an entity's commitment to an exit plan. We adopted the new standard
effective January 1, 2003. The adoption of SFAS No. 146 did not have a material
impact on our results of operations, financial position or cash flows.
9
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2003
(Dollars in thousands)
- --------------------------------------------------------------------------------
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". The interpretation elaborates on
the disclosures to be made by a guarantor in its financial statements under
certain guarantees that is has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. We adopted the
disclosure requirements of the Interpretation as of December 31, 2002, the date
upon which they became effective. These provisions of the Interpretation require
disclosure of the nature of the guarantee, the maximum potential amount of
future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of the
Interpretation were effective January 1, 2003. The implementation of the
recognition requirements of the Interpretation did not have a significant effect
on our consolidated results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation
provides guidance with respect to the identification of variable interest
entities and when assets, liabilities, noncontrolling interests, and the results
of operations of a variable interest entity need to be included in a company's
consolidated financial statements. The Interpretation requires consolidation by
business enterprises of variable interest entities in certain cases. The factors
to be considered in making this determination include the adequacy of the equity
of the entity and the nature of the risks, rights and rewards of the equity
investors in the entity. The Interpretation applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. We are a
limited partner in four partnerships that developed low-income housing
properties that may be subject to the provisions of Fin 46. We do not
consolidate these partnerships but rather record our investment in them using
the equity method of accounting. As of June 30, 2003, our investment in such
limited partnerships amounted to $9,537 in four projects. In addition, we had
loans to these partnerships with a net book value of $5,500 at June 30, 2003. In
addition, FIN 46 may impact the financial statement presentation of our Company
obligated, mandatorily redeemable securities. We are evaluating the effect of
FIN 46 on our accounting for our investment in the low-income housing
partnerships and our Company obligated, mandatorily redeemable securities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with the characteristics of both liabilities and
equity. The statement requires that certain securities, such as our Company
obligated, mandatorily redeemable securities of subsidiary trust holding solely
junior subordinated debentures of the Company, which are classified between
liabilities and equity in the Statement of Financial Condition, be classified as
liabilities. Further, the distribution on such securities are to be classified
as interest cost. No restatement of periods prior to the adoption of SFAS No.
150 is permitted. The provisions for SFAS 150 were effective immediately for
financial instruments entered into or modified after May 31, 2003, and for the
first interim period beginning after June 15, 2003, for all other financial
instruments. The effects of adopting SFAS 150 are to be reported as the
cumulative effect of a change in accounting principle for financial instruments
that were created before the issuance of the Statement and still outstanding at
the beginning of the interim period of adoption. We have not yet completed our
evaluation of the cumulative effect on our financial statements of our adoption
of SFAS 150, which will be effective for the quarter beginning July 1, 2003.
Distributions will be treated as interest subsequent to adoption.
NOTE 3 COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY
In August 1997, the Ocwen Capital Trust ("OCT") issued $125,000 of
10.875% Capital Securities (the "Capital Securities"). Proceeds from the
issuance of the Capital Securities were invested in 10.875% Junior Subordinated
Debentures issued by OCN. The Junior Subordinated Debentures, which represent
the sole assets of OCT, will mature on August 1, 2027. To date, OCT has
repurchased $68,751 of its Capital Securities, although none were repurchased
during the first six months of 2003.
Holders of the Capital Securities are entitled to receive cumulative
cash distributions accruing from the date of original issuance and payable
semiannually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998, at an annual rate of 10.875% of the liquidation amount of
$1,000 per Capital Security. Payment of distributions out of moneys held by OCT,
and payments on liquidation of OCT or the redemption of Capital Securities, are
guaranteed by OCN to the extent OCT has funds available. If OCN does not make
principal or interest payments on the Junior Subordinated Debentures, OCT will
not have sufficient funds to make distributions on the Capital Securities, in
which event the guarantee shall not apply to such distributions until OCT has
sufficient funds available therefore. Accumulated distributions payable on the
Capital Securities amounted to $2,549 at June 30, 2003 and December 31, 2002,
and are included in accrued interest payable.
10
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2003
(Dollars in thousands)
- --------------------------------------------------------------------------------
OCN has the right to defer payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 10 consecutive semiannual periods with respect to each deferral
period, provided that no extension period may extend beyond the stated maturity
of the Junior Subordinated Debentures. Upon the termination of any such
extension period and the payment of all amounts then due on any interest payment
date, OCN 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 OCN may not permit any subsidiary to, (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, our 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 10.875% per annum, compounded
semiannually.
The Junior Subordinated Debentures are redeemable prior to maturity at
our option, subject to the receipt of any necessary prior regulatory approval,
(i) in whole or in part on or after August 1, 2007, at a redemption price equal
to 105.438% of the principal amount thereof on August 1, 2007, declining ratably
on each August 1 thereafter to 100% on or after August 1, 2017, plus accrued
interest thereon, or (ii) at any time, in whole (but not in part), upon the
occurrence and continuation of a special event (defined as a tax event,
regulatory capital event or investment company event) at a redemption price
equal to the greater of (a) 100% of the principal amount thereof or (b) the sum
of the present values of the principal amount and premium payable with respect
to an optional redemption of such Junior Subordinated Debentures on August 1,
2007, together with scheduled payments of interest from the prepayment date to
August 1, 2007, discounted to the prepayment date on a semiannual basis at the
adjusted Treasury rate plus accrued interest thereon to the date of prepayment.
The Capital Securities are subject to mandatory redemption, in whole or in part,
upon repayment of the Junior Subordinated Debentures at maturity or their
earlier redemption, in an amount equal to the amount of the related Junior
Subordinated Debentures maturing or being redeemed and at a redemption price
equal to the redemption price of the Junior Subordinated Debentures, plus
accumulated and unpaid distributions thereon to the date of redemption.
For financial reporting purposes, OCT is treated as a subsidiary of
Ocwen Financial Corporation and, accordingly, the accounts of OCT are included
in the consolidated financial statements of OCN. Intercompany transactions
between OCT and OCN, including the Junior Subordinated Debentures, are
eliminated in the consolidated financial statements of OCN. The Capital
Securities are presented as a separate caption between liabilities and
stockholders' equity in the consolidated statement of financial condition of OCN
as "Company-obligated, mandatorily redeemable securities of subsidiary trust
holding solely Junior Subordinated Debentures of the company." Distributions on
the Capital Securities are recorded as a separate caption immediately following
non-interest expense in the consolidated statements of operations of OCN. As
noted earlier, this method of accounting is currently being evaluated due to the
issuance of FIN 46 and SFAS 150.
In connection with the issuance of the Capital Securities, we incurred
certain costs, which have been capitalized and are being amortized over the term
of the Capital Securities. The unamortized balance of these issuance costs
amounted to $1,803 and $1,841 at June 30, 2003 and December 31, 2002,
respectively, and is included in Other assets.
11
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2003
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 4 DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative financial instruments for the purpose of managing our
exposure to adverse fluctuations in interest and foreign currency exchange
rates.
Interest Rate Management
We have purchased amortizing caps and floors to hedge our interest rate
exposure relating to our match funded loans and securities. These caps and
floors do not qualify for hedge accounting; therefore, changes in fair value are
recorded in the income statement. The terms of these outstanding caps and floors
at June 30, 2003 and December 31, 2002 are as follows at the dates indicated:
Notional
Amount Maturity Index Strike Rate Fair Value
------------- ------------ --------------- ----------- ----------
June 30, 2003
Caps........................... $ 105,290 October 2003 LIBOR 1 - Month 7.00% $ --
Floors......................... $ 28,729 October 2003 CMT 2 - Year 4.35 287
----------
$ 287
==========
December 31, 2002
Caps........................... $ 111,799 October 2003 LIBOR 1 - Month 7.00% $ --
Floors......................... $ 30,563 October 2003 CMT 2 - Year 4.35 592
----------
$ 592
==========
Foreign Currency Management
We enter into foreign currency derivatives to hedge our investments in
foreign subsidiaries that own residual interests backed by residential loans
originated in the UK ("UK residuals") and in our shopping center located in
Halifax, Nova Scotia (the "Nova Scotia Shopping Center"). It is our policy to
periodically adjust the amount of foreign currency derivative contracts we have
entered into in response to changes in our investments in these assets. We have
determined that the local currency of our investment in UK residuals and the
Nova Scotia Shopping Center is the functional currency. Our foreign currency
derivative financial instruments qualify for hedge accounting. Accordingly, we
include the gains or losses in the net unrealized foreign currency translation
in accumulated other comprehensive income in stockholders' equity. The following
table sets forth the terms and values of these foreign currency financial
instruments at June 30, 2003 and December 31, 2002:
Strike
Position Maturity Notional Amount Rate Fair Value
-------- -------------- --------------- ---------- ----------
June 30, 2003
Canadian Dollar currency futures......... Short September 2003 C$ 11,400 0.7285 $ (101)
British Pound currency futures........... Short September 2003 (pound) 17,875 1.6450 (32)
----------
$ (133)
==========
December 31, 2002
Canadian Dollar currency futures......... Short March 2003 C$ 11,400 0.6390 $ 78
British Pound currency futures........... Short March 2003 (pound) 18,750 1.5599 (793)
----------
$ (715)
==========
12
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2003
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 5 REGULATORY REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
and the regulations promulgated thereunder established certain minimum levels of
regulatory capital for savings institutions subject to OTS supervision. The Bank
must follow specific capital guidelines stipulated by the OTS, which involve
quantitative measures of the Bank's assets, liabilities and certain off-balance
sheet items. An institution that fails to comply with its regulatory capital
requirements must obtain OTS approval of a capital plan and can be subject to a
capital directive and certain restrictions on its operations. At June 30, 2003,
the minimum regulatory capital requirements were:
o Tangible and core capital of 1.50% and 3.00% of total adjusted assets,
respectively, consisting principally of stockholders' equity, but
excluding most intangible assets, such as goodwill and any net
unrealized gains or losses on debt securities available for sale.
Effective April 1, 1999, the OTS minimum core capital ratio provides
that only those institutions with a Uniform Financial Institution
Rating System rating of "1" are subject to a 3.00% minimum core
capital ratio. All other institutions are subject to a 4.00% minimum
core capital ratio.
o Risk-based capital consisting of core capital plus certain
subordinated debt and other capital instruments and, subject to
certain limitations, general valuation allowances on loans receivable,
equal to 8.00% of the value of risk-weighted assets.
At June 30, 2003 the Bank was "well capitalized" under the prompt
corrective action regulations adopted by the OTS pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991. To be categorized as "well
capitalized," the Bank must maintain minimum core capital, Tier 1 risk-based
capital and risk-based capital ratios as set forth in the following table. The
Bank's capital amounts and classification are subject to review by federal
regulators regarding components, risk-weightings and other factors. There are no
conditions or events since June 30, 2003 that we believe have changed the Bank's
category.
Following an examination by the OTS in late 1996 and early 1997, the
Bank committed to the OTS to maintain a core capital (leverage) ratio and a
total risk-based capital ratio of at least 9.00% and 13.00%, respectively. The
Bank continues to be in compliance with this commitment as well as with the
regulatory capital requirements of general applicability (as indicated in the
table below). Based on discussions with the OTS, the Bank believes that this
commitment does not affect its status as a "well-capitalized" institution,
assuming the Bank's continued compliance with the regulatory capital
requirements required to be maintained by it pursuant to such commitment.
Following the completion of the annual safety and soundness examination
of the OTS in 2000, we submitted a written business plan and budget to the OTS
regarding our plans for the business, primarily that of the Bank, over the next
several years. The primary focus of that plan was the reduction in our non-core
business activities and the reduction of our deposit liabilities and long-term
debt obligations as we focused on the growth of our fee-based business
activities.
The OTS approved the initial plan in February 2001. Since that time, we
submitted a revised plan to the OTS in April of 2002. The Plan included as its
primary focus the reduction of risk through the sale or resolution of our
non-core assets and the reduction of our reliance on brokered certificates of
deposit as a source of funding. Based on discussions with the OTS regarding the
revised plan, we have committed to maintain our investment in mortgage servicing
rights at approximately 60% of core capital (before any deduction thereto for
servicing rights) at the Bank and 50% of stockholders' equity on a consolidated
basis. We regularly review actual results as compared to our plan with the OTS
on a less formal basis. At June 30, 2003 we are above the level of mortgage
servicing rights that we committed to maintain. However, based on conversations
with the OTS, we are in fundamental compliance with the Plan.
13
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2003
(Dollars in thousands)
- --------------------------------------------------------------------------------
The following table summarizes the Bank's actual and required
regulatory capital at June 30, 2003:
To be Well
Capitalized for
Minimum for Capital Prompt Corrective Committed Capital
Actual Adequacy Purposes Action Provisions Requirements
------------------- ------------------- ------------------ -----------------
Ratio Amount Ratio Amount Ratio Amount Ratio
------ ---------- ------ --------- ------ --------- -----------------
Stockholders' equity, and ratio to
total assets....................... 17.63% $ 173,579
Disallowed servicing assets........... (10,243)
Disallowed deferred tax assets........ (22,983)
Non-includable subsidiary............. (848)
----------
Tier 1 (core) capital and ratio to
adjusted total assets.............. 14.67% 139,505 4.00% $ 38,030 5.00% $ 47,537 9.00%
========= =========
Non-mortgage servicing assets......... (2,298)
----------
Tangible capital and ratio to
tangible assets.................... 14.47% $ 137,207 1.50% $ 14,227
========== =========
Tier 1 capital and ratio to
risk-weighted assets............... 18.66% $ 139,505 6.00% $ 44,854
========== =========
Allowance for loan and lease losses... 6,916
Qualifying subordinated debentures.... 6,613
----------
Tier 2 capital........................ 13,529
----------
Total risk-based capital and ratio to
risk-weighted assets............... 20.47% $ 153,034 8.00% $ 59,806 10.00% $ 74,757 13 .00%
========== ========= =========
Total regulatory assets............... $ 984,840
==========
Adjusted total assets................. $ 950,749
==========
Tangible assets....................... $ 948,451
==========
Risk-weighted assets................... $ 747,574
==========
14
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2003
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 6 INTEREST INCOME AND EXPENSE BEFORE PROVISION FOR LOAN LOSSES
Three Months Six Months
-------------------- --------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------------------------ -------- -------- -------- --------
(Dollars in thousands)
Interest income
Interest earning cash and other .............. $ 96 $ 69 $ 146 $ 161
Federal funds sold and repurchase agreements.. 419 693 737 1,272
Trading securities ........................... 4,757 4,159 9,622 8,517
Loans ........................................ 737 2,077 1,109 7,513
Match funded loans and securities ............ 989 1,808 2,141 4,057
-------- -------- -------- --------
6,998 8,806 13,755 21,520
-------- -------- -------- --------
Interest expense
Deposits ..................................... 4,535 7,082 9,400 15,699
Securities sold under agreements to repurchase -- 71 3 198
Bonds - match funded agreements .............. 1,258 1,807 2,564 3,716
Lines of credit and other secured borrowings . 1,319 1,180 2,176 2,331
Notes and debentures ......................... 2,293 4,574 4,588 9,166
-------- -------- -------- --------
9,405 14,714 18,731 31,110
-------- -------- -------- --------
Net interest expense before provision for
loan losses ................................ $ (2,407) $ (5,908) $ (4,976) $ (9,590)
======== ======== ======== ========
15
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2003
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 7 BUSINESS SEGMENT REPORTING
An operating segment is defined as a component of an enterprise (a)
that engages in business activities from which it may earn revenues and incur
expenses, (b) whose operating results are regularly reviewed by the enterprise's
chief operating decision maker to make decisions about resources to be allocated
to the segment and assess its performance, and (c) for which discrete financial
information is available.
A brief description of our segments follows:
Core Businesses
---------------
o Residential Loan Servicing. Through this business we provide loan
servicing including asset management and resolution services to
third party owners of subprime residential mortgage and high
loan-to-value loans for a fee. We acquire the rights to service
loans and obtain such rights by purchasing them outright or by
entering into sub-servicing contracts.
o OTX. Through this segment we provide technology solutions for the
mortgage and real estate industries. OTX products include a
residential loan servicing system (REALServicing(TM)), a commercial
loan servicing system (REALSynergy(TM)) and an Internet based
mortgage loan processing and vendor management system
(REALTransSM).
o Ocwen Realty Advisors (ORA). Through ORA we provide residential
property valuation services.
o Unsecured Collections. This core business conducts collection
activities for third party owners of unsecured receivables and for
a portfolio of unsecured credit card receivables that we acquired
at a discount in 1999 and 2000.
o Global Outsourcing. This new business segment began operations in
December 2002. Global Outsourcing provides business process
outsourcing services to third parties and leverages the operational
capacity of our facilities in India.
o International Operations. This segment is being reported as a
business segment for the first time this year. In 2003, this
segment primarily represents the results of operations of Global
Servicing Solutions, LLC, our new joint servicing venture with
Merrill Lynch for the servicing of assets in various countries.
Results for the first six months of 2002 primarily reflect a one
time consulting project for the government of Jamaica.
Non-Core Businesses
-------------------
o Residential Discount Loans. This segment consisted of operations
to acquire at a discount and subsequently resolve sub-performing
and non-performing residential mortgage loans. We completed our
last acquisition of residential loans in 2000. Based on the
relative insignificance of the non-core assets remaining in this
segment, the remaining assets of this business and any related
income or loss arising from their resolution have been included in
the Corporate Items and Other segment beginning January 1, 2003.
o Commercial Finance. This segment comprised operations to acquire
sub-performing commercial loans at a discount, as well as
operations to invest in and reposition under-performing real estate
assets. No assets have been acquired since 2000; since that time,
this business has consisted of the repositioning, management and
resolution of the remaining assets.
o Affordable Housing. Includes our investments, primarily through
limited partnerships, in qualified low-income rental housing for
the purpose of obtaining Federal income tax credits pursuant to
Section 42 of the Code. Except to complete those projects in which
an investment had already been made, we ceased making investments
in properties in 2000.
o Subprime Finance. In August 1999, we closed our domestic subprime
origination business, which had been conducted primarily through
OFS. Previously, activities of this segment included our
acquisition and origination of single family residential loans to
non-conforming borrowers. We have continued to manage and resolve
the remaining non-core assets.
Corporate Items and Other
-------------------------
This segment includes business activities that are individually
insignificant, interest income on cash and cash equivalents, interest
expense on corporate assets, gains and losses from debt repurchases,
trading gains or losses associated with our collateralized mortgage
obligation ("CMO") trading portfolio and general corporate expenses.
16
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2003
(Dollars in thousands)
- --------------------------------------------------------------------------------
We allocate interest income and expense to each business segment for
the investment of funds raised or funding of investments made taking into
consideration the duration of such liabilities or assets. We also make
allocations of non-interest expense generated by corporate support services to
each business segment based upon our estimate of time and effort spent in the
respective activity.
Financial information for our segments is as follows for the dates
indicated:
Net
Interest Provision Non- Pre-Tax
Income for Loan Non-Interest Interest Income
(Expense) Losses Income Expense (Loss) Total Assets
---------- ---------- ------------ ---------- ---------- ------------
At or for the three months ended June 30, 2003
- ----------------------------------------------
Core businesses
Residential Loan Servicing........................ $ (4,937) $ -- $ 28,810 $ 15,472 $ 8,401 $ 626,050
OTX............................................... -- -- 2,534 5,179 (2,645) 6,138
Ocwen Realty Advisors............................. (6) -- 4,905 3,305 1,594 1,112
Unsecured Collections............................. -- -- 2,653 1,688 964 227
Global Outsourcing................................ -- -- 401 478 (77) 237
International Operations.......................... (11) -- 535 1,281 (757) 5,459
---------- ---------- ---------- --------- ---------- -----------
(4,954) -- 39,838 27,403 7,480 639,223
---------- ---------- ---------- --------- ---------- -----------
Non-core businesses
Commercial Finance................................ (2,096) (3,373) (3,690) 1,853 (4,266) 145,747
Affordable Housing................................ (811) 3 364 873 (1,324) 64,967
Subprime Finance.................................. 4,372 -- 3,067 1,655 5,785 41,064
---------- ---------- ---------- --------- ---------- -----------
1,465 (3,370) (259) 4,381 195 251,778
---------- ---------- ---------- --------- ---------- -----------
Corporate Items and Other......................... 1,082 119 104 2,833 (3,294) 371,934
---------- ---------- ---------- --------- ---------- -----------
$ (2,407) $ (3,251) $ 39,683 $ 34,617 $ 4,381 $ 1,262,935
========== ========== ========== ========= ========== ===========
At or for the three months ended June 30, 2002
- ----------------------------------------------
Core businesses
Residential Loan Servicing........................ $ (4,336) $ -- $ 30,423 $ 18,005 $ 8,083 $ 502,002
OTX (1)........................................... -- -- 1,612 6,516 (4,904) 9,276
Ocwen Realty Advisors............................. -- -- 3,518 3,018 499 451
Unsecured Collections............................. -- (186) 2,851 1,898 1,139 312
Global Outsourcing................................ -- -- -- -- -- --
International Operations.......................... 1 -- -- 438 (438) 5,414
---------- ---------- ---------- --------- ---------- -----------
(4,335) (186) 38,404 29,875 4,379 517,455
---------- ---------- ---------- --------- ---------- -----------
Non-core businesses
Residential Discount Loans........................ 1,677 (165) 73 1,157 757 55,686
Commercial Finance................................ (2,738) 7,313 (25,968) 2,304 (38,324) 257,182
Affordable Housing................................ (1,177) 3,770 65 6,794 (11,675) 94,803
Subprime Finance.................................. 2,392 -- (235) 1,987 168 51,775
---------- ---------- ---------- --------- ---------- -----------
154 10,918 (26,065) 12,242 (49,074) 459,446
---------- ---------- ---------- --------- ---------- -----------
Corporate Items and Other......................... (1,727) -- 168 2,382 (5,503) 414,880
---------- ---------- ---------- --------- ---------- -----------
$ (5,908) $ 10,732 $ 12,507 $ 44,499 $ (50,198) $ 1,391,781
========== ========== ========== ========= ========== ===========
(1) For the three months ended June 30, 2002, non-interest income of OTX
includes $1,034 of revenues charged to other business segments.
17
Net
Interest Provision Non- Pre-Tax
Income for Loan Non-Interest Interest Income
(Expense) Losses Income Expense (Loss) Total Assets
---------- ---------- ------------ ---------- ---------- ------------
At or for the six months ended June 30, 2003
- --------------------------------------------
Core businesses
Residential Loan Servicing....................... $ (9,824) $ -- $ 59,393 $ 31,920 $ 17,649 $ 626,050
OTX.............................................. -- -- 5,007 10,979 (5,972) 6,138
Ocwen Realty Advisors............................ (9) -- 8,726 6,108 2,609 1,112
Unsecured Collections............................ -- -- 5,505 3,224 2,281 227
Global Outsourcing............................... -- -- 752 748 4 237
International Operations......................... (34) -- 1,227 3,101 (1,908) 5,459
--------- --------- --------- ---------- ---------- ----------
(9,867) -- 80,610 56,080 14,663 639,223
--------- --------- --------- ---------- ---------- ----------
Non-core businesses
Commercial Finance............................... (4,397) (3,458) (1,711) 4,274 (6,925) 145,747
Affordable Housing............................... (1,648) 148 714 2,522 (3,604) 64,967
Subprime Finance................................. 8,859 -- 2,463 13,022 (1,700) 41,064
--------- --------- --------- ---------- ---------- ----------
2,814 (3,310) 1,466 19,818 (12,229) 251,778
--------- --------- --------- ---------- ---------- ----------
Corporate Items and Other........................ 2,077 225 277 5,527 (6,455) 371,934
--------- --------- --------- ---------- ---------- ----------
$ (4,976) $ (3,085) $ 82,353 $ 81,425 $ (4,021) $1,262,935
========= ========= ========= ========== ========== ==========
At or for the six months ended June 30, 2002
- --------------------------------------------
Core businesses
Residential Loan Servicing....................... $ (8,737) $ -- $ 60,587 $ 36,218 $ 15,631 $ 502,002
OTX (1).......................................... -- -- 3,143 13,329 (10,186) 9,276
Ocwen Realty Advisors............................ -- -- 7,628 6,609 1,019 451
Unsecured Collections............................ -- (251) 5,465 3,633 2,083 312
Global Outsourcing............................... -- -- -- -- -- --
International Operations......................... -- -- 1,379 1,317 63 5,414
--------- --------- --------- ---------- ---------- ----------
(8,737) (251) 78,202 61,106 8,610 517,455
--------- --------- --------- ---------- ---------- ----------
Non-core businesses
Residential Discount Loans....................... 4,049 (2,302) (1,768) 2,914 1,668 55,686
Commercial Finance............................... (3,588) 10,025 (24,606) 4,524 (42,744) 257,182
Affordable Housing............................... (2,872) 3,939 312 23,161 (29,658) 94,803
Subprime Finance................................. 4,143 -- 3,170 2,452 4,861 51,775
--------- --------- --------- ---------- ---------- ----------
1,732 11,662 (22,892) 33,051 (65,873) 459,446
--------- --------- --------- ---------- ---------- ----------
Corporate Items and Other........................ (2,585) -- (1,232) 5,381 (12,427) 414,880
--------- --------- --------- ---------- ---------- ----------
$ (9,590) $ 11,411 $ 54,078 $ 99,538 $ (69,690) $1,391,781
========= ========= ========= ========== ========== ==========
(1) For the six months ended June 30, 2002, non-interest income of OTX includes
$2,009 of revenues charged to other business segments.
18
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2003
(Dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 8 COMMITMENTS AND CONTINGENCIES
At June 30, 2003, we had commitments of $149 to fund construction loans
secured by multi-family properties. In addition, we had commitments under
outstanding letters of credit in the amount of $190. Through our investment in
subordinated securities and subprime residual securities, which had a fair value
of $43,007 at June 30, 2003, we support senior classes of securities.
On April 20, 1999, a complaint was filed on behalf of a putative class
of public shareholders of OCN in the Circuit Court of the Fifteenth Judicial
Circuit, Palm Beach County, Florida against OCN and OAC. On April 23, 1999, a
complaint was filed on behalf of a putative class of public shareholders of OAC
in the Circuit Court of the Fifteenth Judicial Circuit, Palm Beach County,
Florida, against OAC and certain directors of OAC. The plaintiffs in both
complaints sought to enjoin consummation of the acquisition of OAC by OCN. The
cases were consolidated, and on September 13, 1999 a consolidated amended
complaint was filed. The injunction was denied, and on October 14, 1999 OCN was
dismissed as a party. Plaintiffs' remaining claims were for damages for alleged
breaches of common law fiduciary duties. In October 2001, the parties reached an
agreement in principle, which provides for a payment to plaintiffs in complete
settlement off all claims for damages and attorney's fees and costs. The
agreement in principle also requires us to pay a share of certain additional
administrative costs attendant to the settlement, in an amount not yet
determined. The agreement in principle is subject to the approval of the Court.
This matter is not expected to have a material impact on our financial
statements.
The former owners of Admiral Home Loan ("Claimants") filed a Demand for
Arbitration against OCN and William C. Erbey claiming damages in the amount of
$21,250 arising out of a 1997 acquisition agreement pursuant to which a
subsidiary of OCN acquired all the assets of Admiral Home Loan. The Claimants
amended their Demand to include a claim for Civil Theft under Florida statutes
for which treble damages are sought. An evidentiary hearing on the matter was
concluded before a three-person arbitration panel on February 24, 2003. On March
11, 2003, the Parties submitted post-hearing findings of fact and conclusions of
law to the arbitration panel, which took the matter under advisement. In a 2 to
1 decision issued on April 24, 2003, the arbitration panel awarded the Claimants
$6,000 plus interest and costs. In the first quarter of 2003, we established a
reserve in the amount of $10,000 including attorney fees as a result of this
award.
We are subject to various other pending legal proceedings. In our
opinion, the resolution of these other claims will not have a material effect on
the consolidated financial statements.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
General
OCN is a financial services company headquartered in West Palm Beach,
Florida. Our primary business is the servicing and special servicing of
nonconforming, subperforming and nonperforming residential and commercial
mortgage loans. We also specialize in the development of related loan servicing
technology and software for the mortgage and real estate industries.
OCN is a registered savings and loan holding company subject to
regulation by the OTS. The Bank is subject to regulation by the OTS, its
chartering authority, and by the Federal Deposit Insurance Corporation ("FDIC")
as a result of its membership in the Savings Association Insurance Fund, which
insures the Bank's deposits up to the maximum extent permitted by law. The Bank
is also subject to regulation by the Board of Governors of the Federal Reserve
System and is currently a member of the Federal Home Loan Bank ("FHLB") of New
York, one of the 12 regional banks that comprise the FHLB System.
We operate one bank branch in Fort Lee, New Jersey. This location,
which provides most of our retail banking services, is primarily focused on the
issuance of retail certificates of deposit that serve as a supplementary source
of financing for us. We do not conduct loan origination activities in the Fort
Lee branch. In prior years, we had also issued brokered certificates of deposit
from our offices in West Palm Beach, Florida. However, we ceased the issuance of
brokered deposits in the summer of 2000 and have since paid off our maturing
brokered deposits as they have come due. We also currently operate several of
our core businesses primarily in the Bank: Residential Loan Servicing, ORA and
portions of Unsecured Collections. In addition, our non-core Affordable Housing
business operates in the Bank, as does a portion of our non-core Commercial
Finance business. Despite the reduction in our reliance on brokered certificates
of deposit as a funding source, the retail deposits issued by our banking
operation continue to provide an important source of financing for these
business activities. See "Liquidity, Commitments and Off-Balance Sheet Risks"
for additional discussion of brokered and non-brokered deposits as a source of
funding.
The following discussion of our consolidated financial condition,
results of operations, capital resources and liquidity should be read in
conjunction with the Interim Consolidated Financial Statements and related Notes
included in Item 1 herein.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Selected Consolidated Financial Information Increase (Decrease)
Balance Sheet Data June 30, December 31, -------------------------
2003 2002 $ %
---------- ---------- ---------- ------
Total assets ........................................... $1,262,935 $1,222,242 $ 40,693 3%
Trading securities, at fair value .................... 51,836 58,895 (7,059) (12)
Investments in real estate ........................... 55,453 58,676 (3,223) (5)
Affordable housing properties ........................ 12,182 15,319 (3,137) (20)
Loans, net ........................................... 35,922 76,857 (40,935) (53)
Match funded assets, net ............................. 152,968 167,744 (14,776) (9)
Real estate owned, net ............................... 53,781 62,039 (8,258) (13)
Advances on loans and loans serviced for others ...... 304,690 266,356 38,334 14
Mortgage servicing rights ............................ 180,789 171,611 9,178 5
Total liabilities ...................................... 900,492 853,497 46,995 6
Deposits ............................................. 391,371 425,970 (34,599) (8)
Escrow deposits on loans and loans serviced for others 105,395 84,986 20,409 24
Bonds-match funded agreements ........................ 130,110 147,071 (16,961) (12)
Lines of credit and other secured borrowings ......... 161,398 82,746 78,652 95
Notes and debentures ................................. 76,540 76,975 (435) (1)
Minority interest in subsidiary ........................ 1,442 1,778 (336) (19)
Capital Securities ..................................... 56,249 56,249 -- --
Stockholders' equity ................................... 304,752 310,718 (5,966) (2)
At or for the Three Months Ended June 30,
---------------------------------------------------
Favorable/(Unfavorable)
-------------------------
Operations Data 2003 2002 $ %
---------- ---------- ---------- ------
Net income (loss) ...................................... $ 4,149 $ (50,198) $ 54,347 108%
Net interest income (expense) .......................... (2,407) (5,908) 3,501 59
Provision for loan losses .............................. (3,251) 10,732 13,983 130
Non-interest income .................................... 39,683 12,507 27,176 217
Non-interest expense ................................... 34,617 44,499 9,882 22
Distributions on Capital Securities .................... 1,529 1,566 37 2
Income tax expense ..................................... 305 -- (305) (100)
Per Common Share
Net income (loss)
Basic ................................................ $ 0.06 $ (0.75) $ 0.81 108%
Diluted .............................................. 0.06 (0.75) 0.81 108%
Stock price
High ................................................. $ 4.87 $ 7.50 $ (2.63) (35)%
Low .................................................. 3.13 5.31 (2.18) (41)%
Close ................................................ 4.54 5.50 (0.96) (17)%
Key Ratios
Annualized return on average assets .................... 1.30% (13.67)% N/A 110%
Annualized return on average equity .................... 5.46% (56.24)% N/A 110%
Efficiency ratio (1) ................................... 85.42% (1,076.68)% N/A 108%
Core (leverage) capital ratio .......................... 14.67% 14.88% N/A (1)%
Risk-based capital ratio ............................... 20.47% 23.13% N/A (12)%
(1) The efficiency ratio represents non-interest expense divided by the sum of
net interest income or expense after provision for loan losses and
non-interest income.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
At or for the Three Months Ended June 30,
---------------------------------------------------
Favorable/(Unfavorable)
-------------------------
Operations Data 2003 2002 $ %
---------- ---------- ---------- ------
Net income (loss) ...................................... $ (4,297) $ (54,690) $ 50,393 92%
Net interest income (expense) .......................... (4,976) (9,590) 4,614 48
Provision for loan losses .............................. (3,085) 11,411 14,496 127
Non-interest income .................................... 82,353 54,066 28,287 52
Non-interest expense ................................... 81,425 99,526 18,101 18
Distributions on Capital Securities .................... 3,058 3,229 170 5
Income tax expense ..................................... 612 1,166 554 48
Effect of change in accounting principle, net of taxes . -- 16,166 (16,166) (100)
Per Common Share
Net loss
Basic and diluted .................................... $ (0.06) $ (0.81) $ 0.75 92%
Stock price
High ................................................. $ 4.87 $ 8.48 $ (3.61) (43)%
Low .................................................. 2.71 5.31 (2.60) (49)%
Key Ratios
Annualized return on average assets .................... (0.68)% (7.12)% N/A 90%
Annualized return on average equity .................... (2.80)% (29.53)% N/A 90%
Efficiency ratio (1) ................................... 101.20% 301.00% N/A (66)%
(1) The efficiency ratio represents non-interest expense divided by the sum of
net interest income or expense after provision for loan losses and
non-interest income.
Overview of Risks and Related Critical Accounting Policies
For the past several years, we have been undergoing a fundamental
transition in the nature of our business. In late 1999 and early 2000, we began
to execute a strategic plan to shift our business activities away from
capital-intensive businesses involving the purchase or origination of loans,
real estate and related assets toward less capital-intensive businesses that
generate fee-based revenues. As a result, we generally ceased to originate loans
or invest in assets in certain of our business segments ("non-core businesses")
unless we were contractually committed to do so. However, we continue actively
to manage and resolve the remaining assets in these segments. As of June 30,
2003, our core and non-core businesses were as follows:
Core Businesses Non-Core Businesses
--------------- -------------------
Residential Loan Servicing Commercial Finance
Ocwen Technology Xchange ("OTX") Affordable Housing
Ocwen Realty Advisors ("ORA") Subprime Finance
Unsecured Collections
Global Outsourcing
International Operations
In addition to our business segments, we use our Corporate Items and
Other segment to account for certain items of revenue and expense that are not
directly related to a business unit. We include in our Corporate Items and Other
segment interest income on cash and cash equivalents, interest expense on
corporate assets, gains and losses from debt repurchases, trading gains or
losses associated with our collateralized mortgage obligation ("CMO") trading
portfolio and general corporate expenses.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Principal Risk Factors. We included a discussion of the principal risk
factors that relate to our businesses and may affect future results on pages 16
through 19 of Management's Discussion and Analysis of Operations and Financial
Conditions in our Annual Report on Form 10-K for the year ended December 31,
2002.
Critical Accounting Policies. Our strategies to exit non-core
businesses and expand our core businesses are affected by risks in the
marketplace. Further, our ability to measure and report our operating results
and financial position is heavily influenced by the need to estimate the impact
or outcome of these risks, or other future events. Our critical accounting
policies are those that relate to the estimation and measurement of these risks,
and an understanding of these policies is fundamental to understanding
Management's Discussion and Analysis of Results of Operations and Financial
Condition. We summarize our more subjective and complex accounting policies as
they relate to our overall business strategy on pages 19 and 20 of Management's
Discussion and Analysis of Results of Operations and Financial Condition in our
Annual Report on Form 10-K for the year ended December 31, 2002. We discuss our
significant accounting policies in detail in Note 1 to our Consolidated
Financial Statements included in our Annual Report on Form 10-K for the year
ended December 31, 2002.
Results of Operations
General. We recorded net income of $4,149 for the second quarter of
2003, as compared to a net loss of $(50,198) for the second quarter of 2002. Our
earnings per share were $0.06 for the second quarter of 2003, as compared to a
loss per share of $(0.75) for the second quarter of 2002. For the six months
ended June 30, 2003 we recorded a net loss of $(4,297) or $(0.06) per share as
compared to a loss of $(54,690) or $(0.81) per share for the same period of
2002.
Our core businesses recorded combined pre-tax income of $7,480 in the
second quarter of 2003, an increase of $3,101 or 71% as compared to the second
quarter of 2002. For the first six months of 2003, pre-tax income for our core
businesses was $14,663, an increase of $6,053 or 70% compared to the same period
of 2002. The improvement in combined pre-tax income from our core business
segments in 2003 as compared to 2002 is primarily due to declines in OTX losses
and an increase in Residential Loan Servicing income. Our non-core business
segments earned pre-tax income of $195 in the second quarter of 2003, a $49,269
improvement over the loss in the second quarter of 2002. For the first six
months of 2003 our non-core businesses incurred a pre-tax loss of $(12,229) in
2003, an improvement of $53,644 over the same period of 2002. The improvement in
the combined results of our non-core segments in 2003 as compared to 2002 is
largely due to a reduction in loss provisions and impairment charges on
Commercial and Affordable Housing assets. Results of our Corporate Items and
Other segment have also improved over 2002 as losses have continued to decline
in 2003 largely due to reduced interest expense resulting from debt repurchases
in the fourth quarter of 2002. We discuss these segment results in detail in our
review of segment profitability, which follows.
Segment Profitability. In general, we have ceased conducting any new
business activities related to our non-core businesses, although we are actively
engaged in the sale or other resolution of the remaining non-core assets. These
assets are comprised of loans, real estate owned (REO), investments in real
estate, securities held in our residual and subordinate trading portfolio and
affordable housing properties.
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following tables present the pre-tax income (loss) and total assets
for each of our reportable segments at and for the dates indicated:
Pre-Tax Income (loss)
--------------------------------------------------
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2003 2002 2003 2002
- -------------------------------------------------------- ---------- ---------- ---------- ----------
Core businesses
Residential Loan Servicing ......................... $ 8,401 $ 8,083 $ 17,649 $ 15,631
OTX ................................................ (2,645) (4,904) (5,972) (10,186)
Ocwen Realty Advisors .............................. 1,594 499 2,609 1,019
Unsecured Collections .............................. 964 1,139 2,281 2,083
Global Outsourcing ................................. (77) -- 4 --
International Operations ........................... (757) (438) (1,908) 63
---------- ---------- ---------- ----------
7,480 4,379 14,663 8,610
---------- ---------- ---------- ----------
Non-core businesses
Residential Discount Loans ......................... -- 757 -- 1,668
Commercial Finance ................................. (4,266) (38,324) (6,925) (42,744)
Affordable Housing ................................. (1,324) (11,675) (3,604) (29,658)
Subprime Finance ................................... 5,785 168 (1,700) 4,861
---------- ---------- ---------- ----------
195 (49,074) (12,229) (65,873)
---------- ---------- ---------- ----------
Corporate Items and Other .............................. (3,294) (5,503) (6,455) (12,427)
---------- ---------- ---------- ----------
$ 4,381 $ (50,198) $ (4,021) $ (69,690)
========== ========== ========== ==========
Total Assets
June 30, December 31,
2003 2002
---------- ------------
Core businesses
Residential Loan Servicing ................................................... $ 626,050 $ 579,114
OTX .......................................................................... 6,138 6,172
Ocwen Realty Advisors ........................................................ 1,112 532
Unsecured Collections ........................................................ 227 296
Global Outsourcing ........................................................... 237 6
International Operations ..................................................... 5,459 5,366
---------- -----------
639,223 591,486
---------- -----------
Non-Core Businesses
Residential Discount Loans ................................................... -- 44,833
Commercial Finance ........................................................... 145,747 196,269
Affordable Housing ........................................................... 64,967 62,093
Subprime Finance ............................................................. 41,064 41,949
---------- -----------
251,778 345,144
---------- -----------
Corporate Items and Other ........................................................ 371,934 285,612
---------- -----------
$1,262,935 $ 1,222,242
========== ===========
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table summarizes our remaining investment in non-core
assets, which are included in the total asset amounts presented above:
Non-Core Assets
-------------------------
June 30, December 31,
2003 2002
-------- ------------
Non-Core Businesses
Residential Discount Loans ............... $ -- $ 4,633
Commercial Finance ....................... 139,195 190,602
Affordable Housing (1) ................... 18,456 21,548
Subprime Finance (2) ..................... 39,047 33,447
Corporate Items and Other ................ 3,647 --
-------- -------------
$200,345 $ 250,230
======== =============
(1) At June 30, 2003 and December 31, 2002, properties with a carrying value of
$2,770 and $4,458 respectively, were subject to sales contracts that had
not yet met the accounting criteria for sales treatment.
(2) The increase in non-core assets of the Subprime Finance segment in 2003 is
in large part due to the transfer of securities formerly classified as
"Match Funded Assets" to "Trading Securities" during the second quarter as
a result of the repurchase and retirement of the associated match funded
debt. See "Changes in Financial Condition - Match Funded Assets." These
securities had a fair value of $5,926 at June 30, 2003.
The following is a discussion of the pre-tax income (loss) for each of
our reportable business segments.
Residential Loan Servicing. Through this core business we provide loan
servicing, including asset management and resolution services, to third party
owners of subprime residential mortgage and "high loan to value" loans for a
fee. We acquire the rights to service loans and obtain such rights by purchasing
them outright or by entering into sub-servicing contracts. Results for the
second quarter and the first six months of 2003 as compared to the same periods
of 2002 reflect growth in the volume of mortgage loans serviced as shown in the
table below.
2003 2002
----------- -----------
Number of loans at June 30 ................... 339,902 318,993
Unpaid principal balance at June 30 .......... $33,713,494 $25,989,479
Average unpaid principal balance for the
following periods:
Three months ended June 30 ............... $30,994,887 $24,794,375
Six months ended June 30 ................. $30,730,460 $23,850,396
Three Months Six Months
Selected information ------------------- --------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------ -------- -------- -------- --------
Net interest expense ............................ $ 4,937 $ 4,336 $ 9,824 $ 8,737
Servicing and other fees ........................ 28,304 29,869 58,511 59,466
Non-interest expense ............................ 15,472 18,005 31,920 36,218
o The trend of increasing net interest expense reflects increased borrowing
to support increases in the average balance of advances and servicing
rights, which do not earn interest. See "Net interest Income (Expense)" for
additional information regarding average balances.
o In spite of the current low interest rate environment and an impairment
charge of $387 in the second quarter of 2003, pre-tax income increased by
$318 in the second quarter of 2003 as compared to 2002. For the first six
months of 2003, pre-tax income improved to $17,649, an increase of $2,018
or 13% as compared to the same period of 2002. The improvement in pre-tax
earnings during 2003 was largely due to volume growth and expense reduction
efforts. See "Non-Interest Income - Servicing and Other Fees" for a detail
of the principal components of servicing and other fees.
25
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
o Non-interest expense decreased by $2,533 or 14% in the second quarter of
2003 as compared to 2002. Year to date, non-interest expense declined
$4,298 or 12% in 2003 as compared to 2002. This decline in non-interest
expense occurred in spite of the fact that the number of assets we serviced
actually increased during 2003. The decline in such expenses was a result
of cost reduction initiatives in the areas of compensation and employee
benefits and technology and communication costs.
OTX. Through this core segment we provide technology solutions for the
mortgage and real estate industries. OTX products include a residential loan
servicing system (REALServicing), a commercial loan servicing system
(REALSynergy) and an internet-based mortgage loan processing application and
vendor management system (REALTrans). The losses incurred by this segment, which
began its operations in 1998, are a result of our continuing investment in the
development and marketing of these technology products. The decline in the loss
incurred in the second quarter and the first six months of 2003 as compared to
the same periods of 2002 is largely the result of ongoing cost reduction
efforts, including expanded use of our India resources, and to a lesser degree
an increase in software revenues.
Three Months Six Months
Selected information ------------------- --------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------ -------- -------- -------- --------
Non-interest income ............................. $ 2,534 $ 1,612 $ 5,007 $ 3,143
Non-interest expense ............................ 5,179 6,516 10,979 13,329
o The increase in non-interest income in the second quarter of 2003 as
compared to 2002 was largely due to a $616 increase in transaction fees
resulting from an increase in REALTrans transaction volumes. Year to date,
non-interest income for 2003 increased by $1,864 as compared to the same
period of 2002 including an increase of $1,261 related to REALTrans.
o The $1,337 or 21% decline in non-interest expense in the second quarter of
2003 as compared to 2002 primarily reflects an $851 decline in technology
and communication costs and a $336 decline in compensation and benefits.
For the first six months of 2003, non-interest expense declined by $2,350
primarily due to a $1,372 decline in compensation and benefits and a $609
decline in technology and communication costs.
Ocwen Realty Advisors. Through ORA we provide residential property
valuation services. Results for the second quarter of 2003 reflect an
improvement in pre-tax profit of $1,095 or 219% over 2002. Year to date, pre-tax
profit improved by $1,590 or 156% in 2003 as compared to 2002.
Three Months Six Months
Selected information ------------------- --------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------ -------- -------- -------- --------
Non-interest income ............................. $ 4,905 $ 3,518 $ 8,726 $ 7,628
Non-interest expense ............................ 3,305 3,018 6,108 6,609
o Our increased profitability reflects an improved gross margin as valuation
expenses declined from 72% of revenues in both the second quarter and first
six months of 2002 to 55% for the same periods of 2003.
Unsecured Collections. This core business conducts collection
activities for third party owners of unsecured receivables and for a portfolio
of unsecured credit card receivables that we acquired at a discount in 1999 and
2000. We accounted for collections of our unsecured credit card receivables
portfolio under the cost recovery method through the end of 2001, when we
reduced the net book value of these unsecured receivables to zero as a result of
collections and additional reserves.
Three Months Six Months
Selected information ------------------- --------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------ -------- -------- -------- --------
Non-interest income:
Collections ................................... $ 689 $ 1,083 $ 1,546 $ 2,490
Third-party fees .............................. 1,942 1,765 3,902 2,973
Other ......................................... 22 3 57 2
Non-interest expense ............................ 1,688 1,898 3,224 3,633
Global Outsourcing. This new business segment began operations in
December 2002 and recorded a pre-tax loss of $(77) in the second quarter of 2003
and pre-tax income of $4 for the first six months of 2003. These results
primarily reflect start-up costs incurred in connection with employee training
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
for new contracts expected to begin operations in the third quarter. Global
Outsourcing provides business process outsourcing services to third parties and
leverages the operational capacity of our facilities in India.
International Operations. This segment, which is being reported as a
core business segment for the first time this year, recorded a pre-tax loss of
$(757) in the second quarter and $(1,908) for the first six months of 2003. In
2002, International Operations reported a pre-tax loss of $(438) for the second
quarter and pre-tax income of $63 for the first six months. In 2003, this
segment primarily represents the results of operations of Global Servicing
Solutions, LLC, our new joint servicing venture with Merrill Lynch for the
servicing of assets in various countries. Results for 2002 primarily reflect a
one time consulting project for the government of Jamaica.
Residential Discount Loans. Based on the relative insignificance of the
non-core assets remaining in this segment, the remaining assets of this business
and any related income or loss arising from their resolution have been included
in the Corporate Items and Other segment beginning January 1, 2003. Results for
this non-core segment reflect the sale and resolution of loans and real estate
owned as part of our ongoing strategy to exit capital-intensive businesses. This
segment consisted of operations to acquire at a discount and subsequently
resolve sub-performing and non-performing residential mortgage loans. We
completed our last acquisition of residential discount loans in 2000. See
"Changes in Financial Condition - Loans, Net." This business held non-core
assets of $4,633 at December 31, 2002.
Three Months Six Months
Selected information ------------------- --------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------ -------- -------- -------- --------
Net interest income ........................... -- $ 1,677 $ -- $ 4,049
Provision for loan losses ..................... -- (165) -- (2,302)
Non-interest income:
Gain (loss) on interest earning assets, net . -- (427) -- (2,436)
Gain on real estate owned, net .............. -- 336 -- 500
Other ....................................... -- 164 -- 168
Non-interest expense .......................... -- 1,157 -- 2,914
o Loss on interest earning assets is primarily comprised of losses from the
sale of loans.
Commercial Finance. Results for this non-core segment reflect our
continuing exit from loan and real estate businesses. We have not purchased any
commercial assets since 2000. With the exception of loans made to facilitate the
sale of our own assets, we have also not originated any loans since 2000. See
"Changes in Financial Condition - Loans, Net." Since then, this business has
consisted of the management, repositioning, and resolution of the remaining
non-core assets. At June 30, 2003, the $139,195 of non-core assets remaining in
this business consisted of 14 loan and real estate assets and an unrated
subordinate security with a fair value of $2,577. These 14 assets consisted of
five loans totaling $28,736, four REO properties totaling $52,429 and four
investments in real estate totaling $55,453. Of the 14 remaining assets, the
five largest amounted to $103,643 or 76% of the total. During the second quarter
of 2003, three loans and one REO property were sold with a combined net book
value prior to sale of $46,533. While we believe that additional sales will
occur during 2003, it is probable that some properties will not be sold until
2004 or later.
We regularly assess the value of our remaining assets and provide
additional loss reserves or impairment charges as appropriate. Combined reserves
on our remaining commercial loans and REO balances at June 30, 2003 amounted to
26% of the book value of such assets, consistent with reserve levels at December
31, 2002.
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Three Months Six Months
Selected information ------------------- --------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------ -------- -------- -------- --------
Net interest expense ............................ $ 2,096 $ 2,738 $ 4,397 $ 3,588
Provision for loan losses ....................... (3,373) 7,313 (3,458) 10,025
Non-interest income:
Gain (loss) on real estate owned, net ......... (159) (12,142) 197 (16,331)
Gain (loss) on interest-earning assets, net ... 27 (541) 27 (541)
Net operating gain (loss) on investments in
real estate .................................. (4,595) (13,993) (3,701) (9,339)
Other ......................................... 1,037 708 1,766 1,605
Non-interest expense .......................... 1,853 2,304 4,274 4,524
o The negative provision for loan losses in 2003 primarily resulted from the
recovery of excess reserves on loan sales during the second quarter.
Reserve levels on our remaining commercial loans were 13% of book value at
June 30, 2003 as compared to 19% at December 31, 2002. See "Provision for
Loan Losses".
o The loss on REO for the second quarter of 2003 included a provision for
loss in fair value of $691 as compared to $12,551 for the second quarter of
2002. For the year to date periods, the provision for loss in fair value
amounted to $336 and $17,752 for 2003 and 2002, respectively. Reserves on
our four remaining commercial REO properties at June 30, 2003 amounted to
32% of book value. This compares to reserve levels of 30% of book value on
six properties at December 31, 2002.
o Net operating losses on investments in real estate for 2003 and 2002
included impairment charges of $5,526 and $15,317, respectively, recorded
in the second quarter. Earnings on loans accounted for as investments in
real estate declined to $346 for the first six months of 2003 from $3,909
for the same period of 2002 as a result of sales and resolutions. See
"Changes in Financial Condition - Investments in Real Estate".
Affordable Housing. Historically, we invested in affordable housing
properties primarily through a series of limited partnerships. Except to
complete those projects in which an investment had already been made, we ceased
making investments in properties in 2000 as part of our shift in strategy to
fee-based businesses and because the volume of tax credits being generated was
exceeding our ability to utilize them effectively. Since that time, we have been
marketing each of these properties for sale. As a result of sales and increased
reserve levels, our investment in affordable housing properties had been reduced
to $12,182 at June 30, 2003 from $15,319 at December 31, 2002. Of the remaining
balance, $2,770 relates to a property that is subject to a sales contract that
has not yet met the accounting criteria for sales treatment. In addition, this
segment has $6,274 of loans outstanding for limited partnership properties that
we do not consolidate in our financial statements. While we cannot project sales
with certainty, we believe that it is possible that we will sell the remaining
properties before the end of 2003 and that new sources of financing will be
established to repay the remaining loan balances. We regularly assess the
carrying value of our remaining assets and provide additional loss reserves as
appropriate. At June 30, 2003, our combined reserves associated with affordable
housing properties and loans amounted to 51% of the remaining book value of such
assets as compared to 48% at December 31, 2002.
28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Three Months Six Months
Selected information ------------------- --------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------ -------- -------- -------- --------
Net interest expense ............................ $ 811 $ 1,177 $ 1,648 $ 2,872
Provision for loan losses ....................... 3 3,770 148 3,939
Net operating losses on investments in certain
affordable housing properties ................ 226 6,228 883 21,909
o Net interest expense has declined primarily because finance charges have
declined as affordable housing properties have been sold. This trend was
offset in part by an increase in receivables, which also are not
interest-bearing, arising from sales.
o The provision for loan losses in 2002 reflects an increase in reserves
during the second quarter in response to revisions in estimated permanent
financing proceeds. Reserve levels on these loans were 42% of book value at
both June 30, 2003 and December 31, 2002.
o Net operating losses have declined primarily because of a decline in
charges we recorded for estimated losses on the sale of the properties.
These charges amounted to $5,998 and $21,294 during the three and six
months ended June 30, 2002, respectively. Losses for 2003 included $432 of
such charges recorded in the first quarter. The reserves associated with
our remaining properties amounted to 55% at June 30, 2003 as compared to
50% at December 31, 2002. See "Changes in Financial Condition - Affordable
Housing Properties."
Subprime Finance. We were engaged in domestic subprime residential loan
origination prior to ceasing originations in August of 1999; however, we have
continued to manage and resolve the remaining non-core assets. At June 30, 2003,
the non-core assets remaining in this business consisted primarily of trading
securities with a fair value of $38,960, including $5,926 of securities
previously reported as match funded assets. These securities are presently
generating income and return of principal through cash flows.
Three Months Six Months
Selected information ------------------- --------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------ -------- -------- -------- --------
Interest income ................................. $ 4,656 $ 3,274 $ 9,486 $ 6,188
Interest expense ................................ 284 882 627 2,045
Gain (loss) on trading securities, net .......... 3,071 (65) 2,466 3,338
Non-interest expense ............................ 1,655 1,987 13,022 2,452
o The increase in interest income during 2003 as compared to 2002 is largely
the result of an increase in cash flow distributions received on unrated
single family subprime residual securities.
o The decline in interest expense is consistent with the declines in
securities and loan balances.
o Net gains on trading securities for 2002 included $4,406 of realized gains
from sales during the second quarter.
o The $10,570 increase in non-interest expense during the first six months of
2003 compared to 2002 is primarily due to the $10,000 Admiral Home Loan
arbitration loss and related legal expenses. See Note 8 to the Interim
Consolidated Financial Statements for additional information regarding this
litigation.
29
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Corporate Items and Other. Pre-tax results for this segment include
business activities that are individually insignificant, interest income on cash
and cash equivalents, interest expense on corporate assets, gains and losses
from debt repurchases, trading gains or losses associated with our CMO trading
portfolio and general corporate expenses. The table below presents the more
significant amounts included in each of the periods indicated.
Three Months Six Months
Selected information ------------------- --------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------ -------- -------- -------- --------
Net interest expense ............................ $ 1,634 $ 3,761 $ 3,521 $ 7,407
Distributions on Capital Trust Securities ....... 1,529 1,566 3,058 3,229
Technology and other corporate expenses ......... 1,628 2,888 3,299 6,025
Gain (loss) on debt repurchases ................. (4) 1,070 (4) 1,074
o Net interest expense in 2003 declined primarily as a result of significant
debt repurchases during the fourth quarter of 2002 and the ongoing
reduction in brokered deposits.
o Corporate expenses declined in 2003 primarily as a result of a reduction in
technology and other operating expenses retained in this segment. The
decline in technology and other corporate expenses retained in this segment
resulted primarily from cost savings initiatives that we completed in the
fourth quarter of 2002.
See Note 7 to the Interim Consolidated Financial Statements, included
in Item 1 herein, for additional information related to our operating segments.
Net Interest Income (Expense). Net interest income (expense) is the
difference between the interest income earned from our interest-earning assets
and the interest expense incurred on our interest-bearing liabilities. Net
interest income (expense) is determined by net interest spread (i.e., the
difference between the yield earned on our interest-earning assets and the rates
incurred on our 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 our interest-earning
assets and interest-bearing liabilities.
In addition to interest income reported in this caption, we also earn
interest on the balance of custodial accounts we hold in connection with our
Residential Loan Servicing business. These amounts are reported as servicing
fees and are not included in the following information. See "Non-Interest Income
- - Servicing and Other Fees".
Our net interest income and net interest margin began declining in 2000
and have been negative since 2001. This trend reflects a decline in the ratio of
interest-earning assets to interest-bearing liabilities, which has fallen from
98% in 1999 to 46% in the second quarter of 2003 (59% in the second quarter of
2002). Both our acquisition of OAC in 1999 and our change in strategic direction
from capital-intensive businesses to fee-based sources of income have
contributed to an increase in the relative amount of non-interest-earning assets
(such as real estate, advances on loans serviced for others and mortgage
servicing rights) that are funded by interest-bearing liabilities. We expect
this trend to continue as we dispose of our remaining non-core assets, a portion
of which are interest-bearing, and increase non-interest-earning assets of our
core businesses. On the other hand, the net interest spread and margin actually
improved during the three and six months ended June 30, 2003 as compared to the
same periods of 2002 primarily as a result of debt we redeemed during November
2002 totaling $73,545, which had relatively high fixed rates of interest expense
and maturity of brokered certificates of deposit.
30
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following tables set forth, for the periods indicated, information
regarding the total amount of income from our interest-earning assets and the
resultant average yields, the interest expense associated with our
interest-bearing liabilities, expressed in dollars and rates, and the net
interest spread and net interest margin. Information is based on average daily
balances for the indicated periods:
Three Months Ended June 30,
----------------------------------------------------------------------
2003 2002
-------------------------------- -----------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------- --------- ------- ---------- ---------- ---------
Average Assets
Interest earning cash and other.................... $ 29,679 $ 96 1.29% $ 13,524 $ 69 2.04%
Federal funds sold and repurchase agreements....... 135,794 419 1.23 151,017 693 1.84
Trading securities
CMOs (AAA-rated)................................ 10,500 16 0.61 114,512 831 2.90
Subordinates, residuals and other............... 36,503 4,741 51.95 37,975 3,328 35.05
Loans (1).......................................... 93,499 737 3.15 153,397 2,077 5.42
Match funded loans and securities.................. 44,063 989 8.98 69,532 1,808 10.40
--------- --------- ----------- --------
Total interest earning assets................... 350,038 6,998 8.00 539,957 8,806 6.52
--------- --------
Non-interest earning cash.......................... 85,813 67,765
Affordable housing properties...................... 13,146 61,430
Real estate owned, net............................. 55,614 97,234
Investment in real estate.......................... 59,944 90,136
Advances on loans and loans serviced for others.... 288,805 265,077
Mortgage servicing rights.......................... 172,251 123,385
Match funded advances on loans serviced for others. 118,546 96,845
Receivables........................................ 76,385 61,794
Other assets....................................... 59,558 64,786
---------- -----------
Total assets.................................... $1,280,100 $1,468,409
========== ==========
Average Liabilities and Stockholders Equity
Interest-bearing demand deposits................... $ 17,005 60 1.41% $ 15,246 56 1.47%
Savings deposits................................... 1,423 3 0.84 1,764 5 1.13
Certificates of deposit............................ 404,334 4,472 4.42 483,881 7,021 5.80
--------- --------- ----------- --------
Total interest-bearing deposits................. 422,762 4,535 4.29 500,891 7,082 5.66
Securities sold under agreements to repurchase..... -- -- 15,341 71 1.85
Bonds-match funded agreements...................... 136,106 1,258 3.70 148,046 1,807 4.88
Lines of credit and other secured borrowings....... 121,173 1,319 4.35 96,914 1,180 4.87
Notes and debentures............................... 76,869 2,293 11.93 153,451 4,574 11.92
--------- --------- ---------- --------
Total interest-bearing liabilities.............. 756,910 9,405 4.97 914,643 14,714 6.43
--------- --------- ---------- --------
Non-interest bearing deposits...................... 5,783 6,789
Escrow deposits.................................... 96,695 83,852
Excess of net assets acquired over purchase price.. -- 1,478
Other liabilities.................................. 59,175 47,043
---------- ----------
Total liabilities............................... 918,563 1,053,805
Capital Securities................................. 56,249 57,592
Minority interest.................................. 1,561 16
Stockholders' equity............................... 303,727 356,996
---------- ----------
Total liabilities and stockholders' equity...... $1,280,100 $1,468,409
========== ==========
Net interest income (expense)...................... $ (2,407) $ (5,908)
========= ========
Net interest spread................................ 3.03% 0.09%
Net interest margin................................ (2.75)% (4.38)%
Ratio of interest-earning assets to
interest-bearing liabilities................... 46% 59%
(1) The average balances include non-performing loans, interest on which is
recognized on a cash basis.
31
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Six Months Ended June 30,
---------------------------------------------------------------------
2003 2002
--------------------------------- ---------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------- --------- ------- ---------- ---------- -------
Average Assets
Interest earning cash and other.................... $ 20,815 $ 146 1.40% $ 13,878 $ 161 2.32%
Federal funds sold and repurchase agreements....... 120,237 737 1.23 144,290 1,272 1.76
Trading securities
CMOs (AAA-rated)................................ 13,310 (90) (1.35) 125,191 2,144 3.43
Subordinates, residuals and other............... 36,679 9,712 52.96 52,306 6,373 24.37
Loans (1).......................................... 97,409 1,109 2.28 171,098 7,513 8.78
Match funded loans and securities.................. 47,056 2,141 9.10 72,751 4,057 11.15
--------- --------- ---------- --------
Total interest earning assets................... 335,506 13,755 8.20 579,514 21,520 7.43
--------- --------
Non-interest earning cash.......................... 86,427 60,841
Affordable housing properties...................... 14,141 82,003
Real estate owned, net............................. 56,445 104,283
Investment in real estate.......................... 59,359 99,890
Real estate held for sale.......................... -- 6,637
Advances on loans and loans serviced for others.... 285,346 269,038
Mortgage servicing rights.......................... 171,535 113,423
Match funded advances on loans serviced for others. 119,263 100,156
Receivables........................................ 80,300 55,793
Other assets....................................... 53,270 64,466
---------- ----------
Total assets.................................... $1,261,592 $1,536,044
========== ==========
Average Liabilities and Stockholders Equity
Interest-bearing demand deposits................... $ 16,818 119 1.42% $ 13,599 123 1.81%
Savings deposits................................... 1,490 7 0.94 1,587 9 1.13
Certificates of deposit............................ 402,762 9,274 4.61 523,933 15,567 5.94
--------- --------- ---------- --------
Total interest-bearing deposits................. 421,070 9,400 4.46 539,119 15,699 5.82
Securities sold under agreements to repurchase..... 500 3 1.20 21,420 198 1.85
Bonds-match funded agreements...................... 139,919 2,564 3.66 150,794 3,716 4.93
Lines of credit and other secured borrowings....... 107,955 2,176 4.03 98,624 2,331 4.73
Notes and debentures............................... 76,922 4,588 11.93 152,476 9,166 12.02
--------- --------- ---------- --------
Total interest-bearing liabilities.............. 746,366 18,731 5.02 962,433 31,110 6.46
--------- --------- ---------- --------
Non-interest bearing deposits...................... 5,332 6,298
Escrow deposits.................................... 93,237 81,661
Excess of net assets acquired over purchase price.. -- 1,478
Other liabilities.................................. 51,691 54,589
---------- ----------
Total liabilities............................... 896,626 1,106,459
Capital Securities................................. 56,249 59,376
Minority interest.................................. 1,589 (230)
Stockholders' equity............................... 307,128 370,439
---------- ----------
Total liabilities and stockholders' equity...... $1,261,592 $1,536,044
========== ==========
Net interest income (expense)...................... $ (4,976) $ (9,590)
========= ========
Net interest spread................................ 3.18% 0.97%
Net interest margin................................ (2.97)% (3.31)%
Ratio of interest-earning assets to
interest-bearing liabilities....................... 45% 60%
(1) The average balances include non-performing loans, interest on which is
recognized on a cash basis.
32
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected our 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.
Three Months Six Months
------------------------------------ ----------------------------------
2003 vs. 2002 2003 vs. 2002
------------------------------------ ----------------------------------
Favorable (Unfavorable) Variance Favorable (Unfavorable) Variance
For the period ended June 30, 2003 vs. 2002 Due To Due To
- --------------------------------------------- ------------------------------------ ----------------------------------
Rate Volume Total Rate Volume Total
------- ------- ------- ------- ------- --------
Interest Income from Interest-Earning Assets
- --------------------------------------------
Interest earning cash and other ........ $ (32) $ 59 $ 27 $ (78) $ 63 $ (15)
Federal funds sold and repurchase
agreements............................ (210) (64) (274) (346) (189) (535)
Trading securities:
CMOs (AAA-rated) .................... (379) (436) (815) (1,362) (872) (2,234)
Subordinates, residuals and other ... 1,547 (134) 1,413 5,696 (2,357) 3,339
Loans .................................. (693) (647) (1,340) (4,049) (2,355) (6,404)
Match funded loans and securities ...... (223) (596) (819) (657) (1,259) (1,916)
------ ------- ------- ------- ------- --------
Total interest income from
interest-earning assets ........... 10 (1,818) (1,808) (796) (6,969) (7,765)
------ ------- ------- ------- ------- --------
Interest Expense on Interest-Bearing
Liabilities
- ------------------------------------
Interest-bearing demand deposits ....... 2 (6) (4) 30 (26) 4
Savings deposits ....................... 1 1 2 1 1 2
Certificates of deposit ................ 1,507 1,042 2,549 3,103 3,190 6,293
------ ------- ------- ------- ------- --------
Total interest-bearing deposits ..... 1,510 1,037 2,547 3,134 3,165 6,299
Securities sold under agreements to repurchase -- 71 71 52 143 195
Bonds-match funded agreements .......... 412 137 549 899 253 1,152
Lines of credit and other secured borrowing 134 (273) (139) 363 (208) 155
Notes and debentures ................... (3) 2,284 2,281 71 4,507 4,578
------ ------- ------- ------- ------- --------
Total interest expense on interest-bearing
liabilities ....................... 2,053 3,256 5,309 4,519 7,860 12,379
------ ------- ------- ------- ------- --------
Favorable (unfavorable) variance, net .. $2,063 $ 1,438 $ 3,501 $ 3,723 $ 891 $ 4,614
====== ======= ======= ======= ======= ========
We incurred net interest expense before provision for loan losses of
$(2,407) for the three months ended June 30, 2003 as compared to $(5,908) for
the same period of the prior year, a favorable variance of $3,501 or 59%. This
favorable variance was due to a decrease in the balance of our average
interest-bearing liabilities and an increase in the net interest spread, offset
by a decrease in the balance of our average interest-earning assets. The net
interest spread increased 294 basis points as a result of a 148 basis-point
increase in the weighted average yield on our interest-earning assets, and a 146
basis-point decline in the weighted average rate on our interest-bearing
liabilities. The net impact of these rate changes was a $2,063 favorable
variance. The average balance of our interest-earning assets decreased by
$189,919 or 35% during the second quarter of 2003 and reduced interest income by
$1,818. The average balance of our interest-bearing liabilities decreased by
$157,733 or 17% during the second quarter of 2003 and decreased interest expense
by $3,256. The net impact of these volume changes resulted in a $1,438 favorable
variance.
For the first six months of 2003 we incurred net interest expense
before provision for loan losses of $(4,976) as compared to $(9,590) for the
same period of the prior year, a favorable variance of $4,614 or 48%. This
favorable variance was due to a decrease in the balance of our average
interest-bearing liabilities and an increase in the net interest spread, offset
by a decrease in the balance of our average interest-earning assets. The net
interest spread increased 221 basis points as a result of a 77 basis-point
increase in the weighted average yield on our interest-earning assets, and a 145
basis-point decline in the weighted average rate on our interest-bearing
liabilities. The net impact of these rate changes was a $3,723 favorable
variance. The average balance of our interest-earning assets decreased by
$244,008 or 42% during the first six months of 2003 and reduced interest income
by $6,969. The average balance of our interest-bearing liabilities decreased by
$216,068 or 22% during the first six months of 2003 and decreased interest
expense by $7,860. The net impact of these volume changes resulted in an $891
favorable variance.
33
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Annualized
Average Balance Increase Average Yield Increase
--------------------- (Decrease) ---------------- (Decrease)
For the three months ended June 30, 2003 2002 $ 2003 2002 Basis Points
- -------------------------------------------- --------- --------- --------- ------ ------ ------------
Interest earning cash and other ............ $ 29,679 $ 13,524 $ 16,155 1.29% 2.04% (75)
Federal funds sold and repurchase agreements 135,794 151,017 (15,223) 1.23% 1.84% (61)
Trading securities:
CMOs (AAA-rated) ......................... 10,500 114,512 (104,012) 0.61% 2.90% (229)
Subordinates, residuals and other ........ 36,503 37,975 (1,472) 51.95% 35.05% 1,690
Loans ...................................... 93,499 153,397 (59,898) 3.15% 5.42% (227)
Match funded loans and securities .......... 44,063 69,532 (25,469) 8.98% 10.40% (142)
--------- --------- ---------
$ 350,038 $ 539,957 $(189,919) 8.00% 6.52% 148
========= ========= =========
Annualized
Average Balance Increase Average Yield Increase
--------------------- (Decrease) ---------------- (Decrease)
For the six months ended June 30, 2003 2002 $ 2003 2002 Basis Points
- -------------------------------------------- --------- --------- --------- ------- ------ ------------
Interest earning cash and other ............ $ 20,815 $ 13,878 $ 6,937 1.40% 2.32% (92)
Federal funds sold and repurchase agreements 120,237 144,290 (24,053) 1.23% 1.76% (53)
Trading securities:
CMOs (AAA-rated) ......................... 13,310 125,191 (111,881) (1.35)% 3.43% (478)
Subordinates, residuals and other ........ 36,679 52,306 (15,627) 52.96% 24.37% 2,859
Loans ...................................... 97,409 171,098 (73,689) 2.28% 8.78% (650)
Match funded loans and securities .......... 47,056 72,751 (25,695) 9.10% 11.15% (205)
--------- --------- ---------
$ 335,506 $ 579,514 $(244,008) 8.20% 7.43% 77
========= ========= =========
Interest income we earned on loans decreased by $1,340 or 65% during
the three months ended June 30, 2003 as compared to the same period of the prior
year primarily as a result of a $59,898 or 39% decline in the average balance
and a 227 basis-point decline in the average yield. For the first six months of
2003, interest income on loans declined $6,404 or 85% as compared to the same
period of 2002 primarily as a result of a $73,689 or 43% decline in the average
balance and a 650 basis point decline in the average yield. Sales, resolutions,
foreclosures and the absence of acquisitions have resulted in the declines in
the average balance of loans during 2003. Resolution income declined from $2,691
for the six months ended June 30, 2002 to $57 for the same period of 2003. In
addition, there was an increase in the proportion of non-performing loans in the
portfolio, on which we do not accrue interest. The yield on loans is likely to
fluctuate from period to period as a result of the timing of resolutions,
particularly the resolution of large multi-family residential and commercial
real estate loans, and the mix of the overall portfolio between performing and
non-performing loans. See "Changes in Financial Condition - Loans, Net."
Interest income we earned on match funded loans and securities
decreased $819 or 45% in the second quarter of 2003 as compared to the second
quarter of 2002. This decrease was due to a $25,469 or 37% decline in the
average balances and a 142 basis-point decline in the average yield. For the
first six months of 2003, interest income on match funded loans and securities
declined $1,916 or 47% compared to the same period of 2002 due to a $25,695 or
35% decline in the average balance and a 205 basis point decline in the average
yield. The decline in the average balances during 2003 was primarily the result
of principal repayments received on both the loans and securities, as well as
the transfer of the match funded securities to residual trading securities
during the second quarter as a result of the repurchase and retirement of the
related match funded debt. See "Changes in Financial Condition - Match Funded
Assets".
Interest income we earned from our combined trading securities
portfolio increased from $4,159 during the three months ended June 30, 2002 to
$4,757 in the second quarter of 2003, a $598 or 14% increase. For the six months
ended June 30, 2003, interest income on trading securities increased $1,105 or
13%. The increase in interest income during 2003 is primarily due to an increase
in the average yield earned on subordinates and residuals, offset by a decline
in the average balance of our investment in trading securities and a decline in
the average yield earned on CMOs. The increase in the average yield on
subordinate and residual securities in 2003 is largely the result of sales of
low-yielding unrated subprime residuals during 2002 and an increase in interest
payments received on unrated single family subprime residuals. The decline in
our average investment in subordinates and residuals during 2003 is primarily
the result of sales, principal repayments and amortization. The declines in our
34
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
average investment in CMOs during 2003 is the result of principal maturities,
principal repayments and amortization of premium. This trend reflects a reduced
need to hold these securities to meet the Qualified Thrift Lender requirements.
CMOs have less cash flow variability and their average lives and yields to
maturity generally are more stable. Therefore, CMOs are priced to yield less
than classes of mortgage-related securities such as subordinates and residuals
that are less stable. The decline in the average yield on CMOs is primarily the
result of declining interest rates and increased prepayments of the underlying
mortgages that back the bonds. When prepayments occur faster than anticipated,
as in 2003, the amortization of premiums paid when the bonds were purchased is
accelerated resulting in a lower or negative yield.
Annualized
Average Balance Increase Average Yield Increase
--------------------- (Decrease) ---------------- (Decrease)
For the three months ended June 30, 2003 2002 $ 2003 2002 Basis Points
- ---------------------------------------------- --------- --------- --------- ------ ------ ------------
Interest-bearing deposits .................... $ 422,762 $ 500,891 $ (78,129) 4.29% 5.66% (137)
Securities sold under agreements to repurchase -- 15,341 (15,341) --% 1.85% (185)
Bonds-match funded agreements ................ 136,106 148,046 (11,940) 3.70% 4.88% (118)
Lines of credit and other secured borrowings . 121,173 96,914 24,259 4.35% 4.87% (52)
Notes and debentures ......................... 76,869 153,451 (76,582) 11.93% 11.92% 1
--------- --------- ---------
$ 756,910 $ 914,643 $(157,733) 4.97% 6.43% (146)
========= ========= =========
Annualized
Average Balance Increase Average Yield Increase
--------------------- (Decrease) ---------------- (Decrease)
For the six months ended June 30, 2003 2002 $ 2003 2002 Basis Points
- ---------------------------------------------- --------- --------- --------- ------ ------ ------------
Interest-bearing deposits .................... $ 421,070 $ 539,119 $(118,049) 4.46% 5.82% (136)
Securities sold under agreements to repurchase 500 21,420 (20,920) 1.20% 1.85% (65)
Bonds-match funded agreements ................ 139,919 150,794 (10,875) 3.66% 4.93% (127)
Lines of credit and other secured borrowings . 107,955 98,624 9,331 4.03% 4.73% (70)
Notes and debentures ......................... 76,922 152,476 (75,554) 11.93% 12.02% (9)
--------- --------- ---------
$ 746,366 $ 962,433 $(216,067) 5.02% 6.46% (144)
========= ========= =========
Interest expense we incurred on our interest-bearing deposits decreased
$2,547 or 36% during the three months ended June 30, 2003 as compared to the
same period of the prior year due to a $78,129 or 16% decrease in the average
balance and a 137 basis-point decline in the average rate. For the first six
months of 2003, interest expense on deposits declined $6,299 or 40% as compared
to the first six months of 2002 as a result of a $118,049 or 22% decline in the
average balance and a 136 basis point decline in the average rate. The decline
in the average balance of deposits during 2003 resulted primarily from maturing
brokered certificates of deposit. We have not issued any new brokered
certificates of deposit since 2000 and, at this time, do not intend to issue any
such deposits in the foreseeable future. We do however plan to retain
non-brokered deposits as a source of financing. See "Changes in Financial
Condition - Deposits."
Interest expense on notes and debentures declined by $2,281 or 50%
during the second quarter of 2003 as compared to the second quarter of 2002.
This decline was due to a $76,582 or 50% decline in the average outstanding
balance. For the six months ended June 30, 2003, interest expense on notes and
debentures declined $4,578 or 50% as compared to the same period of 2002 due to
a $75,554 or 50% decline in the average balances outstanding. The declines in
average balance outstanding resulted primarily from our November 2002 call
redemption of $40,000 of our 11.875% notes and $33,500 of our 12% subordinated
debentures. See "Changes in Financial Condition - Notes and Debentures."
Interest expense we incurred on bonds-match funded agreements declined
$549 or 30% during the three months ended June 30, 2003 as compared to the same
period of the prior year as a result of a 118 basis-point decline in the average
rate and a $11,940 or 8% decrease in the average balance outstanding. For the
six months ended June 30, 2003 interest expense on match funded agreements
declined $1,152 or 31% due to a 127 basis point decline in the average rate and
a $10,875 or 7% decline in the average outstanding balance. The decline in the
average rates during the 2003 is largely due to declines in LIBOR. The decrease
in the average balances during 2003 is due to principal repayments, as well as
the redemption of bonds-match funded agreements secured by residual securities
during the second quarter. See "Changes in Financial Condition - Bonds - Match
Funded Agreements."
35
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Provisions for Loan Losses. At June 30, 2003, our total net loan
balance was $35,922 or 2.8% of total assets. Of the balance remaining at June
30, 2003, $28,736 represents five loans held in our Commercial Finance segment
and $6,274 represents three multi-family loans held in our Affordable Housing
segment. Because of the small number of remaining loans, we are able to perform
a specific risk assessment on each Commercial Finance and Affordable Housing
loan. Our risk assessment of Commercial Finance loans includes a review of the
underlying loan collateral, general and local economic conditions, property type
risk, borrower's capacity and willingness to pay, and projections of prospective
cash flows based on property-specific events. For loans held in our Affordable
Housing business, we project the amounts to be realized from the disposition of
the property to determine the appropriate allowance for loan losses. We also
analyze the historical trends in the gains or losses on disposition and
resolution of loans as compared to the allowance for loan losses at the time of
disposition and resolution. The results of this analysis are also taken into
consideration in evaluating the allowance for loan losses on the remaining
loans. The allowance for loan losses is management's best estimate of probable
inherent loan losses incurred as of June 30, 2003. Provisions we record for
losses on our loans are charged to operations to maintain an allowance for
losses on our loans at a level we consider adequate based upon an evaluation of
known and inherent risks in such portfolios, as described above.
The following table presents the provisions for loan losses by business
segment for the periods indicated:
Three Months Six Months
------------------------------- -------------------------------
For the periods ended June 30, 2003 2002 2003 2002
- ---------------------------------------------------- -------------- -------------- -------------- --------------
Loans:
Unsecured Collections............................. $ -- $ (186) $ -- $ (251)
Residential Discount Loans........................ -- (235) -- (2,350)
Commercial Finance................................ (3,374) 7,313 (3,458) 10,026
Affordable Housing................................ 3 3,770 148 3,938
Corporate Items and Other......................... 109 -- 222 --
-------------- -------------- -------------- --------------
(3,262) 10,662 (3,088) 11,363
Match funded loans:
Residential Discount Loans........................ -- 70 -- 48
Corporate Items and Other......................... 11 -- 3 --
-------------- -------------- -------------- --------------
$ (3,251) $ 10,732 $ (3,085) $ 11,411
============== ============== ============== ==============
The decline in the provision we recorded on loans during the three and
six months ended June 30, 2003 as compared to the same period in 2002 is
primarily due to sales and resolutions of commercial loans. The negative loan
loss provision for 2003 resulted primarily from the recovery of excess reserves
on sales of commercial loans, which were non-performing, during the second
quarter. Our allowance for loan losses as a percentage of non-performing loans
has increased from 27.5% at December 31, 2002 to 40.6% at June 30, 2003. For
additional information regarding non-performing loans, see "Changes in Financial
Condition - Loans, Net." As indicated in the table below, our allowance as a
percentage of loans decreased slightly from 21.3% at December 31, 2002 to 19.9%
at June 30, 2003.
36
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth the allowance for loan losses as a
percentage of the respective loan balances by business segment at the dates
indicated:
Allowance
Loan as a % of
Allowance Balance Loans
----------- ----------- -----------
June 30, 2003
- -------------
Loans:
Commercial Finance ............. $ 4,210 $ 32,946 12.8%
Affordable Housing ............. 4,576 10,850 42.2%
Corporate Items and Other ...... 123 1,035 11.9%
----------- -----------
8,909 44,831 19.9%
Match funded loans:
Corporate Items and Other ...... 148 31,551 0.5%
----------- -----------
$ 9,057 $ 76,382 11.9%
=========== ===========
December 31, 2002
- -----------------
Loans:
Residential Discount Loans ..... $ 154 $ 1,584 9.7%
Commercial Finance ............. 16,179 85,377 19.0%
Affordable Housing ............. 4,428 10,657 41.6%
----------- -----------
20,761 97,618 21.3%
Match funded loans:
Residential Discount Loans ..... 144 38,129 0.4%
----------- -----------
$ 20,905 $ 135,747 15.4%
=========== ===========
June 30, 2002
- -------------
Loans:
Residential Discount Loans ..... $ 176 $ 1,995 8.8%
Commercial Finance ............. 4,974 16,856 29.5%
Affordable Housing ............. 13,378 121,686 11.0%
----------- -----------
18,528 140,537 13.2%
Match funded loans:
Residential Discount Loans ..... 218 44,599 0.5%
----------- -----------
$ 18,746 $ 185,136 10.1%
=========== ===========
For additional information regarding our allowance for loan losses on
the above portfolios, see "Changes in Financial Condition - Allowance for Loan
Losses." For information relating to our valuation allowance on real estate
owned, see "Changes in Financial Condition - Real Estate Owned."
Non-Interest Income. The following table sets forth the principal
components of our non-interest income during the periods indicated:
Three Months Six Months
--------------------------- ---------------------------
For the periods ended June 30, 2003 2002 2003 2002
- -------------------------------------------------------------- ------------ ------------ ------------ ------------
Servicing and other fees...................................... $ 37,130 $ 35,848 $ 74,778 $ 71,574
Gain (loss) on interest earning assets, net................... 27 (996) 27 (2,773)
Gain (loss) on trading and match funded securities, net....... 3,188 161 2,765 2,953
Gain (loss) on real estate owned, net......................... (279) (11,858) (23) (15,970)
Gain (loss) on other non-interest earning assets, net......... 180 (93) 474 (841)
Net operating gains (losses) on investments in real estate.... (4,595) (13,993) (3,702) (9,339)
Gain (loss) on repurchase of debt............................. (4) 1,070 (4) 1,074
Other income.................................................. 4,036 2,368 8,038 7,400
------------ ------------ ------------ ------------
$ 39,683 $ 12,507 $ 82,353 $ 54,078
============ ============ ============ ============
37
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Servicing and Other Fees. Our servicing and other fees are primarily
comprised of fees we earned from investors for servicing residential mortgage
loans on their behalf. The following table sets forth the principal components
of our servicing and other fees by segment for the periods indicated:
For the three months ended June 30, 2003 2002
- ---------------------------------------------- --------------------------------------- ---------------------------------------
Residential Residential
Loan Other Loan Other
Servicing Segments Total Servicing Segments Total
----------- ----------- ----------- ----------- ----------- -----------
Loan servicing and related fees:
Loan servicing fees (1) .................... $ 38,352 $ 2,151 $ 40,503 $ 33,771 $ 1,814 $ 35,585
Late charges ............................... 9,155 537 9,692 6,740 216 6,956
Interest on custodial accounts (2) ......... 2,434 1 2,435 2,131 -- 2,131
Special servicing fees ..................... 526 -- 526 844 76 920
Compensating interest expense (3) .......... (7,657) -- (7,657) (4,709) -- (4,709)
Amortization of servicing rights (4) ....... (22,227) -- (22,227) (13,459) -- (13,459)
Other, net ................................. 2,460 1,063 3,523 1,030 166 1,196
----------- ----------- ----------- ----------- ----------- -----------
23,043 3,752 26,795 26,348 2,272 28,620
Other fees:
Property valuation fees (ORA) .............. -- 4,906 4,906 -- 3,507 3,507
Default servicing fees ..................... 1,020 136 1,156 1,131 -- 1,131
Retail banking fees ........................ 1,825 5 1,830 1,116 7 1,123
Other ...................................... 2,416 27 2,443 1,274 193 1,467
----------- ----------- ----------- ----------- ----------- -----------
$ 28,304 $ 8,826 $ 37,130 $ 29,869 $ 5,979 $ 35,848
=========== =========== =========== =========== =========== ===========
For the six months ended June 30, 2003 2002
- ---------------------------------------------- --------------------------------------- ---------------------------------------
Residential Residential
Loan Other Loan Other
Servicing Segments Total Servicing Segments Total
----------- ----------- ----------- ----------- ----------- -----------
Loan servicing and related fees:
Loan servicing fees (1) .................... $ 77,962 $ 4,468 $ 82,430 $ 65,049 $ 3,214 $ 68,263
Late charges ............................... 18,046 854 18,900 13,580 454 14,034
Interest on custodial accounts (2) ......... 4,274 -- 4,274 3,737 -- 3,737
Special servicing fees ..................... 1,180 -- 1,180 2,273 -- 2,273
Compensating interest expense (3) .......... (13,621) -- (13,621) (8,779) -- (8,779)
Amortization of servicing rights (4) ....... (43,405) -- (43,405) (24,085) (109) (24,194)
Other, net ................................. 3,660 1,907 5,567 979 552 1,531
----------- ----------- ----------- ----------- ----------- -----------
48,096 7,229 55,325 52,754 4,111 56,865
Other fees:
Property valuation fees (ORA) .............. -- 8,726 8,726 -- 7,742 7,742
Default servicing fees ..................... 1,993 183 2,176 2,413 -- 2,413
Retail banking fees ........................ 3,551 10 3,561 2,073 17 2,090
Other ...................................... 4,871 119 4,990 2,226 238 2,464
----------- ----------- ----------- ----------- ----------- -----------
$ 58,511 $ 16,267 $ 74,778 $ 59,466 $ 12,108 $ 71,574
=========== =========== =========== =========== =========== ===========
(1) The increase in loan servicing fees during 2003 is largely due to the
growth in residential loans we serviced for others. The average unpaid
principal balance of all loans we serviced during the three months
ended June 30, 2003 and 2002 amounted to $31,966,467 and $26,235,201,
respectively. The average unpaid principal during the six months ended
June 30, 2003 and 2002 was $31,783,113 and $25,291,305, respectively.
(2) Interest we earned on custodial accounts during the holding period
between collection of borrower payments and remittance to investors.
(3) A servicer of securitized loans is typically obligated to pay the
securitization trust the difference between a full month of interest
and the interest collected on loans that are repaid before the end of a
calendar month.
(4) The increase in amortization expense during 2003 reflects an increase
in our purchases of rights to service loans for others. See "Changes in
Financial Condition - Mortgage Servicing Rights".
38
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth loans we serviced at the dates
indicated:
Subprime Loans (1) Other Loans Total
------------------------- ------------------------- --------------------------
No. of No. of No. of
Amount Loans Amount Loans Amount Loans
----------- ----------- ----------- ----------- ----------- -----------
June 30, 2003
- -------------
Performing: (2)
Residential servicing ................... $29,740,367 288,171 $ 915,019 15,178 $30,655,386 303,349
Commercial servicing .................... -- -- 426,072 311 426,072 311
----------- ----------- ----------- ----------- ----------- -----------
$29,740,367 288,171 $ 1,341,091 15,489 $31,081,458 303,660
=========== =========== =========== =========== =========== ===========
Non-performing: (2)
Residential servicing ................... $ 2,831,220 32,778 $ 226,888 3,775 $ 3,058,108 36,553
Commercial servicing .................... -- -- 554,985 288 554,985 288
=========== ----------- ----------- ----------- ----------- -----------
$ 2,831,220 32,778 $ 781,873 4,063 $ 3,613,093 36,841
=========== =========== =========== =========== =========== ===========
Total loans serviced for others:
Residential servicing ................... $32,571,587 320,949 $ 1,141,907 18,953 $33,713,494 339,902
Commercial servicing .................... -- -- 981,057 599 981,057 599
----------- ----------- ----------- ----------- ----------- -----------
$32,571,587 320,949 $ 2,122,964 19,552 $34,694,551 340,501
=========== =========== =========== =========== =========== ===========
December 31, 2002
- -----------------
Performing: (2)
Residential servicing ................... $26,817,731 282,926 $ 1,089,109 17,204 $27,906,840 300,130
Commercial servicing .................... -- -- 752,722 407 752,722 407
----------- ----------- ----------- ----------- ----------- -----------
$26,817,731 282,926 $ 1,841,831 17,611 $28,659,562 300,537
=========== =========== =========== =========== =========== ===========
Non-performing: (2)
Residential servicing ................... $ 2,565,823 31,626 $ 261,014 4,277 $ 2,826,837 35,903
Commercial servicing .................... -- -- 582,964 238 582,964 238
----------- ----------- ----------- ----------- ----------- -----------
$ 2,565,823 31,626 $ 843,978 4,515 $ 3,409,801 36,141
=========== =========== =========== =========== =========== ===========
Total loans serviced for others:
Residential servicing ................... $29,383,554 314,552 $ 1,350,123 21,481 $30,733,677 336,033
Commercial servicing .................... -- -- 1,335,686 645 1,335,686 645
----------- ----------- ----------- ----------- ----------- -----------
$29,383,554 314,552 $ 2,685,809 22,126 $32,069,363 336,678
=========== =========== =========== =========== =========== ===========
(1) Subprime loans represent loans we service which were made by others to
borrowers who did not qualify under guidelines of the Fannie Mae and
Freddie Mac ("nonconforming loans").
(2) Non-performing loans serviced for others have been delinquent for 90
days of more. Performing loans serviced for others are current or have
been delinquent for less than 90 days.
Loss on Interest Earning Assets, Net. Losses for 2002 of $(2,773)
resulted primarily from $(2,454) of losses on sales of residential discount
loans.
39
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Gain on Trading and Match Funded Securities, Net. The gain on trading
and match funded securities, net, includes both unrealized gains and losses on
securities and realized gains and losses resulting from sales thereof. Changes
in fair value are reported in income in the period of change.
Three Months Six Months
-------------------------------- -------------------------------
For the period ended June 30, 2003 2002 2003 2002
- ------------------------------------------------------- ------------- ------------- ------------- -------------
Unrealized gain (loss):
Trading securities................................... $ 3,310 $ 663 $ 3,013 $ (1,191)
Match funded securities.............................. (122) 96 (248) 273
------------- ------------- ------------- -------------
3,188 759 2,765 (918)
------------- ------------- ------------- -------------
Realized gain (loss):
Trading securities................................... -- (598) -- 3,871
------------- ------------- ------------- -------------
$ 3,188 $ 161 $ 2,765 $ 2,953
============= ============= ============= =============
Gain (Loss) on Real Estate Owned, Net. The following table sets forth
the results of our real estate owned (which does not include investments in real
estate that are discussed below), during the periods indicated:
Three Months Six Months
-------------------------------- -------------------------------
For the period ended June 30, 2003 2002 2003 2002
- ------------------------------------------------------- -------------- ------------- ------------- -------------
Gains on sales......................................... $ 13 $ 1,002 $ 92 $ 2,563
Provision for losses in fair value..................... (781) (12,954) (484) (19,076)
Operating income (expense), net (1).................... 489 94 369 543
-------------- ------------- ------------- -------------
$ (279) $ (11,858) $ (23) $ (15,970)
============== ============= ============= =============
(1) Includes rental income and expenses associated with holding and
maintaining properties.
The results of our real estate owned for the periods presented above
reflect a decline in the number of properties owned. See "Changes in Financial
Condition - Real Estate Owned" for additional information regarding real estate
owned and related reserves for losses in fair value.
Net Operating Gains (Losses) on Investments in Real Estate. The
following table sets forth the results of our investment in real estate
operations during the periods indicated:
Three Months Six Months
------------------------------- -------------------------------
For the period ended June 30, 2003 2002 2003 2002
- ------------------------------------------------------- ------------- ------------- ------------- -------------
Operating income, net (1).............................. $ 938 $ 833 $ 1,478 $ 2,069
Equity in earnings of loans accounted
for as investments in real estate (2).............. (7) 491 346 3,909
Impairment charges..................................... (5,526) (15,317) (5,526) (15,317)
------------- ------------- ------------- -------------
$ (4,595) $ (13,993) $ (3,702) $ (9,339)
============= ============= ============= =============
(1) The decline in operating income for 2003 as compared to 2002 is
primarily the result of our sale of our shopping center located in
Bradenton, Florida during 2002. See "Changes in Financial Condition -
Investments in Real Estate."
(2) The decrease in equity in earnings during 2003 related to certain loans
accounted for as investments in real estate is primarily the result of
significant resolution gains earned in connection with the repayment of
loans during the first quarter of 2002.
(3) Impairment charges during 2003 and 2002 included write-downs totaling
$5,526 and $14,549, respectively, of the carrying value of our
remaining properties held for investment to our estimate of their
realizable values. See "Changes in Financial Condition - Investments in
Real Estate".
40
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Other Income. The following table sets forth the principal components
of other income for the periods indicated:
Three Months Six Months
--------------------------- ---------------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Collections of credit card receivables............... $ 689 $ 1,083 $ 1,546 $ 2,490
Consulting fees (1).................................. 48 -- 142 1,398
Software revenue (2)................................. 2,555 529 5,027 1,002
Brokerage commissions (3)............................ 527 633 941 1,251
Other................................................ 217 123 382 1,259
---------- ---------- ---------- ----------
$ 4,036 $ 2,368 $ 8,038 $ 7,400
========== ========== ========== ==========
(1) For 2002, these fees consisted principally of consulting fees earned
during the first quarter as advisor to Jamaica's Financial Sector
Adjustment Company in the resolution or liquidation of non-performing
loans and real estate assets.
(2) Software revenues earned by OTX from unaffiliated customers. These
amounts exclude revenues earned from other consolidated affiliates,
which have been eliminated in consolidation. See Note 7 to the Interim
Consolidated Financial Statements included in Item 1 herein.
(3) Commissions earned from sales of real estate owned properties.
Non-Interest Expense. The following table sets forth the principal
components of our non-interest expense during the periods indicated:
Three Months Six Months
--------------------------- ---------------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Compensation and employee benefits................... $ 17,130 $ 19,708 $ 34,838 $ 40,781
Occupancy and equipment.............................. 2,685 3,331 5,515 6,045
Technology and communication costs................... 4,497 6,009 8,994 11,061
Loan expenses........................................ 3,465 3,436 7,000 7,371
Net operating losses on investments in affordable
housing properties................................. 226 6,228 883 21,910
Professional services and regulatory fees............ 4,060 3,172 19,344 7,768
Other operating expenses............................. 2,554 2,615 4,851 4,602
---------- ---------- ---------- ----------
$ 34,617 $ 44,499 $ 81,425 $ 99,538
========== ========== ========== ==========
Compensation and Employee Benefits. The following table presents the
principal components of compensation and benefits we incurred for the periods
indicated:
Three Months Six Months
-------------------------- --------------------------
For the periods ended June 30, 2003 2002 2003 2002
- ------------------------------------------------------- --------- --------- --------- ---------
Salaries (1)........................................... $ 11,655 $ 13,765 $ 23,630 $ 27,847
Bonuses (2)............................................ 2,374 2,187 5,243 4,582
Payroll taxes.......................................... 792 1,092 2,026 2,609
Commissions............................................ 410 1,148 801 2,022
Insurance.............................................. 553 718 1,073 1,386
Severance.............................................. 736 93 817 601
Contract programmers................................... 55 144 60 389
Relocation............................................. 60 129 289 248
Other.................................................. 495 432 899 1,097
--------- --------- --------- ---------
$ 17,130 $ 19,708 $ 34,838 $ 40,781
========= ========= ========= =========
(1) Salaries includes fees paid for the services of temporary employees.
(2) Bonus expense includes compensation related to stock options we granted
to employees at an exercise price below fair market value.
41
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Salary expense has declined during 2003 as compared to 2002 in spite of
an increase in the average number of total employees. This is due in large part
to our ongoing globalization initiative to reduce labor costs through the
migration of certain functions (primarily in support of Residential Loan
Servicing and OTX) to our offices in Bangalore and Mumbai, India. This
initiative has resulted in a significant increase in the concentration of our
workforce in India. During the second quarter of 2003, we had an average of
1,990 total employees, including an average of 1,062 in our India offices. For
the second quarter of 2002, our total number of employees averaged 1,794 and
included an average of 443 employees in our India locations. During the first
six months of 2003, we had average total employment of 1,915, including 969 in
India, as compared to 1,729 in total and 367 in India during the first six
months of 2002. We may experience additional growth in our India staff during
the remainder of 2003, dependent upon the growth of our new business
initiatives, primarily Global Outsourcing. The decline in salaries, in spite of
the increase in the number of employees, is also the result of a change in the
mix of our workforce in the United States to a greater concentration of clerical
level employees. This change in mix has occurred as we have exited
capital-intensive businesses in favor of fee-based businesses, primarily
Residential Loan Servicing.
Occupancy and Equipment. Occupancy and equipment costs consist
principally of rents, depreciation, building maintenance, mail and delivery
expenses and other costs of our office operations.
Technology and Communication Costs. Technology and communication costs
consist primarily of depreciation on our computer hardware and software,
technology-related consulting fees (primarily OTX), telephone expenses and
amortization of capitalized software development costs. The decline in
technology and communication costs during the three and six months ended June
30, 2003 as compared to the same periods of 2002 is primarily due to declines in
consulting fees incurred by OTX and declines in other miscellaneous technology
costs of our Residential Loan Servicing business segment.
Loan Expenses. Loan expenses are largely comprised of appraisal fees
incurred in connection with property valuation services we provided through ORA.
See "Segment Profitability - Ocwen Realty Advisors" for additional discussion of
these costs. Loan expenses also include other miscellaneous expenses incurred in
connection with loans we own and those we service for others. See "Changes in
Financial Condition - Loans, Net."
Net Operating Losses on Investments in Affordable Housing Properties.
Net operating losses on our investments in affordable housing properties have
declined significantly during 2003 as compared to 2002. This decline is
primarily the result of lower charges that we recorded for expected losses from
the sale of properties. These charges reflect revisions to completion cost
estimates and modifications to projected sales results and amounted to $5,998
and $21,294 during the three and six months ended June 30, 2002, respectively.
For 2003, $432 of such charges were recorded during the first quarter. See
"Changes in Financial Condition - Affordable Housing Properties".
Professional Services and Regulatory Fees. Professional services and
regulatory fees are primarily comprised of legal fees and settlements,
non-technology related consulting fees, audit fees and insurance. The increase
in professional services and regulatory fees in the second quarter of 2003 as
compared to 2002 was primarily due to an increase in legal fees and settlements
offset by a decline in consulting fees. Professional services and regulatory
fees increased by $11,576 during the first six months of 2003 as compared to
2002. This increase was largely due to a $12,468 increase in legal fees and
settlements resulting primarily from the $10,000 reserve, plus related legal
fees, established in the first quarter of 2003 in connection with the
arbitration award to the former owners of Admiral Home Loan. See Note 8 to the
Interim Consolidated Financial Statements included in Item 1 for additional
information regarding this award.
Other Operating Expenses. Other operating expenses primarily include
travel costs, check processing and other deposit related costs, amortization of
deferred costs and provisions for uncollectible receivables.
Distributions on Company Obligated, Mandatorily Redeemable Securities
of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the
Company. Cash distributions on the Capital Securities are payable semi-annually
in arrears on February 1 and August 1 of each year at an annual rate of 10.875%.
We recorded $1,529 and $1,566 of distributions to holders of the Capital
Securities during the three months ended June 30, 2003 and 2002, respectively.
For the six-month periods, these distributions amounted to $3,058 and $3,229
during 2003 and 2002, respectively. The decline in distributions is the result
of repurchases during 2002. See Note 3 to the Interim Consolidated Financial
Statements included in Item 1 and "Changes in Financial Condition -
Company-Obligated, Mandatorily Redeemable Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures of the Company."
42
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Income Tax Expense (Benefit). The following table provides details of
our income tax expense (benefit) for the periods indicated:
Three Months Six Months
-------------------------------- -------------------------------
For the period ended June 30, 2003 2002 2003 2002
- -------------------------------------------------------- -------------- -------------- -------------- --------------
Income tax benefit on loss before taxes and effect of
change in accounting principle....................... $ (1,918) $ (18,197) $ (1,992) (25,879)
Provision for valuation allowance on current year's
deferred tax asset................................... 2,223 18,197 2,604 27,045
-------------- -------------- -------------- --------------
Income tax expense................................... 305 -- 612 1,166
Income tax benefit on effect of change in accounting
principle............................................ -- -- -- (1,166)
-------------- -------------- -------------- --------------
Total income tax expense................................ $ 305 $ -- $ 612 $ --
============== ============== ============== ==============
Total income tax expense of $305 and $612 for the three and six months
ended June 30, 2003 represents tax payments related to our investment in
non-economic tax residual securities that have no book value. Excluding the
effect of these tax payments, our effective tax rate was 0% for the six months
ended June 30, 2003 and 2002. Income tax expense includes the effects of tax
credits of $598 and $628 during the three ended June 30, 2003 and 2002,
respectively, and $1,777 and $1,487, respectively during the six months ended
June 30, 2003 and 2002, resulting from our investment in affordable housing
properties.
For the six months of 2002, our effective tax rate was 0% as income tax
expense of $1,166 offset the benefit of $1,166 related to the effect of the
change in accounting principle recorded during the second quarter.
The provision for deferred tax asset valuation allowance is a non-cash
charge increasing the aggregate valuation allowance based on our estimate under
the applicable accounting rules of the amount of the deferred tax asset that we
are more likely than not to realize.
Changes in Financial Condition
Trading Securities. The following table sets forth the fair value of
our trading securities at the dates indicated:
June 30, December 31,
2003 2002
------------ ------------
Collateralized mortgage obligations and U.S. Treasury securities:
Collateralized mortgage obligations (AAA-rated) (1).................................. $ 4,982 $ 20,540
U.S. Treasury securities............................................................. 3,847 1,016
------------ ------------
$ 8,829 $ 21,556
============ ============
Subordinates and residuals:
Single family residential
BB-rated subordinates.............................................................. $ 587 $ 599
B-rated subordinates............................................................... 596 606
Unrated subordinates .............................................................. 287 344
Unrated subprime residuals (2)..................................................... 38,960 33,213
------------ ------------
40,430 34,762
Commercial unrated subordinates...................................................... 2,577 2,577
------------ ------------
$ 43,007 $ 37,339
============ ============
(1) During the six months ended June 30, 2003, CMO trading securities
declined $15,558. This decline was primarily due to maturities and
principal repayments.
(2) During the six months ended June 30, 2003, unrated subprime residual
trading securities increased by $5,747. This increase was primarily due
to due to the transfer of securities formerly classified as "Match
Funded Assets" to "Trading Securities" during the second quarter as a
result of the repurchase and retirement of the associated match funded
debt. These securities had a fair
43
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
value of $5,926 at June 30, 2003. See "Changes in Financial Condition -
Match Funded Assets". Principal repayments received during the first
six months of 2003 were offset almost entirely by increases in fair
value.
CMOs are like traditional debt instruments because they have stated
principal amounts and traditionally defined interest-rate terms. Subordinate and
residual interests in mortgage-related securities provide credit support to the
more senior classes of the mortgage-related securities. Principal from the
underlying mortgage loans generally is allocated first to the senior classes,
with the most senior class having a priority right to the cash flow from the
mortgage loans until its payment requirements are satisfied. To the extent that
there are defaults and unrecoverable losses on the underlying mortgage loans,
resulting in reduced cash flows, the most subordinate security will be the first
to bear this loss. Because subordinate and residual interests generally have no
credit support, to the extent there are realized losses on the mortgage loans
comprising the mortgage collateral for such securities, we may not recover the
full amount or, indeed, any of our initial investment in such subordinate and
residual interests.
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. For residual interests in residential mortgage-backed securities,
overcollateralization is the amount by which the collateral balance exceeds the
sum of the bond principal amounts. Overcollateralization is achieved by applying
monthly a portion of the interest payments of the underlying mortgages toward
the reduction of the senior class certificate principal amounts, causing them to
amortize more rapidly than the aggregate loan balance. Overcollateralization
represents the first tier of loss protection afforded to the non-residual
holders. To the extent not consumed by losses on more highly rated bonds,
overcollateralization is remitted to the residual holders. 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.
We periodically assess the carrying value of our subordinate and
residual securities. There can be no assurance that our estimates used to
determine the value of those securities will remain appropriate for the life of
each securitization. If actual loan prepayments or defaults exceed our
estimates, the carrying value of the securities may be decreased during the
period in which we recognized the disparity.
The following table presents information regarding our subordinate and
residual trading securities summarized by classification and rating at June 30,
2003:
Anticipated Anticipated Anticipated
Yield to Yield to Weighted
Percent Maturity at Maturity at Average
Owned Purchase 06/30/03 Remaining
Rating/Description (1) Fair Value by Ocwen (2)(3) (2)(4) Coupon Life (2)(5)
- ------------------------------------------- ---------- --------- ----------- ----------- -------- -----------
Residential:
BB-rated subordinates.................. $ 587 100.00% 16.80% 8.60% 6.16% 3.10
B-rated subordinates................... 596 100.00 17.41 25.22 6.34 1.91
Unrated subordinates................... 287 100.00 14.77 27.44 6.95 0.04
Unrated subprime residuals............. 38,960 100.00 17.15 5.30 N/A 5.48
----------
40,430
Commercial:
Unrated subordinates................... 2,577 100.00 22.15 12.10 7.37 1.35
----------
$ 43,007
==========
(1) 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 after senior
classes and will experience losses before any
44
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
senior class. The lowest potential class designation is "unrated"
which, if included in a securitization, will always receive interest
last and experience losses first.
(2) Subordinate and residual securities do not have a contractual maturity
but are paid down over time as cash distributions are received. Because
they do not have a stated maturity, we disclose the weighted average
life of these securities.
(3) Represents the effective yield from inception to maturity based on the
purchase price and anticipated future cash flows under pricing
assumptions.
(4) Represents the effective yield based on the purchase price, actual cash
flows received from inception until the respective date, and the then
current estimate of future cash flows under the assumptions at the
respective date. Changes in the June 30, 2003 anticipated yield to
maturity from that originally anticipated are primarily the result of
changes in prepayment assumptions and loss assumptions.
(5) Represents the weighted average life in years based on the June 30,
2003 book value.
The following table sets forth the principal amount of mortgage loans
by the geographic location of the property securing the mortgages that underlie
our subordinate and residual trading securities at June 30, 2003:
Description U.K. California New York Florida New Jersey Other (1) Total
- ----------- -------- ---------- --------- --------- ---------- ---------- ----------
Single family residential..... $ 76,490 $ 45,496 $ 31,345 $ 30,786 $ 29,547 $ 253,741 $ 467,405
Commercial.................... -- 12,874 -- -- -- 40,961 53,835
Multi-family residential...... -- 832 381 247 686 2,308 4,454
-------- ---------- --------- --------- ---------- ---------- ----------
Total ........................ $ 76,490 $ 59,202 $ 31,726 $ 31,033 $ 30,233 $ 297,010 $ 525,694
======== ========== ========= ========= ========== ========== ==========
Percentage of total........... 14.55% 11.26% 6.04% 5.90% 5.75% 56.50% 100.00%
======== ========== ========= ========= ========== ========== ==========
(1) Consists of properties located in 46 other states, none of which
aggregated over $28,411 in any one state.
Investments in Real Estate. Our investments in real estate totaled
$55,453 or 4.4% of total assets at June 30, 2003 and consisted of the following
at the dates indicated:
June 30, December 31,
2003 2002
------------- -------------
Properties held for investment:
Office building.................................................................. $ 21,438 $ 27,602
Retail shopping center........................................................... 10,746 9,090
Building improvements............................................................ 17,743 17,387
Tenant improvements and lease commissions........................................ 4,727 2,795
Furniture and fixtures........................................................... 34 30
------------- -------------
54,688 56,904
Accumulated depreciation......................................................... (6,362) (5,316)
------------- -------------
48,326 51,588
Commercial loans accounted for as investments in real estate........................ 2,094 2,188
Investment in real estate partnerships.............................................. 5,033 4,900
------------- -------------
$ 55,453 $ 58,676
============= =============
Properties Held for Investment. Properties held for investment at June
30, 2003 and December 31, 2002 consisted of one office building located in
Jacksonville, Florida and one shopping center located in Halifax, Nova Scotia.
At June 30, 2003 the office building was approximately 63.3% leased and the
shopping center was approximately 68.6% leased. The $2,216 decline in the
aggregate gross carrying value of our properties held for investment during the
first six months of 2003 was primarily due to an impairment charge of $5,526
45
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
recorded during the second quarter on our office building investment, offset in
part by capitalized improvements of $2,961.
Loans Accounted for as Investments in Real Estate. We acquired certain
acquisition, development and construction loans in January 2000 in which we
participate in the expected residual profits of the underlying real estate, and
where the borrower has not contributed substantial equity to the project. As
such, we account for these loans under the equity method of accounting as though
we have an investment in a real estate limited partnership. Our investment at
June 30, 2003 and December 31, 2002 consisted of one loan.
Investments in Real Estate Partnerships. Our investment at June 30,
2003 and December 31, 2002 consisted of interests in two limited partnerships
operating as real estate ventures, consisting of multi-family type properties.
Affordable Housing Properties. Historically, we invested in
multi-family residential projects that have been allocated low-income housing
tax credits under Section 42 of the Internal Revenue Code of 1986, as amended,
by a state tax credit allocating agency. We ceased making new investments in
2000 as part of our shift in strategy to fee-based businesses and because the
volume of tax credits being generated was exceeding our ability to utilize them
effectively. Since that time, we have been marketing each of these properties
for sale. As a result, our investment in affordable housing properties has been
declining and consisted of only six investments at June 30, 2003. The carrying
values of our affordable housing investments amounted to $12,182 or 1.0% of
total assets at June 30, 2003 and were comprised of the following at the dates
indicated:
June 30, December 31,
2003 2002
----------- -----------
Properties subject to sales agreements (1)......... $ 2,770 $ 4,458
Properties not yet sold............................ 9,412 10,861
----------- -----------
Total......................................... $ 12,182 $ 15,319
=========== ===========
(1) These sales agreements have not yet met all the accounting criteria to
qualify for sales treatment.
The $3,137 decline in the balances during the six months ended June 30,
2003 was primarily due to sales of projects with a combined book value of
approximately $1,597 and increased reserves for estimated losses from future
sales.
The qualified affordable housing projects underlying our investments in
low-income housing tax credit interests are geographically located throughout
the United States. At June 30, 2003, our largest single investment was $5,519,
which relates to a project located in N. Wildwood, New Jersey.
Low-income housing tax credit partnerships in which we invest both as a
limited and, through a subsidiary, as general partner are presented on a
consolidated basis and totaled $2,645 and $3,357 at June 30, 2003 and December
31, 2002, respectively. Our investment in partnerships in which we invest only
as a limited partner amounted to $9,537 and $11,962 at June 30, 2003 and
December 31, 2002, respectively, and are accounted for using the equity method.
We recorded a loss from operations after depreciation of $226 and $6,228 for the
three months ended June 30, 2003 and 2002, respectively and $883 and $21,910 for
the six months ended June 30, 2003 and 2002, respectively. For the three and six
months ended June 30, 2002, these losses from operations included $5,998 and
$21,294 of provisions for estimated losses on properties. In both periods, these
provisions included a charge of $3,944 to record a discount on a long-term
receivable that arose from the sale of seven properties. In the six months ended
June 30, 2003, the loss from operations includes $432 of provisions for
estimated losses. There was no provision for estimated loss in the three months
ended June 30, 2003. See "Results of Operations - Non-Interest Expense - Net
Operating Losses on Investments in Affordable Housing Properties".
Loans, Net. Our total net investment in loans of $35,922 at June 30,
2003 represents 2.8% of total assets. Originations in the second quarters of
2003 and 2002 represent loans we made to facilitate sales of real estate assets
we owned and fundings of pre-existing commitments on construction loans.
Otherwise, we have not originated or acquired any new loans since 2000. This
reflects our strategy to dispose of assets associated with non-core business
lines.
46
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Composition of Loans, Net. The following table sets forth the
composition of our loans by business segment and type of loan at the dates
indicated:
June 30, December 31,
2003 2002
------------- -------------
Residential Discount Loans: (1)
Unpaid principal balance
Single family residential loans...................................................... $ -- $ 2,163
Unaccreted discount and deferred fees.................................................. -- (579)
Allowance for loan losses.............................................................. -- (154)
------------- -------------
-- 1,430
------------- -------------
Affordable Housing:
Unpaid principal balance
Multi-family residential loans....................................................... 10,850 11,003
Undisbursed loan funds................................................................. -- (346)
Allowance for loan losses.............................................................. (4,576) (4,428)
------------- -------------
6,274 6,229
------------- -------------
Commercial Finance:
Unpaid principal balance
Office buildings..................................................................... -- 41,215
Hotels............................................................................... 17,668 11,668
Retail properties.................................................................... -- 27,500
Multifamily residential loans........................................................ 15,965 15,215
Other properties..................................................................... 150 1,188
------------ ------------
33,783 96,786
Unaccreted discount and deferred fees.................................................. (837) (11,409)
Allowance for loan losses.............................................................. (4,210) (16,179)
------------- -------------
28,736 69,198
------------- -------------
Corporate Items and Other:
Unpaid principal balance
Single family residential loans...................................................... 1,603 --
Unaccreted discount and deferred fees.................................................. (568) --
Allowance for loan losses.............................................................. (123) --
------------- -------------
912 --
------------- -------------
Loans, net................................................................................ $ 35,922 $ 76,857
============= =============
(1) Loans and all other assets of the Residential Discount Loans segment
were transferred to the Corporate Items and Other segment, effective
January 1, 2003.
Loans are secured by mortgages on property located throughout the
United States. The following table sets forth the five states in which the
largest amount of properties securing our loans were located at June 30, 2003:
Corporate
Items and Affordable Commercial
Other Housing Finance Total
------------ ------------ ------------ ------------
Florida...................................... $ -- $ 774 $ 6,360 $ 7,134
Michigan..................................... -- -- 5,850 5,850
New Jersey................................... -- 5,500 -- 5,500
Texas........................................ -- -- 4,772 4,772
Pennsylvania................................. 188 -- 4,005 4,193
Other (1).................................... 724 -- 7,749 8,473
------------ ------------ ------------ ------------
Total..................................... $ 912 $ 6,274 $ 28,736 $ 35,922
============ ============ ============ ============
(1) Consists of properties located in 10 other states, none of which
aggregated over $4,021 in any one state.
47
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Activity in Loans. The following table sets forth our loan activity
during the periods indicated:
Three Months Six Months
---------------------------------- ---------------------------------
For the period ended June30, 2003 2002 2003 2002
- ----------------------------------------------- -------------- ------------- ------------- -------------
Balance at beginning of period................. $ 80,891 $ 150,557 $ 76,857 $ 185,293
Originations (1)
Commercial Finance........................... -- -- 6,000 16,569
Corporate Items and Other.................... 108 879 420 879
-------------- ------------- ------------- -------------
108 879 6,420 17,448
-------------- ------------- ------------- -------------
Resolutions and repayments (2)................. (26,893) (2,700) (27,936) (21,692)
Loans transferred to real estate owned......... (63) (5,877) (157) (13,215)
Sales.......................................... (42,042) (14,172) (42,042) (64,002)
Decrease in undisbursed loan proceeds.......... -- 1,066 346 1,762
(Increase) decrease in discount and deferred
fees......................................... 12,019 2,909 10,582 24,531
(Increase) decrease in allowance for loan
losses....................................... 11,902 (10,653) 11,852 (8,116)
-------------- ------------- ------------- -------------
Balance at end of period....................... $ 35,922 $ 122,009 $ 35,922 $ 122,009
============== ============= ============= =============
(1) Commercial Finance originations represent loans made to facilitate
sales of our own assets and fundings of construction loans we
originated in prior years. Commercial originations during the six
months ended June 30, 2003 represents a single loan made during the
first quarter to facilitate the sale of a hotel REO property.
Commercial originations during the six months ended June 30, 2002
included a loan of $9,153 that we made during the first quarter to
facilitate the sale of three assisted living facilities. Originations
in the Corporate Items and Other segment represent repurchases of
single family loans previously sold.
(2) Resolutions and repayments consists of loans that were resolved in a
manner that resulted in partial or full repayment of the loan to us, as
well as principal payments on loans that have been brought current in
accordance with their original or modified terms (whether pursuant to
forbearance agreements or otherwise) or on other loans that have not
been resolved.
The following table sets forth certain information relating to our
non-performing loans at the dates indicated:
June 30, December 31,
2003 2002
------------ ------------
Non-performing loans: (1)
Corporate Items and Other.................................................. $ 1,035 $ --
Residential Discount Loans................................................. -- 1,345
Affordable Housing......................................................... 10,329 9,798
Commercial Finance......................................................... 10,573 64,406
------------ ------------
$ 21,937 $ 75,549
============ ============
Non-performing loans as a percentage of: (1)
Total loans (2)............................................................ 48.9% 77.4%
Total assets............................................................... 1.7% 6.2%
Allowance for loan losses as a percentage of:
Total loans (2)............................................................ 19.9% 21.3%
Non-performing loans (1)................................................... 40.6% 27.5%
(1) Loans which are contractually past due 90 days or more in accordance
with the original terms of the loan agreement. We do not accrue
interest on loans past due 90 days or more. The decline in
non-performing loans held in our Commercial Finance Segment occurred
because of sales during the second quarter.
(2) Total loans are net of unaccreted discount, unamortized deferred fees
and undisbursed loan funds.
See "Changes in Financial Condition - Allowance for Loan Losses" below
for additional information regarding the allowance for loan losses.
48
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Match Funded Assets. Match funded assets are comprised of the following
at the dates indicated:
June 30, December 31,
2003 2002
------------- -------------
Single family residential loans (1)................................................... $ 31,551 $ 38,129
Allowance for loan losses............................................................. (148) (144)
------------- -------------
Match funded loans, net............................................................... 31,403 37,985
------------- -------------
Match funded securities............................................................... -- 8,057
------------- -------------
Match funded advances on loans serviced for others
Principal and interest............................................................... 61,660 66,524
Taxes and insurance.................................................................. 33,479 30,301
Other................................................................................ 26,426 24,877
------------- -------------
121,565 121,702
------------- -------------
$ 152,968 $ 167,744
============= =============
(1) Includes $2,386 and $3,120 of non-performing loans at June 30, 2003 and
December 31, 2002, respectively.
We acquired single family residential match funded loans in connection
with our acquisition of OAC. OAC had previously securitized these loans and
transferred them to a real estate mortgage investment conduit on November 13,
1998. The transfer did not qualify as a sale for accounting purposes since we
retained effective control of the loans transferred. Accordingly, we recorded
the proceeds that we received from the transfer as a liability (bonds-match
funded agreements). The $6,582 decline in the balance during the first six
months of 2003 was largely due to repayment of loan principal.
The match funded loans are secured by mortgages on properties located
throughout the United States. The following table sets forth the five states in
which the largest amount of properties securing our loans were located at June
30, 2003:
Michigan...................................................... $ 4,344
Texas......................................................... 2,987
California.................................................... 2,494
Florida....................................................... 1,963
Massachusetts................................................. 1,949
Other (1)..................................................... 17,814
-------------
$ 31,551
=============
(1) Consists of properties located in 35 other states, none of which
aggregated over $1,741 in any one state.
Match funded securities resulted from our transfer of four unrated
residual securities to a trust on December 16, 1999 in exchange for non-recourse
notes. The transfer did not qualify as a sale for accounting purposes since we
retained effective control over the securities transferred. Accordingly, we
reported the amount of proceeds we received from the transfer as a secured
borrowing with pledge of collateral (bonds-match funded agreements). In June
2003, the Ocwen NIM Trust 1999 - OAC1 adopted a plan of complete liquidation,
which caused the early redemption of the related bonds-match funded agreements.
The match funded securities, which had a fair value of $5,926, were transferred
to trading securities. See "Changes in Financial Conditions - Trading
Securities" and - "Bonds - Match Funded Agreements."
Match funded advances on loans serviced for others resulted from our
transfer of certain residential loan servicing related advances to a third party
in exchange for cash. The original and subsequent transfers did not qualify as a
sale for accounting purposes since we retained effective control of the
advances. Accordingly, we report the amount of proceeds we received from the
transfers as a secured borrowing with pledge of collateral (bonds-match funded
agreements.) See "Bonds-Match Funded Agreements."
Allowances for Loan Losses. As discussed in the "Results of Operations
- - Provision for Loan Losses" section, we maintain an allowance for loan losses
for each of our loans at a level that we consider adequate to provide for
probable losses based upon an evaluation of known and inherent risks.
49
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth the breakdown of the allowance for loan
losses on our loans and match funded loans and the percentage of allowance and
loans in each segment to totals in the respective portfolios at the dates
indicated:
June 30, 2003 December 31, 2002
-------------------------------------------- --------------------------------------------
Allowance Loan Balance Allowance Loan Balance
-------------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- -------- -------- --------
Loans:
Residential Discount loans ..... $ -- --% $ -- --% $ 154 1% $ 1,584 2%
Affordable Housing ............. 4,576 51% 10,850 24% 4,428 21% 10,657 11%
Commercial Finance ............. 4,210 47% 32,946 74% 16,179 78% 85,377 87%
Corporate Items and Other ...... 123 2% 1,035 2% -- --% -- --%
-------- -------- -------- -------- -------- -------- -------- --------
$ 8,909 100% $ 44,831 100% $ 20,761 100% $ 97,618 100%
======== ======== ======== ======== ======== ======== ======== ========
Match funded loans:
Corporate Items and Other ...... $ 148 100% $ 31,551 100% $ 144 100% $ 38,129 100%
======== ======== ======== ======== ======== ======== ======== ========
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict use of the allowance to absorb
losses in any other category.
The following table sets forth an analysis of activity in the allowance
for loan losses relating to our loans during the three and six months ended June
30, 2003:
Three Months Six Months
-------------------------- --------------------------
For the period ended June 30, 2003 2002 2003 2002
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Balance at beginning of period......................... $ 20,810 $ 7,877 $ 20,761 $ 10,414
Provision for loan losses.............................. (3,261) 10,664 (3,088) 11,363
Charge-offs:
Residential Discount Loans......................... -- 23 -- (875)
Commercial Finance................................. (8,505) (380) (8,512) (2,782)
Corporate Items and Other.......................... (135) -- (252) --
---------- ---------- ---------- ----------
Total charge-offs............................... (8,640) (357) (8,764) (3,657)
Recoveries:
Residential Discount Loans......................... -- 187 -- 251
Commercial Finance................................. -- 157 -- 157
---------- ---------- ---------- ----------
Net charge-offs................................. (8,640) (13) (8,764) (3,249)
---------- ---------- ---------- ----------
Balance at end of period............................... $ 8,909 $ 18,528 $ 8,909 $ 18,528
========== ========== ========== ==========
50
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Real Estate Owned, Net. REO, net, has been declining since 1998 as
sales have more than offset loan foreclosures. At June 30, 2003 our portfolio of
REO consisted of only 32 properties, including four commercial properties, and
totaled $53,781, or 4.3% of total assets. The absence of loan acquisitions since
2000 is the principal reason for the decline in foreclosures. Our REO consists
almost entirely of properties we acquired by foreclosure or deed-in-lieu thereof
on loans we previously acquired at a discount.
The following table sets forth the composition of our REO at the dates
indicated:
June 30, December 31,
2003 2002
------------ ------------
Residential Discount Loans..................... $ -- $ 1,887
Commercial Finance............................. 52,429 60,152
Corporate Items and Other...................... 1,352 --
------------ ------------
$ 53,781 $ 62,039
============ ============
The following table sets forth certain geographical information at June
30, 2003 related to our REO:
Corporate
Items and Commercial
Other Finance Total
--------------------- --------------------- ---------------------
No. of No. of No. of
Amount Properties Amount Properties Amount Properties
--------- ---------- -------- ---------- -------- ----------
Florida........................................ $ -- -- 40,948 1 $ 40,948 1
Michigan....................................... -- -- 10,946 2 10,946 2
California..................................... -- -- 535 1 535 1
New York....................................... 358 2 -- -- 358 2
Pennsylvania................................... 321 4 -- -- 321 4
Other (1)...................................... 673 22 -- -- 673 22
--------- -------- -------- --------- -------- --------
$ 1,352 28 $ 52,429 4 $ 53,781 32
========= ======== ======== ========= ======== ========
(1) Consists of properties located in 14 other states, none of which
aggregated over $131 in any one state.
The following tables set forth the activity in REO during the periods
indicated:
Three Months Six Months
---------------------------- ----------------------------
For the period ended June 30, 2003 2002 2003 2002
- ---------------------------------------------------------- ------------ ------------ ------------ ------------
Amount
Balance at beginning of period............................ $ 55,816 $ 100,490 $ 62,039 $ 110,465
Properties acquired through foreclosure or deed-in-lieu
thereof:
Loans................................................... 62 5,877 157 13,215
Less discount transferred............................... (14) (2,596) (29) (5,854)
Add advances transferred................................ 14 42 26 211
------------ ------------ ------------ ------------
62 3,323 154 7,572
------------ ------------ ------------ ------------
Capital improvements...................................... 639 806 1,058 1,592
Sales..................................................... (3,038) (9,821) (10,604) (20,857)
Decrease (increase) in valuation allowance................ 302 (10,697) 1,134 (14,671)
------------ ------------ ------------ ------------
Balance at end of period.................................. $ 53,781 $ 84,101 $ 53,781 $ 84,101
============ ============ ============ ============
Three Months Six Months
---------------------------- ----------------------------
For the period ended June 30, 2003 2002 2003 2002
- ---------------------------------------------------------- ------------ ------------ ------------ ------------
Number of Properties
Balance at beginning of period............................ 42 232 55 389
Properties acquired through foreclosure or deed-in-lieu 1 4 2 19
thereof...................................................
Sales..................................................... (11) (104) (25) (276)
------------ ------------ ------------ ------------
Balance at end of period.................................. 32 132 32 132
============ ============ ============ ============
51
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following tables set forth the amount of time that we have held our
REO at the dates indicated:
Commercial Corporate Items
June 30, 2003 Finance and Other Total
- ---------------------------------------- --------------------- ---------------------- ---------------------
Net Book Net Book Net Book
Holding Period: Value Count Value Count Value Count
-------- -------- --------- -------- --------- --------
One to six months.................... $ -- -- $ 152 2 $ 152 2
Seven to 12 months................... -- -- -- -- -- --
13 to 24 months...................... -- -- 178 5 178 5
Over 24 months....................... 52,429 4 1,022 21 53,451 25
-------- -------- --------- -------- --------- --------
$ 52,429 4 $ 1,352 28 $ 53,781 32
======== ======== ========= ======== ========= ========
Commercial Residential
December 31, 2002 Finance Discount Loans Total
- ---------------------------------------- --------------------- ---------------------- ---------------------
Net Book Net Book Net Book
Holding Period: Value Count Value Count Value Count
-------- -------- --------- -------- --------- --------
One to six months.................... $ -- -- $ -- -- $ -- --
Seven to 12 months................... -- -- 176 3 176 3
13 to 24 months...................... 18,616 4 609 19 19,225 23
Over 24 months....................... 41,536 2 1,102 27 42,638 29
-------- -------- --------- -------- --------- --------
$ 60,152 6 $ 1,887 49 $ 62,039 55
======== ======== ========= ======== ========= ========
Our sales of REO resulted in losses, net of the provision for loss, of
$(768) and $(11,952) during the second quarter of 2003 and 2002, respectively,
which are included in determining our total net gain (loss) on REO. We recorded
losses of $(392) and $(16,513), net of provision for loss, for the first six
months of 2003 and 2002, respectively. Commercial REO that we have held in
excess of 24 months at June 30, 2003 consisted primarily of a single large
retail shopping mall with a carrying value of $40,948 and two hotels with a
combined carrying value of $10,946. As anticipated, the shopping mall property
migrated into the over 24 month category in 2000 because it was being
repositioned for sale. Commercial properties held for 13 to 24 months as of
December 31, 2002 consisted of four hotels, two of which we sold during 2003.
The average period during which we held the REO which was sold during the
quarters ended June 30, 2003 and 2002, was 31 months and 12 months,
respectively.
We value properties acquired through foreclosure or by deed-in-lieu
thereof at the lower of amortized cost or fair value less costs of disposition.
We periodically reevaluate properties included in the our REO portfolio to
determine that we are carrying them at the lower of cost or fair value less
estimated costs to sell. We record holding and maintenance costs we incur
related to properties as expenses in the period incurred. We recognize decreases
in value in REO after acquisition as a valuation allowance. We reflect
subsequent increases related to the valuation of REO as a reduction in the
valuation allowance, but not below zero. We charge or credit to income increases
and decreases in the valuation allowance, respectively.
52
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth the activity, in aggregate, in the
valuation allowances on real estate owned during the periods indicated:
Three Months Six Months
-------------------------------- -------------------------------
For the period ended June 30, 2003 2002 2003 2002
- ------------------------------------------------------- ------------- ------------- ------------- -------------
Balance at beginning of period......................... $ 24,812 $ 23,072 $ 25,644 $ 19,098
Provisions for losses ................................. 781 12,954 484 19,076
Sales.................................................. (188) (1,192) (490) (2,349)
Charge-offs............................................ (895) (1,065) (1,128) (2,056)
------------- ------------- ------------- -------------
Balance at end of period............................... $ 24,510 $ 33,769 $ 24,510 $ 33,769
============= ============= ============= =============
Valuation allowance as a percentage of total gross
real estate owned (1)............................... 31.3% 28.6% 31.3% 28.6%
(1) The valuation allowance has not declined proportionately to the decline
in the balance of gross REO primarily because of the large retail
shopping mall that we are repositioning for sale, as discussed above,
which had a valuation allowance of $22,120 at June 30, 2003. Therefore,
this ratio has increased in 2003 as compared to 2002. At December 31,
2002, the valuation allowance as a percentage of total gross real
estate owned was 29.3%.
Advances on Loans and Loans Serviced for Others. Advances related to
our loan portfolios and loans we serviced for others consisted of the following
at the dates indicated:
June 30, December 31,
2003 2002
-------------- --------------
Loans:
Taxes and insurance............... $ 118 $ 136
Other............................. 327 502
-------------- --------------
445 638
-------------- --------------
Loans serviced for others:
Principal and interest............ 65,414 63,326
Taxes and insurance............... 136,386 117,937
Other............................. 102,444 84,455
------------- --------------
304,244 265,718
-------------- --------------
$ 304,689 $ 266,356
============== ==============
During any period in which the borrower is not making payments, we are
required under certain servicing agreements to advance our own funds to meet
contractual principal and interest remittance requirements for certain
investors, pay property taxes and insurance premiums and process foreclosures.
We generally recover such advances from borrowers for reinstated and performing
loans and from investors for foreclosed loans. We record a charge to servicing
income to the extent that we estimate that advances are uncollectible under
provisions of the servicing contracts, taking into consideration historical loss
and delinquency experience, length of delinquency and amount of the advance. The
balances of advances on loans serviced for others do not include match funded
advances that are transferred to a third party in a transaction that does not
qualify as a sale for accounting purposes and that we account for as a secured
borrowing. See "Changes in Financial Condition - Match Funded Assets".
Mortgage Servicing Rights. The unamortized balance of our mortgage
servicing rights is predominantly residential and increased by $9,178 during the
six months ended June 30, 2003 as purchases exceeded amortization. The following
table sets forth the activity in our mortgage servicing rights during the
periods indicated:
Three Months Six Months
--------------------------------- ---------------------------------
For the periods ended June 30, 2003 2002 2003 2002
- -------------------------------------------------- ------------- ------------- ------------- -------------
Balance at beginning of period.................... $ 166,855 $ 112,032 $ 171,611 $ 101,107
Purchases ........................................ 36,160 35,104 52,583 56,997
Amortization ..................................... (21,839) (13,459) (43,018) (24,193)
Impairment........................................ (387) -- (387) --
Sales............................................. -- -- -- (234)
------------- ------------- ------------- -------------
Balance at end of period.......................... $ 180,789 $ 133,677 $ 180,789 $ 133,677
============= ============= ============= =============
53
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
At June 30, 2003, we serviced loans under approximately 363 servicing
agreements for 21 clients. Purchases during the first six months of 2003 were
all residential, and $23,269 were acquired under flow agreements with third
party lenders whereby we have committed to purchase newly originated mortgage
servicing rights up to an agreed upon amount.
Receivables. Receivables consisted of the following at the dates
indicated:
June 30, December 31,
2003 2002
------------ ------------
Affordable housing sales, net (1).............. $ 35,687 $ 40,299
Income taxes................................... 21,312 20,841
Trade, net (2)................................. 11,382 10,819
Rent........................................... 1,665 1,586
Accrued interest .............................. 652 734
Other.......................................... 6,401 4,665
------------ ------------
$ 77,099 $ 78,944
============ ============
(1) Represents uncollected proceeds from the sale of affordable housing
properties. See "Changes in Financial Conditions - Affordable Housing
Properties." Includes reserves for doubtful accounts of $2,373 and
$1,340 as of June 30, 2003 and December 31, 2003, respectively, and
unaccreted discount of $2,840 and $3,400, respectively.
(2) Trade receivables are principally generated by the operations of our
Loan Servicing, OTX, Ocwen Realty Advisors and Unsecured Collections
business segments. Includes reserves for doubtful accounts of $2,122
and $2,032 as of June 30, 2003 and December 31, 2003, respectively.
Other Assets. Other assets consisted of the following at the dates
indicated:
June 30, December 31,
2003 2002
------------ ------------
Capitalized software development costs, net.... $ 3,258 $ 4,010
Interest earning collateral deposits........... 8,769 --
Goodwill, net.................................. 1,618 1,618
Deferred debt issuance costs, net.............. 4,025 2,946
Investment securities, at cost................. 4,293 5,361
Deferred tax asset, net (1).................... 7,954 8,387
Other.......................................... 5,925 6,964
------------ ------------
$ 35,842 $ 29,286
============ ============
(1) Deferred tax assets are net of valuation allowances. See "results of
Operations - Income Tax Expense (Benefit)."
54
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Deposits. The following table sets forth information related to our
deposits at the dates indicated:
June 30, 2003 December 31, 2002
------------------------------------ ------------------------------------
Weighted Weighted
Average % of Total Average % of Total
Amount Rate Deposits Amount Rate Deposits
--------- ---------- ---------- --------- ---------- ----------
Non-interest bearing checking accounts..... $ 3,764 --% 0.9% $ 4,378 --% 1.0%
NOW and money market checking accounts..... 18,290 1.16% 4.7 17,720 1.20% 4.2
Savings accounts........................... 1,440 1.00% 0.4 1,592 1.00% 0.4
--------- ---------- --------- ----------
23,494 6.0 23,690 5.6
--------- ---------
Certificates of deposit.................... 368,220 402,917
Unamortized deferred fees.................. (343) (637)
--------- ---------
Total certificates of deposit.............. 367,877 4.04% 94.0 402,280 4.89% 94.4
--------- ---------- --------- ----------
Total deposits.......................... $ 391,371 100.0% $ 425,970 100.0%
========= ========== ========= ==========
Certificates of deposit included $126,874 and $198,248 at June 30, 2003
and December 31, 2002, respectively, of brokered deposits originated through
national, regional and local investment banking firms that solicit deposits from
their customers, all of which are non-cancelable at June 30, 2003. During the
second quarter of 2003, we exercised our right to call brokered certificates of
deposit with a face value of $18,194, that carried an interest rate of 6%, in
order to further reduce interest expense. We have not issued any new brokered
certificates of deposit since 2000 and, at this time, do not intend to issue any
such deposits in the foreseeable future. We do however plan to retain
non-brokered deposits as a source of financing our operations.
At June 30, 2003 and December 31, 2002, certificates of deposit with
outstanding balances of $100 or more amounted to $149,440 and $125,451,
respectively. Of those deposits at June 30, 2003, $63,160 were from political
subdivisions in New Jersey and were secured or collateralized as required under
state law. The following table sets forth the remaining maturities of our time
deposits with balances of $100 or more at June 30, 2003:
Matures within three months.................................... $ 52,916
Matures after three months through six months.................. 41,613
Matures after six months through twelve months................. 33,642
Matures after twelve months.................................... 21,269
------------
$ 149,440
============
Escrow Deposits on Loans and Loans Serviced for Others. Escrow deposits
on our loans and loans we serviced for others amounted to $105,395 and $84,986
at June 30, 2003 and December 31, 2002, respectively. The balance consisted
principally of custodial deposit balances representing collections that we made
from borrowers for the payment of taxes and insurance premiums on mortgage
properties underlying loans that we serviced for others. See "Results of
Operations - Non-Interest Income - Servicing and Other Fees."
55
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Bonds-Match Funded Agreements. Bonds-match funded agreements represent
proceeds received from transfers of loans, residual securities and advances on
our loans serviced for others. Because we retained effective control over the
assets transferred, these transfers did not qualify as sales for accounting
purposes and, therefore, we report them as secured borrowings with pledges of
collateral. Bonds-match funded agreements were comprised of the following at the
dates indicated:
June 30, December 31,
Collateral (Interest Rate) 2003 2002
- ---------------------------------------------------------------------------------------- ------------ ------------
Single family loans (LIBOR plus 65-70 basis points) (1)................................. $ 26,651 $ 32,217
Unrated residual securities (9.50%) (2)................................................. -- 8,057
Advances on loans serviced for others (LIBOR plus 160 basis points) (3)................. 103,459 106,797
------------ ------------
$ 130,110 $ 147,071
============ ============
(1) The decline in the balance outstanding during the six months ended June
30, 2003 was due to principal repayments, offset by amortization of
discount.
(2) During the second quarter of 2003, the Ocwen NIM Trust 1999 - OAC1
adopted a plan of complete liquidation and, thereby, caused the early
redemption of the bonds-match funded agreements that were secured by
residual securities. See "Changes in Financial Condition - Match Funded
Assets."
(3) Under the terms of the agreement, we are eligible to sell additional
advances on loans serviced for others up to a maximum balance of
$200,000.
Lines of Credit and Other Secured Borrowings. We have obtained secured
borrowings from unaffiliated financial institutions as follows:
June 30, December 31,
Borrowing Type Collateral 2003 2002 Maturity Interest Rate (1)
- -------------------------- ------------------------- --------- ------------ ----------- --------------------------
Line of credit Advances on loans
serviced for others (2) $ 97,427 $ 78,511 April 2004 LIBOR + 200 basis points
Mortgage note Investment in real
estate - office
building, LIBOR + 350 basis
Jacksonville, Florida 20,000 -- May 2005 points, floor of 5.75%
Secured loan Trading securities -
unrated subprime
residuals (UK) 18,846 -- June 2004 LIBOR + 275 basis points
Senior secured credit Purchased mortgage
agreement servicing rights and
advances on loans LIBOR + 162.5 or 225
serviced for others (3) 15,896 -- April 2004 basis points
Installment note Purchased mortgage
servicing rights 4,994 -- June 2004 2.81%
Term loan September LIBOR + 250 basis
Loan receivable 4,235 4,235 2003 points, floor of 8.00%
--------- ---------
$ 161,398 $ 82,746
========= =========
(1) 1-month LIBOR was 1.12% and 1.38% at June 30, 2003 and December 31,
2002, respectively.
(2) Maximum amount of borrowing under this facility is $100,000.
(3) Maximum amount of borrowing under this facility is $60,000.
During 2003, we have entered in to a number of additional secured
borrowing agreements. These actions are consistent with the strategic plan that
we adopted in 2000, which included, among other things, a commitment to reduce
our reliance on brokered deposits and long-term debt as sources of financing for
our operations. See "Liquidity, Commitments and Off-Balance Sheet Risks."
56
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Notes and Debentures. Notes and debentures mature as follows:
June 30, December 31,
2003 2002
----------- -----------
2003:
11.875% Notes due October 1........................ $ 43,475 $ 43,475
2005:
12% Subordinated Debentures due September 15 (1)... 33,065 33,500
----------- -----------
$ 76,540 $ 76,975
=========== ===========
(1) During the second quarter of 2003 we repurchased $435 of our
Subordinated Debentures in the open market resulting in a loss of $(4).
Company Obligated, Mandatorily Redeemable Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures of the Company. The
outstanding balance of the 10.875% Capital Securities due August 1, 2027 of
$56,249 at June 30, 2003 is unchanged from December 31, 2002. See Note 3 to the
Interim Consolidated Financial Statements included in Item 1 hereof.
Minority Interest in Subsidiary. Minority interest of $1,442 and $1,778
at June 30, 2003 and December 31, 2002, respectively, represents the investment
by others in GSS, which we formed during the third quarter of 2002 to establish,
license and operate distressed asset management servicing companies in various
countries around the world. The minority interest represents 38% of the
investment in these companies as of June 30, 2003.
Stockholders' Equity. Stockholders' equity decreased $5,966 or 1.9%
during the six months ended June 30, 2003. The decrease was primarily due to the
net loss of $(4,297) for the first half of 2003 and our repurchase of 494,500
shares of our common stock for $2,235 during the second quarter. See
Consolidated Statements of Changes in Stockholders' Equity of the Interim
Consolidated Financial Statements included in Item 1 herein.
Liquidity, Commitments and Off-Balance Sheet Risks
Our primary sources of funds for liquidity are:
o Deposits o Payments received on loans and securities
o Lines of credit and other secured borrowings o Proceeds from sales of assets
o Match funded debt o Servicing fees
o Securities sold under agreements to
repurchase
We plan to retain non-brokered deposits as a source of financing our
operations while at the same time reducing our reliance on brokered deposits. We
plan to reduce this reliance by using proceeds from the sale of non-core assets
to pay off maturing brokered deposits and by diversifying our funding sources
through obtaining credit facilities for servicing rights and advances. Our
ability to continue to attract new non-brokered deposits and rollover existing
non-brokered deposits depends largely on our ability to compete with interest
rates offered by other banks in the northern New Jersey area. In 2002 and during
the first half of 2003, we were able to increase the amount of non-brokered
deposits outstanding. If we are unable to maintain the amount of non-brokered
deposits outstanding and must replace them with alternative sources of funds, it
is likely that we would have to incur higher interest costs to fund our assets.
In the last several years, our Residential Loan Servicing business has
grown through the purchase of servicing rights. Servicing rights entitle the
owner to earn servicing fees and other types of ancillary income and impose
various obligations on the servicer. Among these are the obligation to make
advances for delinquent principal and interest, taxes, insurance and various
other items that are required to preserve the assets being serviced.
Our ability to continue to expand our servicing business depends in
part on our ability to obtain additional financing to purchase new servicing
rights and to fund servicing advances. We currently use a variety of sources of
debt to finance these assets, including deposits, credit facilities and other
seller financing. Our credit facilities provide financing to us at amounts that
are less than the full value of
57
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
the related servicing advances that serve as the collateral for the credit
facilities. If we cannot replace or renew these sources as they mature or obtain
additional sources of financing, we may unable to acquire new servicing rights
and make the associated advances.
Under a match funding agreement that we entered into on December 20,
2001, we are eligible to sell advances on loans serviced for others up to a
maximum debt balance of $200,000 at any one time. At June 30, 2003 we had
$103,459 of bonds-match funded agreements outstanding under this facility,
which, if not renewed, will mature in December 2003. The sales of advances did
not qualify as sales for accounting purposes; therefore, we report them as
secured borrowings with pledges of collateral. We have accounted for additional
sales under this facility in the same manner.
Under a revolving credit facility executed in April 2001 we have the
right to pledge servicing advances as collateral for a loan up to $100,000. The
facility, if not renewed, will mature in April 2004. The balance outstanding
under this facility at June 30, 2003 was $97,427.
In April 2003, we also entered into a $60,000 secured credit agreement
that may be used to fund servicing advances and acquisitions of servicing
rights. The amount of this agreement may be increased to a maximum of $200,000
if increased commitments from existing lenders or new commitments from
prospective lenders can be obtained. The agreement matures April 2004 and bears
interest at LIBOR plus 162.5 basis points for funding of servicing advances or
225 basis points for funding of acquisitions of servicing rights. As of June 30,
2003, we had a balance outstanding under this agreement of $15,896.
In June 2003, we entered, for the first time, into an agreement for
seller financing of purchased mortgage servicing rights. As of June 30, 2003, we
had $4,994 outstanding under such an agreement with an interest rate of 2.81%.
Also in June, we entered into a secured loan agreement under which we
borrowed $18,846. This agreement, which is secured by the assignment of our
interest in certain unrated subprime residual securities, matures June 2004 and
bears interest at LIBOR plus 275 basis points.
In addition, at June 30, 2003, we had $250,006 of unrestricted cash and
cash equivalents and $4,982 of short duration CMOs that we could use to secure
additional borrowings. At June 30, 2003, we were eligible to borrow up to an
aggregate of $50,000 from the FHLB of New York (based on the availability of
acceptable collateral). We had no outstanding FHLB advances or securities we
sold under agreements to repurchase from the FHLB at June 30, 2003 or December
31, 2002.
We closely monitor our liquidity position and ongoing funding
requirements. Among the risks and challenges associated with our funding
activities are the following:
o Scheduled maturities of all certificates of deposit for the twelve months
ending June 30, 2004, the twelve months ending June 30, 2005 and thereafter
amount to $265,983, $84,893 and $17,001, respectively.
o Expiration of an existing collateralized line of credit in April 2004.
o Maturity of our match funded servicing advance funding facility in December
2003, as discussed above.
o Maturity of a note and loan totaling $47,710 in September and October 2003.
o Potential extension of resolution and sale timelines for non-core assets in
the current weak economic environment.
o Ongoing cash requirements to fund operations of our holding company and
OTX.
o Cash requirements to fund our acquisition of additional servicing rights
and related advances.
We believe that our existing sources of liquidity, including internally
generated funds, will be adequate to fund our planned activities for the
foreseeable future, although there can be no assurances in this regard. As
discussed above, we continue to evaluate other sources of liquidity, such as
lines of credit from unaffiliated parties, match funded debt and other secured
borrowings.
Our operating activities provided $22,180 and $162,822 of cash flows
during the six months ended June 30, 2003 and 2002, respectively. During the
foregoing periods, cash was generated from operating activities, despite the net
losses recorded, for two reasons. First, the net losses included non-cash
reserves and impairment charges, depreciation of premises and equipment and
amortization of purchased mortgage-servicing rights in both years. Second, our
securities portfolio generated positive cash flow through sales, interest and
principal payments. The decline in cash flows provided by operating activities
in the first six months of 2003 was primarily the result of a decline in cash
provided by our trading securities and an increase in advances on loans we
serviced for others.
58
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Our investing activities provided cash flows totaling $735 and $66,302
during the six months ended June 30, 2003 and 2002, respectively. During the
foregoing periods, cash flows from our investing activities were provided
primarily from principal payments on our loans and proceeds from sales of loans
and real estate. We used cash flows from our investing activities primarily to
purchase mortgage servicing rights and fund loans made to facilitate the sales
of real estate assets. The decline in net cash provided by investing activities
in the first six months of 2003 is primarily due to a decline in proceeds from
sales of loans, real estate and affordable housing properties.
Our financing activities provided (used) cash flows of $44,838 and
$(245,405) during the six months ended 2003 and 2002, respectively. Cash flows
related to our financing activities primarily resulted from changes in deposits,
proceeds from lines of credit and other secured borrowings and repayment of
match funded debt. The increase in cash provided by financing activities in the
first six months of 2003 as compared to the same period of 2002 resulted
primarily from a decline in maturing deposits and an increase in proceeds from
lines of credit and other secured borrowings as a result of new credit
facilities entered into during the second quarter of 2003. Deposits totaling
$199,807 matured during the first six months of 2002 as compared to $14,190
during the first six months of 2003.
Commitments. At June 30, 2003, we had $149 of commitments related to
the funding of construction loans. We believe that we have adequate resources to
fund all such unfunded commitments to the extent required and that substantially
all of such unfunded commitments will be funded during 2003. See Note 8 to our
Interim Consolidated Financial Statements.
Off-Balance Sheet Risks. In addition to commitments to extend credit,
we are party to various off-balance sheet financial instruments in the normal
course of our business to manage our interest rate risk and foreign currency
exchange rate risk. See Note 4 to our Interim Consolidated Financial Statements
and "Asset and Liability Management".
We conduct business with a variety of financial institutions and other
companies in the normal course of business, including counterparties to our
off-balance sheet financial instruments. We are subject to potential financial
loss if the counterparty is unable to complete an agreed upon transaction. We
seek to limit counterparty risk through financial analysis, dollar limits and
other monitoring procedures.
Regulatory Capital and Other Requirements
See Note 5 to our Interim Consolidated Financial Statements.
Recent Accounting Developments
For information relating to the effects of our adoption of recent
accounting standards, see Note 2 to our Interim Consolidated Financial
Statements.
59
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
(Dollars in thousands)
- --------------------------------------------------------------------------------
Asset and Liability Management
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. Our objective is to
attempt to control risks associated with interest rate and foreign currency
exchange rate movements. In general, our strategy is to match asset and
liability balances within maturity categories and to manage foreign currency
rate exposure related to our investments in non-U.S. dollar functional currency
operations in order to limit our exposure to earnings variations and variations
in the value of assets and liabilities as interest rates and foreign currency
exchange rates change over time. Our Asset/Liability Management Committee (the
"Committee"), which is composed of OCN's directors and officers, formulates and
monitors our asset and liability management in accordance with policies approved
by OCN's Board of Directors. The Committee meets to review, among other things,
the sensitivity of our assets and liabilities to interest rate changes and
foreign currency exchange rate changes, the book and market values of assets and
liabilities, unrealized gains and losses, including those attributable to
hedging transactions, purchase and sale activity, and maturities of investments
and borrowings. The Committee also approves and establishes pricing and funding
decisions with respect to overall asset and liability composition.
The Committee's methods for evaluating interest rate risk include an
analysis of our 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
our interest-earning assets and interest-bearing liabilities at June 30, 2003.
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:
o Adjustable-rate loans, performing discount loans and securities
are included in the period in which they are first scheduled to
adjust and not in the period in which they mature,
o Fixed-rate mortgage-related securities reflect estimated
prepayments, which were estimated based on analyses of broker
estimates, the results of a prepayment model that we use and
empirical data,
o Non-performing discount loans reflect the estimated timing of
resolutions that result in repayment to us,
o Mortgage servicing rights reflect estimated prepayment and
delinquency rates that are projected at the individual loan level.
o NOW and money market checking deposits and savings deposits, which
do not have contractual maturities, reflect estimated levels of
attrition, which are based on our detailed studies of each such
category of deposit and
o Escrow deposits and other non-interest bearing checking accounts,
which amounted to $109,159 at June 30, 2003, are excluded.
60
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
(Dollars in thousands)
- --------------------------------------------------------------------------------
Our management believes that these assumptions approximate actual
experience and considers them reasonable; however, the interest rate sensitivity
of our 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.
June 30, 2003
------------------------------------------------------------------------
Four to More Than
Within Three Twelve One Year to Three Years
Months Months Three Years and Over Total
------------ ------------- ------------ ------------ -------------
Rate-Sensitive Assets
Interest-earning deposits...................... $ 124,164 $ -- $ -- $ -- $ 124,164
Federal funds sold and repurchase agreements... 70,000 -- -- -- 70,000
Trading securities............................. 8,782 9,142 16,276 17,636 51,836
Loans, net (1)................................. 5,782 10,120 13,654 6,366 35,922
Investment securities, net..................... 4,293 -- -- -- 4,293
Match funded loans (1)......................... 780 20,326 4,453 5,844 31,403
Mortgage servicing rights...................... 20,038 46,894 64,544 49,313 180,789
------------ ------------- ------------ ------------ -------------
Total rate-sensitive assets................... 233,839 86,482 98,927 79,159 498,407
------------ ------------ ------------ ------------ ------------
Rate-Sensitive Liabilities
NOW and money market checking deposits......... 16,566 198 424 1,102 18,290
Savings deposits............................... 104 206 407 723 1,440
Certificates of deposit........................ 72,627 193,360 93,709 8,181 367,877
------------ ------------ ------------ ------------ ------------
Total interest-bearing deposits................ 89,297 193,764 94,540 10,006 387,607
Bond-match funded loan agreements.............. 130,110 -- -- -- 130,110
Lines of credit and other secured borrowings... 161,398 -- -- -- 161,398
Notes and debentures........................... -- 43,475 33,065 -- 76,540
------------ ------------ ------------ ------------ ------------
Total rate-sensitive liabilities.............. 380,805 237,239 127,605 10,006 755,655
------------ ------------ ------------ ------------ ------------
Interest rate sensitivity gap excluding
financial instruments.......................... (146,966) (150,757) (28,678) 69,153 (257,248)
Financial Instruments
Interest rate floors............................. -- (287) -- -- (287)
------------- ------------- ------------ ------------- ------------
Total rate-sensitive financial instruments....... -- (287) -- -- (287)
------------- ------------- ------------ ------------- ------------
Interest rate sensitivity gap including
financial instruments.......................... $ (146,966) $ (151,044) $ (28,678) $ 69,153 $ (257,535)
============ ============ ============ ============ ============
Cumulative interest rate sensitivity gap......... $ (146,966) $ (298,010) $ (326,688) $ (257,535)
============ ============ ============ ============
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets...... (29.49)% (59.79)% (65.55)% (51.67)%
(1) Balances have not been reduced for non-performing loans.
We have experienced a large negative interest rate sensitivity gap in
recent years. This change has been the result of both our acquisition of OAC and
our change in strategic focus away from capital-intensive businesses and into
fee-based sources of income. The result has been an increase in the relative
amount of noninterest-earning assets, such as real estate assets and loan
servicing assets that are funded by interest-bearing liabilities. Consequently,
the amount of the interest rate sensitivity gap may continue to be negative as
we continue the transition to fee-based businesses.
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. In the current, low interest rate environment the hypothetical
scenarios are represented by immediate, permanent, parallel movements (shocks)
in the term structure of interest rates of plus 100, 200 and 300 basis points
and minus 100 basis points from the actual term structure observed at quarter
end.
61
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
(Dollars in thousands)
- --------------------------------------------------------------------------------
The current NPV Ratio for each of the seven rate scenarios and the corresponding
limits approved by OCN's Board of Directors, and as applied to OCN, are as
follows at June 30, 2003:
Board Limits Current
Rate Shock in basis points (minimum NPV Ratios) NPV Ratios
- -------------------------- -------------------------- ----------------------
+300 5.00% 32.39%
+200 6.00% 31.21%
+100 7.00% 29.92%
0 8.00% 28.53%
-100 7.00% 27.27%
The Committee also regularly reviews interest rate risk by forecasting
the impact of alternative interest rate environments on net interest income and
NPV and evaluating such impacts against the maximum potential changes in net
interest income and NPV that is authorized by OCN's Board of Directors, and as
applied to OCN. The following table quantifies the potential changes in net
interest income and net portfolio value should interest rates go up or down
(shocked) 300 or 100 basis points, respectively, assuming the yield curves of
the rate shocks will be parallel to each other. The cash flows associated with
loans and securities 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 assets. When interest
rates are shocked, these projected loss and prepayment assumptions are further
adjusted. Changes in prepayment rates and delinquency rates under different
interest rate shocks for mortgage servicing rights are calculated using third
party and proprietary models. Prepayment and delinquency rates are projected at
the individual loan level based on characteristics such as borrower credit
score, note interest rate and prepayment penalty and aggregated into
stratifications of the portfolio based on loan type (Subprime, Alt A, High LTV
and 2nd Mortgage) and by year of origination. The base interest rate scenario
assumes interest rates at June 30, 2003. Actual results could differ
significantly from the OCN results estimated in the following table:
Estimated Changes in
---------------------------------------------------
Rate Shock in basis points Net Interest NPV
- -------------------------- -------------------------- ----------------------
+300 20.79% 18.68%
+200 13.86% 12.81%
+100 6.93% 6.54%
0 0.00% 0.00%
-100 -6.93% -5.72%
The Committee is authorized to utilize a wide variety of off-balance
sheet financial techniques to assist it in the management of interest rate risk
and foreign currency exchange rate risk. These techniques include interest rate
caps and floors and foreign currency futures contracts.
Interest Rate Risk Management. We have purchased amortizing caps and
floors to hedge our interest rate exposure relating to match funded loans and
securities. Those caps and floors had an aggregate notional amount of $105,290
and $28,729, respectively, at June 30, 2003, as compared with an aggregate
notional amount of $111,799 and $30,563, respectively, at December 31, 2002.
See the "Interest Rate Management" section of Note 4 to the Interim
Consolidated Financial Statements included in Item 1 herein for additional
disclosures regarding our interest rate derivative financial instruments.
Foreign Currency Exchange Rate Risk Management. We have entered into
foreign currency futures to hedge our investments in foreign subsidiaries that
own the shopping center located in Halifax, Nova Scotia and residual interests
backed by residential loans originated in the UK.
See the "Foreign Currency Management" section of Note 4 to the Interim
Consolidated Financial Statements included in Item 1 herein for additional
disclosures regarding our foreign currency derivative financial instruments.
62
Item 4. Controls and Procedures.
- --------------------------------------------------------------------------------
Evaluation of disclosure controls and procedures
As of the end of the period covered by this report and pursuant to Rule
13a - 15 of the Securities Exchange Act of 1934 (the "Exchange Act"),
management, including the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness and design of our disclosure
controls and procedures (as that term is defined in Rules 13a - 15(e) and 15d -
15(e) of the Exchange Act). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded, as of the end of the period
covered by this report, that our disclosure controls and procedures were
effective in recording, processing, summarizing and reporting information
required to be disclosed by us, within the time periods specified in the
Securities and Exchange Commission's rules and forms.
Changes in internal controls
In addition and as of the end of the period covered by this report,
there have been no changes in internal control over financial reporting (as
defined in Rule 13a - 15(f) and 15d - 15(f) of the Exchange Act) during the
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the internal control over financial
reporting.
63
Forward-Looking Statements
This quarterly report on Form 10-Q contains 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, including, but
not limited to discussions of the future availability of funds, beliefs
regarding regulatory compliance, expectations as to resolution of our non-core
assets, predictions on loan yield and the adequacy of our funding needs, our
intentions with regard to the issuance of brokered deposits, our estimates for
loan losses and carrying values, and plans for growth in India. Forward-looking
statements are not guarantees of future performance, and involve a number of
assumptions, risks and uncertainties that could cause actual results to differ
materially.
Important factors that could cause actual results to differ materially from
those suggested by the forward-looking statements include, but are not limited
to, the following: general economic and market conditions, prevailing interest
or currency exchange rates, governmental regulations and policies, international
political and economic uncertainty, availability of adequate and timely sources
of liquidity, uncertainty related to dispute resolution and litigation, and real
estate market conditions and trends, as well as other risks detailed in OCN's
reports and filings with the Securities and Exchange Commission, including its
periodic reports on Form 10-Q for the quarter ended March 31, 2003 and Form 10-K
for the year ended December 31, 2002. The forward-looking statements speak only
as of the date they are made and should not be relied upon. OCN undertakes no
obligation to update or revise the forward-looking statements.
64
Part II - Other Information
Item 1. Legal Proceedings.
See "Note 8 Commitments and Contingencies" of Ocwen Financial
Corporation's Interim Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders.
At OCN's Annual Meeting of Shareholders held on May 15, 2003, the
following individuals were elected to the Board of Directors:
Votes For Votes Withheld
-------------- --------------
William C. Erbey.............................. 58,593,021 2,338,982
Ronald M. Faris............................... 58,778,821 2,153,182
William H. Lacy............................... 55,645,350 5,286,653
W. Michael Linn............................... 58,778,992 2,153,011
W.C. Martin................................... 55,645,346 5,286,657
Herbert B. Tasker............................. 58,778,992 2,153,011
Barry N. Wish................................. 58,778,821 2,153,182
Amendments to the 1998 Annual Incentive Plan were also voted on and
approved. The votes were as follows:
Votes for..................................................... 60,523,434
Votes against................................................. 352,018
Abstentions................................................... 56,551
Ratification of PricewaterhouseCoopers LLP as the independent auditors
of OCN for the fiscal year ending December 31, 2003 was also voted on and
approved by the shareholders. The votes were as follows:
Votes for..................................................... 56,278,687
Votes against................................................. 4,644,753
Abstentions................................................... 8,563
Item 6. Exhibits and Reports on Form 8-K.
(a)3 Exhibits.
2.1 Agreement of Merger dated as of July 25, 1999 among Ocwen
Financial Corporation, Ocwen Asset Investment Corp. and Ocwen
Acquisition Company (1)
3.1 Amended and Restated Articles of Incorporation (2)
3.2 Amended and Restated Bylaws (3)
4.0 Form of Certificate of Common Stock (2)
4.1 Form of Indenture between OCN and Bank One, Columbus, NA as
Trustee (2)
4.2 Form of Note due 2003 (Included in Exhibit 4.1) (2)
4.3 Certificate of Trust of Ocwen Capital Trust I (4)
4.4 Amended and Restated Declaration of Trust of Ocwen Capital
Trust I (4)
4.5 Form of Capital Security of Ocwen Capital Trust I (Included in
Exhibit 4.4) (4)
4.6 Form of Indenture relating to 10.875% Junior Subordinated
Debentures due 2027 of OCN (4)
4.7 Form of 10.875% Junior Subordinated Debentures due 2027 of OCN
(Included in Exhibit 4.6) (4)
4.8 Form of Guarantee of the OCN relating to the Capital Securities
of Ocwen Capital Trust I (4)
4.9 Form of Indenture between Ocwen Federal Bank FSB and The Bank of
New York as Trustee (5)
4.10 Form of Subordinated Debentures due 2005 (5)
10.1 Ocwen Financial Corporation 1996 Stock Plan for Directors, as
amended (6)
10.2 Ocwen Financial Corporation 1998 Annual Incentive Plan (7)
10.3 Compensation and Indemnification Agreement, dated as of May 6,
1999, between OAC and the independent committee of the Board of
Directors (8)
10.4 Indemnity agreement, dated August 24, 1999, among OCN and OAC's
Board of Directors (9)
65
Part II - Other Information
10.5 Amended Ocwen Financial Corporation 1991 Non-Qualified Stock
Option Plan, dated October 26, 1999 (9)
10.6 First Amendment to Agreement, dated March 31, 2000, between HCT
Investments, Inc. and OAIC Partnership I, L. P. (9)
10.7 Form of Employment Agreement dated as of April 1, 2001, by and
between Ocwen Financial Corporation and Arthur D. Ringwald (10)
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of the Chief Executive Officer pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.2 Certification of the Chief Financial Officer pursuant to U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
(1) Incorporated by reference from the similarly described exhibit
included with the Registrant's Current Report on Form 8-K
filed with the Commission on July 26, 1999.
(2) Incorporated by reference from the similarly described exhibit
filed in connection with the Registrant's Registration
Statement on Form S-1 (File No. 333-5153), as amended,
declared effective by the Commission on September 25, 1996.
(3) Incorporated by reference from the similarly described exhibit
included with the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998.
(4) Incorporated by reference from the similarly described exhibit
filed in connection with Ocwen Financial Corporation's
Registration Statement on Form S-1 (File No. 333-28889), as
amended, declared effective by the Commission on August 6,
1997.
(5) Incorporated by reference from the similarly described exhibit
filed in connection with Amendment No. 2 to Offering Circular
on Form OC (on Form S-1) filed on September 7, 1995.
(6) Incorporated by reference from the similarly described exhibit
filed in connection with the Registrant's Registration
Statement on Form S-8 (File No. 333-44999), effective when
filed with the Commission on January 28, 1998.
(7) Incorporated by reference from the similarly described exhibit
to Ocwen Financial Corporation's Definitive Proxy Statement
with respect to Ocwen Financial Corporation's 1998 Annual
Meeting of Shareholders filed with the Commission on March 31,
1998.
(8) Incorporated by reference from OAC's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1999.
(9) Incorporated by reference from the similarly described exhibit
included with Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2000.
(10) Incorporated by reference from the similarly described exhibit
included with the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001.
(b) Reports on Form 8-K Filed during the Quarter Ended June 30, 2003.
(1) A Form 8-K was filed by OCN on May 6, 2003 that contained a
news release announcing Ocwen Financial Corporation's
financial results for the first quarter ended March 31, 2003.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
OCWEN FINANCIAL CORPORATION
By: /s/ Mark S. Zeidman
---------------------------------------
Mark S. Zeidman,
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and as its
principal financial officer)
Date: August 14, 2003
67
Exhibit 31.1
CERTIFICATIONS
I, William C. Erbey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ocwen Financial
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a - 15(e) and 15d - 15(e) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 14, 2003 /s/ William C Erbey
--------------------------
William C. Erbey
Chief Executive Officer
68
Exhibit 31.2
CERTIFICATIONS
I, Mark S. Zeidman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ocwen Financial
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a - 15(e) and 15d - 15(e) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 14, 2003 /s/ Mark S. Zeidman
-----------------------------
Mark S. Zeidman
Chief Financial Officer
69
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, William C. Erbey, state and attest that:
(1) I am the Chief Executive Officer of Ocwen Financial Corporation (the
"Registrant").
(2) I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that
o the Quarterly Report on Form 10-Q of the Registrant for the quarter
ended June 30, 2003 (the "periodic report") containing financial
statements fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
o the information contained in the periodic report fairly represents, in
all material respects, the financial condition and results of
operations of the Registrant for the periods presented.
Name: /s/ William C. Erbey
------------------------------
Title: Chief Executive Officer
Date: August 14, 2003
70
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
I, Mark S. Zeidman, state and attest that:
(1) I am the Chief Financial Officer of Ocwen Financial Corporation (the
"Registrant").
(2) I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that
o the Quarterly Report on Form 10-Q of the Registrant for the quarter
ended June 30, 2003 (the "periodic report") containing financial
statements fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
o the information contained in the periodic report fairly represents, in
all material respects, the financial condition and results of
operations of the Registrant for the periods presented.
Name: /s/ Mark S. Zeidman
------------------------------
Title: Chief Financial Officer
Date: August 14, 2003
71
