SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-21341
OCWEN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 65-0039856
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
THE FORUM, SUITE 1000
1675 PALM BEACH LAKES BOULEVARD, WEST PALM BEACH, FLORIDA 33401
(Address of principal executive offices) (Zip Code)
(561) 681-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
Number of shares of Common Stock, $.01 par value, outstanding at the close of
business on November 13, 1996: 26,741,100.
OCWEN FINANCIAL CORPORATION
FORM 10-Q
I N D E X
________________________________________________________________________________
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. INTERIM FINANCIAL STATEMENTS.................................. 3-17
Consolidated Statements of Financial Condition
at September 30, 1996 and December 31, 1995................... 3
Consolidated Statements of Operations for the three
months ended September 30, 1996 and 1995...................... 4
Consolidated Statements of Operations for the nine
months ended September 30, 1996 and 1995...................... 5
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 1996 and the year
ended December 31, 1995....................................... 6
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995...................... 7-8
Notes to Consolidated Financial Statements.................... 9-17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 18-43
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 44
Item 4. Submission of Matters to a Vote of Security Holders........... 44
Item 5. Other Information............................................. 44
Item 6. Exhibits and Reports on Form 8-K.............................. 45
Signature............................................................... 46
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)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
ASSETS
Cash and amounts due from depository institutions $ 7,278 $ 4,200
Interest bearing deposits 17,173 50,432
Federal funds sold and repurchase agreements 185,000 ---
Securities available for sale, at market value 235,305 337,480
Loans available for sale, at lower of cost or market 70,248 251,790
Investment securities, net 8,902 18,665
Loan portfolio, net 369,651 295,605
Discounted loan portfolio, net 908,084 669,771
Principal, interest and dividends receivable 13,493 12,636
Investments in low income housing tax credit interests 104,246 81,362
Real estate owned, net 114,968 166,556
Investment in joint venture 60,885 ---
Premises and equipment, net 29,416 25,359
Income taxes receivable 13,180 1,005
Deferred tax asset 18,173 22,263
Other assets 44,770 36,466
---------- ----------
$2,200,772 $1,973,590
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $1,650,323 $1,501,646
Advances from the Federal Home Loan Bank 70,399 70,399
Securities sold under agreements to repurchase --- 84,761
Notes, debentures and other interest bearing obligations 240,669 117,054
Accrued expenses, payables and other liabilities 66,714 60,183
---------- ----------
Total liabilities 2,028,105 1,834,043
========== ==========
COMMITMENTS AND CONTINGENCIES
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;
26,741,100 and 23,812,270 shares issued and outstanding
at September 30, 1996 and December 31, 1995, respectively 267 238
Additional paid-in capital 23,235 10,449
Retained earnings 155,357 130,275
Unrealized loss on securities available for sale, net of taxes (410) (1,415)
Notes receivable on exercise of common stock options (5,782) ---
---------- ----------
Total stockholders' equity 172,667 139,547
---------- ----------
$2,200,772 $1,973,590
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 1995
- ---------------------------------------- ----------- -----------
Interest income:
Federal funds sold and repurchase agreements $ 1,742 $ 1,165
Securities available for sale 5,890 4,866
Loans available for sale 2,685 3,819
Mortgage-related securities held for investment - 1,084
Loans 8,961 4,042
Discounted loans 23,794 16,800
Investment securities and other 1,073 713
----------- ----------
44,145 32,489
Interest expense:
Deposits 22,879 17,908
Securities sold under agreements to repurchase - 442
Advances from the Federal Home Loan Bank 958 64
Notes, debentures and other interest bearing obligations 3,380 3,756
Securities sold but not yet purchased - 518
----------- ----------
27,217 22,688
Net interest income before provision for loan losses 16,928 9,801
Provision for loan losses 4,469 -
----------- ----------
Net interest income after provision for loan losses 12,459 9,801
Non-interest income:
Servicing fees and other charges 1,158 642
Gains (losses) on sales of interest-earning
assets, net 7,979 (70)
Income on real estate owned, net 5,495 3,070
Other income 472 442
----------- ----------
15,104 4,084
Non-interest expense:
Compensation and employee benefits 8,360 4,847
Occupancy and equipment 2,151 1,852
Hotel operations (income) expense, net (203) 121
Savings Association Insurance Fund recapitalization
assessment 7,140 -
Other operating expenses 4,041 3,454
----------- ----------
21,489 10,274
Equity in earnings of investment in joint venture 4,139 -
----------- ----------
Income from continuing operations before income taxes 10,213 3,611
Income tax expense (benefit) 157 (858)
----------- ----------
Income from continuing operations 10,056 4,469
Discontinued operations:
Loss from operations of discontinued divisions, net of tax
benefit of $886 - (1,332)
Loss on disposal of divisions, net of tax benefit of $1,776 - (3,204)
----------- ----------
Net income (loss) $ 10,056 $ (67)
----------- ----------
----------- ----------
Earnings per share:
Income from continuing operations $ 0.37 $ 0.17
Discontinued operations, net of tax benefits - (0.17)
----------- ----------
Net income $ 0.37 $ -
----------- ----------
----------- ----------
Weighted average common shares outstanding 26,945,303 25,567,030
----------- ----------
----------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 1995
- --------------------------------------- ------------- ------------
Interest Income:
Federal funds sold and repurchase agreements $ 3,840 $ 2,913
Securities available for sale 19,954 11,809
Loans available for sale 14,169 10,973
Mortgage-related securities held for investment --- 3,427
Loans 26,734 7,986
Discounted loans 75,852 53,274
Investment securities and other 3,053 1,977
----------- -----------
143,602 92,359
----------- -----------
Interest expense:
Deposits 68,234 49,698
Securities sold under agreements to repurchase 685 641
Advances from the Federal Home Loan Bank 2,990 321
Notes, debentures and other interest-bearing obligations 10,344 5,552
Securities sold but not yet purchased --- 1,156
----------- -----------
82,253 57,368
----------- -----------
Net interest income before provisions for loss losses 61,349 34,991
Provisions for loan losses 18,839 ---
----------- -----------
Net interest income after provisions for loan losses 42,510 34,991
----------- -----------
Non-interest income:
Servicing fees and other charges 1,945 2,447
Gains on sales of interest earning assets, net 17,580 3,286
Income on real estate owned, net 4,467 5,628
Other income 2,468 1,650
----------- -----------
26,460 13,011
----------- -----------
Non-interest expense:
Compensation and employee benefits 22,922 15,311
Occupancy and equipment 6,378 6,647
Hotel operations (income) expense, net (146) 385
Savings Association Insurance Fund recapitalization assessment 7,140 ---
Other operating expenses 10,744 9,823
----------- -----------
47,038 32,166
----------- -----------
Equity in earnings of investment in joint venture 5,217 ---
----------- -----------
Income from continuing operations before income taxes 27,149 15,836
Income tax expense (benefit) 2,067 (98)
----------- -----------
Income from continuing operations 25,082 15,934
Discontinued operations:
Loss from operations of discontinued divisions, net of tax benefit of $2,321 --- (4,468)
Loss on disposal of divisions, net of tax benefit of $1,776 --- (3,204)
----------- -----------
Net income $ 25,082 $ 8,262
=========== ===========
Earnings per share:
Income from continuing operations $ 0.94 $ 0.55
Discontinued operations, net of tax benefit --- (0.26)
----------- -----------
Net income $ 0.94 $ 0.29
=========== ===========
Weighted average common shares outstanding 26,596,212 29,035,610
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
For the Nine Months Ended September 30, 1996 and Year Ended December 31, 1995
UNREALIZED
LOSS
ON SECURITIES NOTES RECEIVABLE
COMMON STOCK ADDITIONAL AVAILABLE ON EXERCISE
--------------------- PAID-IN RETAINED FOR SALE, OF COMMON
SHARES AMOUNT CAPITAL EARNINGS NET OF TAXES STOCK OPTIONS TOTAL
----------- ------ ---------- ---------- -------------- ----------------- -------
Balances at December 31, 1994 32,194,710 $ 322 $ 13,652 $ 142,230 $ (2,821) $ - $153,383
Net income - - - 25,467 - - 25,467
Repurchase of common stock options - - (132) - - - (132)
Exercise of common stock options 432,620 4 1,416 - - - 1,420
Repurchase of common stock (8,815,060) (88) (4,487) (37,422) - - (41,997)
Change in unrealized loss on
securities available for sale,
net of taxes - - - - 1,406 - 1,406
----------- ----- ------- -------- ------- ----------- ---------
Balances at December 31, 1995 23,812,270 238 10,449 130,275 (1,415) - 139,547
Net income - - - 25,082 - - 25,082
Repurchase of common stock options - - (177) - - - (177)
Exercise of common stock options 2,928,830 29 12,963 - - - 12,992
Change in unrealized loss on securities
available for sale, net of taxes - - - - 1,005 - 1,005
Notes receivable on exercise of
common stock options - - - - - (5,782) (5,782)
----------- ---- ------- -------- ------- ----------- ---------
Balances at September 30, 1996 26,741,100 $ 267 $23,235 $ 155,357 $ (410) $ (5,782) $172,667
----------- ---- ------- -------- ------- ----------- ----------
----------- ---- ------- -------- ------- ----------- ----------
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 NINE MONTHS ENDED SEPTEMBER 30, 1996 1995
- -------------------------------------- --------- ----------
Cash flows from operating activities:
Net income $ 25,082 $ 8,262
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Net cash provided from trading activities 7,232 2,865
Proceeds from sales of loans available for sale 393,963 78,136
Purchases of loans available for sale (237,416) (161,646)
Origination of loans available for sale (2,154) (24,810)
Maturities of and principal payments received on loans available for sale 22,427 5,283
Premium amortization (discount accretion), net 1,487 (3,282)
Depreciation and amortization 5,287 4,384
Provision for loan losses 18,839 -
Provision for real estate losses 13,801 7,768
Loss on sales of premises and equipment 97 195
Gains on sales of interest earning assets, net (17,580) (3,286)
Gain on sale of real estate owned, net (17,757) (13,816)
Gain on sale of interest in tax credit partnership interests (990) -
Decrease (increase) in principal, interest and dividends receivable 490 (1,768)
Increase in income taxes receivable (12,175) -
Decrease in income taxes payable - (15,037)
Increase in accrued expenses, payables and other liabilities 6,728 8,625
Increase in other assets (18,909) (15,930)
--------- --------
Net cash provided (used) by operating activities 188,452 (124,057)
--------- --------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 169,112 799,369
Purchases of securities available for sale (95,271) (833,452)
Maturities of and principal payments received on securities available for sale 22,512 18,418
Maturities of and principal payments received on securities held for investment 10,000 12,755
Purchases of low income housing tax credit interests (27,647) (12,029)
Proceeds from low income housing tax credit interest 3,704 -
Proceeds from sales of discounted loans and loans held for investment 39,137 22,425
Purchase of discounted loans (529,267) (247,558)
Purchase of loans held for investment (278) (23,167)
Originations of loans held for investment (171,611) (111,508)
Investment in joint venture (60,885) -
Principal payments received on discounted loans and loans held for investment 285,538 143,678
Proceeds from sales of real estate owned 136,717 109,982
Purchases of real estate owned in connection with discounted loan purchases (2,313) (16,872)
Proceeds from sale of premises and equipment 233 -
Additions to premises and equipment (7,600) (19,254)
Other, net (278) 5,897
--------- --------
Net cash used by investing activities (228,197) (151,316)
--------- --------
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 NINE MONTHS ENDED SEPTEMBER 30, 1996 1995
- --------------------------------------- ---------- ----------
Cash flows from financing activities:
Increase in deposits 148,677 243,678
Proceeds from issuance of notes and debentures 125,000 107,615
Payments on advances from the Federal Home Loan Bank - (5,000)
Decrease in securities sold under agreements to repurchase (84,761) -
Payments and repurchase of notes and mortgages payable (1,385) (209)
Loans made to executive officers (5,782) -
Exercise of common stock options 12,992 1,045
Repurchase of common stock options and common stock (177) (42,128)
--------- ---------
Net cash provided by financing activities 194,564 305,001
--------- ---------
Net increase in cash and cash equivalents 154,819 29,628
Cash and cash equivalents at beginning of period 54,632 36,750
--------- ---------
Cash and cash equivalents at end of period $ 209,451 $ 66,378
--------- ---------
--------- ---------
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions $ 7,278 $ 22,257
Interest bearing deposits 17,173 24,121
Federal funds sold and repurchase agreements 185,000 20,000
--------- ---------
$ 209,451 $ 66,378
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 76,071 $ 45,435
--------- ---------
--------- ---------
Income taxes $ 4,462 $ 11,400
--------- ---------
--------- ---------
Supplemental schedule of non-cash investing and financing activities:
Exchange of loans available for sale for securities $ 219,633 $ 83,875
--------- ---------
--------- ---------
Real estate owned acquired through foreclosure $ 78,818 $ 157,761
--------- ---------
--------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
8
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
_______________________________________________________________________________
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Ocwen Financial Corporation ("Ocwen" or the "Company") and its
consolidated subsidiaries and have been prepared in conformity with the
instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for
interim financial statements. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
("GAAP") for complete financial statements.
Ocwen is a financial services holding company engaged in asset acquisition and
resolution, residential finance, commercial finance, investment management and
hotel operations through its subsidiaries. The Company owns directly and
indirectly all of the outstanding common and preferred stock of its primary
subsidiaries, Ocwen Federal Bank FSB, (formerly Berkeley Federal Bank & Trust
FSB) (the "Bank") and Investors Mortgage Insurance Holding Company ("IMI"),
which are included in the Company's consolidated financial statements. All
significant intercompany transactions and balances have been eliminated in
consolidation
The Bank is a federally chartered savings bank regulated by the Office of Thrift
Supervision ("OTS"). IMI's primary subsidiaries are engaged in hotel operations
and other real estate related ventures.
In the opinion of management, the accompanying financial statements contain all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the Company's results for the interim periods. The result of
operations and other data for the three and nine month periods ended September
30, 1996 are not necessarily indicative of the results that may be expected for
any other interim periods or for the entire year ending December 31, 1996. The
unaudited consolidated financial statements presented herein should be read in
conjunction with the audited consolidated financial statements and related notes
thereto included in the Company's financial statements for the year ended
December 31, 1995.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the balance sheets and revenues and expenses for the
periods covered. Actual results could differ significantly from those estimates
and assumptions.
NOTE 2 VALUATION ALLOWANCES ON ASSETS HELD FOR DISPOSITION AND
RESOLUTION
As a result of the historical and expected future growth in the discounted loan
portfolio and associated real estate owned, particularly in the commercial
segment, and as requested by the OTS, the Company has modified its methodology
for valuing certain assets held for disposition and resolution beginning in the
first quarter of 1996. This methodology results in a valuation allowance which
supplements the Company's practice of adjusting these assets to the net present
value of expected cash flows discounted at the effective interest rate in the
case of discounted loans and fair value less estimated disposition costs in the
case of real estate owned. Beginning in 1996 the Company has recorded
charge-offs on discounted loans against the allowance for loan losses.
Previously these amounts were deducted from interest income.
NOTE 3 DISCONTINUED OPERATIONS
In September 1995, the Company announced its decision to dispose of its
automated banking division and related activities. The sale and disposition of
this division was substantially complete at December 31, 1995. The Company's
Consolidated Statement of Operations have been restated for the three and nine
months ended September 30, 1995 to reflect the discontinuance of these
operations.
9
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
_______________________________________________________________________________
NOTE 4 ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," which requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Additionally, SFAS
No. 121 requires that long-lived assets and certain identifiable intangibles to
be disposed of be reported at the lower of carrying amount or fair value less
cost to sell, except for certain assets. The adoption of SFAS No. 121 did not
have a material effect on the Company's financial condition or results of
operations.
On January 1, 1996, the Company adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights", which requires that an institution engaged in mortgage
banking activities recognize as a separate asset rights to service mortgage
loans for others, regardless of the manner in which those servicing rights are
acquired. Upon sale or securitization of loans with servicing rights retained,
the Company is required to capitalize the cost associated with the mortgage
servicing rights based on their relative fair values. SFAS No. 122 also
requires that an institution assess its capitalized mortgage servicing rights
for impairment based on the fair value of those rights. Impairment is
recognized through a valuation allowance. See note 7 for disclosures regarding
capitalized mortgage servicing rights as required by SFAS No. 122.
On January 1, 1996, the Company also adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which requires that the fair value of employee
stock-based compensation plans be recorded as a component of compensation
expense in the statement of operations as of the date of grant of awards
related to such plans or that the impact of such fair value on net income and
earnings per share be disclosed on a pro forma basis in a footnote to
financial statements for awards granted after December 15, 1994, if the
accounting for such awards continues to be in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25). The Company will continue such accounting under the provisions of
APB 25 and disclose the pro forma information as required by SFAS No. 123.
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", was issued. SFAS No. 125 (i) sets
forth the criteria for (a) determining when to recognize financial and servicing
assets and liabilities; and (b) accounting for transfers of financial assets as
sales or borrowings; and (ii) requires (a) liabilities and derivatives related
to a transfer of financial assets to be recorded at fair value; (b) servicing
assets and retained interests in transferred assets carrying amounts be
determined by allocating carrying amounts based on fair value; (c) amortization
of servicing assets and liabilities be in proportion to net servicing income;
(d) impairment measurement based on fair value; and (e) pledged financial assets
to be classified as collateral.
SFAS No. 125 provides implementation guidance for assessing isolation of
transferred assets and for accounting for transfers of partial interests,
servicing of financial assets, securitizations, transfers of sales-type and
direct financing lease receivables, securities lending transactions,
repurchase agreements including "dollar rolls", "wash sales", loan
syndications and participations, risk participations in banker's acceptances,
factoring arrangements, transfers of receivables with recourse and
extinguishments of liabilities. SFAS No. 125 is effective for transfers of
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996, and is to be applied prospectively.
10
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
_______________________________________________________________________________
NOTE 5 INTEREST RATE RISK MANAGEMENT INSTRUMENTS
The Company enters into short sales of Eurodollar and U.S. Treasury interest
rate futures contracts as part of its overall interest rate risk management
activity. Interest rate futures contracts are commitments to either purchase or
sell designated financial instruments at a future date for a specified price and
may be settled in cash or through delivery. Terms and other information on the
interest rate futures sold short are as follows:
SEPTEMBER 30, 1996: Maturity Notional Principal Fair Value
-------- ------------------ ----------
Eurodollar futures 1996 $ 87,000 $ (116)
1997 365,000 (211)
1998 40,000 (50)
U.S. Treasury futures 1996 385,400 (1,482)
DECEMBER 31, 1995:
Eurodollar futures 1996 $386,000 $(1,598)
1997 26,000 (168)
U.S. Treasury futures 1996 11,100 (80)
Because futures contracts are exchange traded, holders of these instruments look
to the exchange for performance under these contracts and not the entity holding
the offsetting futures contract, thereby minimizing the risk of nonperformance
under these contracts.
NOTE 6 INVESTMENT IN JOINT VENTURE
On March 22, 1996, the Company was notified by the U.S. Department of Housing
and Urban Development ("HUD") that BCBF, L.L.C., a newly-formed limited
liability company ("LLC") in which the Company and a co-investor each have a 50%
interest, was the successful bidder to purchase 16,196 single-family residential
loans offered by HUD. On April 10, 1996 the LLC consummated the acquisition of
the HUD Loans.
The Company's investment in the LLC is accounted for under the equity method of
accounting. Under the equity method of accounting, an investment in the shares
or other interests of an investee is initially recorded at the cost of the
shares or interests acquired and thereafter is periodically increased
(decreased) by the investor's proportionate share of the earnings (losses) of
the investee and decreased by all dividends received by the investor from the
investee. The Company services loans on behalf of the LLC for a fee, and all
intercompany transactions between the Company and the LLC are eliminated for
financial reporting purposes to the extent of the Company's ownership in the
LLC. At September 30, 1996, the Company's investment in the LLC amounted to
$60,885. Because the LLC is a pass-through entity for federal income tax
purposes, provisions for income taxes will be established separately by each
of the Company and its co-investor and not the LLC.
11
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
_______________________________________________________________________________
Set forth below is the unaudited statement of financial condition of the LLC at
September 30, 1996 and a statement of operations for the
period from the date of acquisition of the HUD Loans through September 30, 1996
and for the three months ended September 30, 1996.
BCBF, L.L.C.
STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30,
1996
------------
Assets:
Cash $ 10
Discounted loans, net 533,940
Real estate owned, net 6,671
Other assets 24,476
-----------
Total assets $565,097
===========
Liabilities:
Note payable $441,151
Other liabilities 2,176
-----------
Total liabilities 443,327
-----------
Equity:
The Company 60,885
Co-investor 60,885
-----------
Total equity 121,770
-----------
Total liabilities and equity $565,097
===========
12
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
_______________________________________________________________________________
BCBF, L.L.C.
STATEMENT OF OPERATIONS
FOR THE PERIOD
FOR THE THREE APRIL 10, 1996
MONTHS ENDED THROUGH
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------ ------------------
Interest income $17,315 $29,537
Interest expense 8,906 17,185
--------- ---------
Net interest income before
provision for loan losses 8,409 12,352
Provision for loan losses 8 2,921
--------- ---------
Net interest income after
provision for loan losses 8,401 9,431
--------- ---------
Non-interest income:
Gain on sale of discounted loans - 1,324
Loss on real estate owned, net (63) (63)
Loan fees 9 16
--------- ---------
(54) 1,277
--------- ---------
Operating expenses:
Loan servicing fees 2,497 4,500
Other loan expenses 69 273
--------- ---------
2,566 4,773
--------- ---------
Net income $ 5,781 $ 5,935
========= =========
The Company's equity in earnings of the LLC includes 50% of the net income of
the LLC plus 50% of the loan servicing fees which are paid to the Company. The
50% of the servicing fees not eliminated in consolidation is reported in
servicing fees and other charges in the Company's Consolidated Statement of
Operations.
On October 15, 1996, the LLC completed a $502,600 securitization of the
majority of the loans purchased from HUD. The Company sold a portion of its
share of the securities totaling approximately $136,100 and recognized a gain
of approximately $22,000 which will impact fourth quarter net income by
approximately $11,600. The Company continues to service such loans and is
paid a servicing fee.
13
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
_______________________________________________________________________________
NOTE 7 MORTGAGE SERVICING RIGHTS
The unamortized balance of mortgage servicing rights which are included in other
assets is as follows:
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
Unamortized balance $ 3,747 $3,433
Valuation allowance (1,630) -
------- -------
$ 2,117 $3,433
------- -------
------- -------
Periodically, the Company evaluates the recoverability of mortgage servicing
rights based on the projected value of future net servicing income. Future
prepayment rates are estimated based on current interest rates and various
portfolio characteristics, including loan type, interest rate, and market
prepayment estimates. If the estimated recovery is lower than the current
amount of mortgage servicing rights, a reduction to mortgage servicing rights
is recorded through an increase in the valuation allowance. Valuation
allowances were established through charges to servicing fees and other
charges during the first and third quarters of 1996 primarily as a result of
higher than projected prepayment rates.
NOTE 8 NOTES
On September 25, 1996 the Company completed the public offering of $125,000
aggregate principal of 11.875% Notes due October 1, 2003 ("the Notes") with
interest payable semi-annually on April 1 and October 1. The Notes are
unsecured general obligations of the Company and are subordinated in right of
payment to the claims of creditors of the Company's subsidiaries.
The Notes may not be redeemed prior to October 1, 2001 except as described
below. On or after such date, the Notes may be redeemed at any time at the
option of the Company, in whole or in part, at the following redemption prices
(expressed as a percentage of the principal amount) plus accrued and unpaid
interest, if redeemed during the twelve-month period beginning October 1 of the
years indicated below:
YEAR REDEMPTION PRICE
---- ----------------
2001 105.938%
2002 102.969%
In addition, the Company may redeem, at its option, up to 35% of the original
aggregate principal amount of the Notes at any time and from time to time until
October 1, 1999 with the net cash proceeds received by the Company from one or
more public or private equity offerings at a redemption price of 111.875% of the
principal amount thereof, plus accrued and unpaid interest.
The indenture governing the Notes requires the Company to maintain unencumbered
liquid assets with a value equal to 100% of the required interest payments due
on the Notes on the next two succeeding semi-annual interest payment dates. The
indenture further provides that the Company shall not sell, transfer or
otherwise dispose of shares of common stock of the Bank or permit the Bank to
issue, sell or otherwise dispose of shares of its common stock unless in either
case the Bank remains a wholly-owned subsidiary of the Company.
Proceeds from the offering of the Notes amounted to approximately $120,156
(net of underwriting discount). On September 30, 1996, the Company
contributed $50,000 of such proceeds to the Bank
14
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
_______________________________________________________________________________
to support future growth. The remainder of the proceeds retained by the
Company are available for general corporate purposes.
NOTE 9 STOCKHOLDERS' EQUITY
On September 25, 1996, certain stockholders of Ocwen completed an initial
public offering of 2,300,000 shares of Ocwen common stock. Prior to this
offering, there had been no public trading market for the common stock. The
common stock is quoted on The Nasdaq Stock Market under the symbol "OCWN".
The Company did not receive any of the proceeds from the common stock
offering.
On July 12, 1996 stockholders of the Company approved an amendment to the
Company's articles of incorporation to increase the authorized number of
common shares from 20,000,000 to 200,000,000 shares, to increase the
authorized number of preferred shares from 250,000 to 20,000,000 shares and
to decrease the par value of the authorized preferred shares from $1.00 to
$0.01 per share. On July 30, 1996, the Company's Board of Directors declared a
10 for 1 stock split for each share of common stock then outstanding in the
form of a stock dividend which was paid to holders of record on July 31,
1996. All references in the interim consolidated financial statements to the
number of shares and per share amounts have been adjusted retroactively for
the recapitalization and stock split.
During September 1996, 2,928,200 shares of common stock were issued in
connection with the exercise of vested stock options by certain of the Company's
and the Bank's current and former officers and directors. The Company loaned
$6,654 to certain of such officers to fund their exercise of the stock
options. Such notes, which are presented as a reduction of shareholders'
equity, have an unpaid principal balance of $5,782 at September 30, 1996,
bear interest at 10.5% per annum, are payable in two equal installments on
March 1, 1998 and March 1, 1999 and are secured by the related shares of
common stock.
NOTE 10 REGULATORY REQUIREMENTS
The Bank is a federally chartered savings bank regulated by the OTS and is
subject to Federal laws and regulations including regulations that require
institutions to comply with minimum regulatory capital requirements.
15
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
_______________________________________________________________________________
A comparison of the Bank's regulatory capital to its regulatory capital
requirements at September 30, 1996 and related additional discussion follows:
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- -------- ----------
GAAP capital $199,477 $199,477 $199,477
Nonallowable assets:
Implementation of Financial Accounting
Standard No. 115 411 411 411
Excess qualifying mortgage servicing rights (212) (212) (212)
Additional capital items:
Subordinated debentures -- -- 100,000
General valuation allowances -- -- 15,755
-------- -------- --------
Regulatory capital-computed 199,676 199,676 315,431
Minimum capital requirement 34,620 69,239 185,027
-------- -------- --------
Regulatory capital excess $165,056 $130,437 $130,404
======== ======== ========
CAPITAL RATIOS:
Required 1.50% 3.00% 8.00%
Actual 8.65% 8.65% 13.64%
The OTS has promulgated a regulation governing capital distributions. The Bank
is considered to be a Tier 1 association under this regulation because it met or
exceeded its fully phased-in capital requirements at September 30, 1996. A Tier
1 association that before and after a proposed capital distribution meets or
exceeds its fully phased-in capital requirements may make capital distributions
during any calendar year equal to the greater of (i) 100% of net income for the
calendar year to date plus 50% of its "surplus capital ratio" at the beginning
of the year or (ii) 75% of its net income over the most recent four-quarter
period. In order to make these capital distributions, the Bank must submit
written notice to the OTS thirty days in advance of making the distribution. In
addition, the indenture governing the Bank's Debentures limits the declaration
or payment of dividends and the purchase or redemption of the Bank's common or
preferred stock in the aggregate to the sum of 50% of the Bank's consolidated
net income and 100% of all capital contributions and proceeds from the issuance
or sale of common stock, since the date the Debentures were issued.
NOTE 11 COMMITMENTS AND CONTINGENCIES
At September 30, 1996 the Company had commitments to fund (i) $60,042 on
multi-family residential loans, (ii) $10,530 on loans secured by office
buildings, (iii) $53,277 on loans secured by hotel properties and (iv) $5,575 on
a loan secured by land. Additionally, the Company had commitments of $88,595 to
purchase residential discounted loans. In connection with its acquisition of
Berkeley Federal Savings Bank in 1993, the Company has a recourse obligation of
$3,979 on single-family residential loans sold to the Federal Home Loan Mortgage
Corporation. The Company, through its investment in subordinated securities and
REMIC residuals which had a book value of $42,545 at September 30, 1996,
supports senior classes of mortgage-related securities having an outstanding
principal balance of $682,510.
16
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
_______________________________________________________________________________
The Company is subject to various pending legal proceedings. Management, after
reviewing these claims with legal counsel, is of the opinion that the resolution
of these claims will not have a material effect on the consolidated financial
statements.
NOTE 12 NON-RECURRING EXPENSE
Included in the 1996 results of operations is a non-recurring expense of $7,140
related to the Federal Deposit Insurance Corporation's ("FDIC") assessment to
recapitalize the Savings Association Insurance Fund ("SAIF") as a result of
federal legislation passed into law on September 30, 1996.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Ocwen Financial Corporation ("Ocwen" or the "Company") is a financial
services company which is primarily engaged in the acquisition and resolution
of troubled loans and in diverse mortgage lending activities. The activities
of the Company are conducted primarily through Ocwen Federal Bank FSB
(formerly Berkeley Federal Bank & Trust FSB) (the "Bank"), a
federally-chartered savings bank and a wholly-owned subsidiary of the Company.
The following discussion of Ocwen's consolidated financial condition and
results of operations and capital resources and liquidity should be read in
conjunction with the Interim Consolidated Financial Statements and related Notes
included elsewhere herein.
SUMMARY
Ocwen's net income for the third quarter of 1996 amounted to $10.1 million
or $0.37 per share compared to a net loss of $67,000 for the third quarter of
1995. Included in net income for the third quarter of 1996 is a net after-tax
charge of $4.0 million or $0.15 per share related to the Federal Deposit
Insurance Corporation's ("FDIC") assessment to recapitalize the Savings
Association Insurance Fund ("SAIF") as a result of federal legislation passed
into law on September 30, 1996. Exclusive of the SAIF assessment, net income
for the third quarter would have been $14.0 million or $0.52 per share.
Highlights include:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
% CHANGE
FAVORABLE
1996 1995 (UNFAVORABLE)
--------- ---------- -------------
(DOLLARS IN THOUSANDS)
Net interest income $ 16,928 $ 9,801 73%
Provision for loan losses 4,469 -- --
Non-interest income 15,104 4,084 270%
SAIF assessment 7,140 -- --
Other non-interest expense 14,349 10,274 (40)%
Income from continuing operations 10,056 4,469 125%
Net income (loss) 10,056 (67) 15,109%
Average interest-earning assets 1,558,563 1,225,034 27%
Average interest-bearing liabilities 1,701,987 1,356,414 (25)%
Interest rate spread:
Yield on interest-earning assets 11.33% 10.61% 7%
Cost of interest-bearing liabilities 6.40% 6.69% 4%
Interest rate spread 4.93% 3.92% 26%
Annualized return on average assets (1) 2.89% 1.15% 151%
Annualized return on average equity (1) 34.70% 14.75% 135%
Efficiency ratio (2) 47.69% 73.99% 36%
(1) Before discontinued operations and SAIF assessment.
(2) Before provision for loan losses and SAIF assessment.
The Company's net income for the nine months ended September 30, 1996
amounted to $25.1 million or $0.94 per share as compared to $8.3 million or
$0.29 per share for the same period in 1995. Exclusive of the SAIF assessment,
net income year to date would have been $29.1 or $1.09 per share. The Company's
earnings for the nine months ended September 30, 1996 include a provision for
loan losses of $18.8 million and a general valuation on real estate owned of
$2.9 million as compared to $-0- for both during the same period of 1995. The
provisions recognized in 1996 include $14.5 million related to a modification in
the Company's methodology for valuing assets held for disposition and
resolution.
18
RESULTS OF OPERATIONS
NET INTEREST INCOME. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received from its interest-earning assets, including federal
funds sold and repurchase agreements, investment securities, mortgage-backed
and related securities, the discounted loan portfolio, the loan portfolio and
loans available for sale, and the interest expense paid on its interest-bearing
liabilities, including deposits, Federal Home Loan Bank ("FHLB") advances, the
11.875% Notes due 2003 ("Notes"), the Bank's 12% Subordinated Debentures due
2005 ("Debentures") and other interest bearing obligations. Net interest
income is determined by an institution's net interest rate spread (i.e., the
difference between the yield earned on its interest-earning assets and the
rates paid on its interest-bearing liabilities), the relative amount of
interest-earning assets and interest-bearing liabilities and the degree of
mismatch in the maturity and repricing characteristics of its
interest-earning assets and interest-bearing liabilities.
19
AVERAGE BALANCE AND RATE ANALYSIS. The following tables set forth, for the
periods indicated, information regarding the total amount of income from
interest-earning assets and the resultant average yields, the interest expense
associated with interest-bearing liabilities, expressed in dollars and rates,
and the net interest rate spread and net interest margin. Information is based
on daily balances during the indicated periods.
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
1996 1995
----------------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE(1)
------- --------- ------------ ------- --------- -------------
(DOLLARS IN THOUSANDS)
AVERAGE ASSETS:
Federal funds sold and repurchase agreements $ 126,121 $ 1,742 5.52% $ 74,954 $ 1,165 6.22%
Securities available for sale 255,547 5,890 9.22 246,771 4,866 7.89
Loans available for sale (2) 116,806 2,685 9.19 157,858 3,819 9.68
Investment securities and other (3) 45,503 1,073 9.43 45,843 713 6.22
Mortgage-related securities held for investment -- -- -- 81,535 1,084 5.32
Loan portfolio (2) 325,830 8,961 11.00 159,358 4,042 10.15
Discounted loan portfolio 688,756 23,794 13.82 458,715 16,800 14.65
---------- ------ ---------- ------
Total interest-earning assets, interest
income 1,558,563 44,145 11.33 1,225,034 32,489 10.61
--------- ------ --------- ------
--------- ---------
Non-interest earning cash 6,639 19,746
Allowance for loan losses (14,048) (1,076)
Investments in low-income housing
tax credit interests 100,015 66,182
Investment in Joint Venture 62,192 --
Real estate owned, net 126,458 160,469
Other assets 103,272 88,471
---------- -----------
Total assets $1,943,091 $1,558,826
---------- ----------
---------- ----------
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits $ 46,444 425 3.66 $ 50,386 301 2.39
Savings deposits 3,505 20 2.28 21,083 123 2.33
Certificates of deposit 1,464,844 22,434 6.13 1,093,959 17,484 6.39
--------- ------ --------- ------
Total interest-bearing deposits 1,514,793 22,879 6.04 1,165,428 17,908 6.15
--------- ------ --------- ------
Notes, debentures and other 115,696 3,380 11.69 127,554 3,756 11.78
Securities sold under agreements to repurchase -- -- -- 30,045 442 5.88
Securities sold but not yet purchased -- -- -- 30,488 518 6.80
Federal Home Loan Bank advances 71,498 958 5.36 2,899 64 8.83
----------- -------- ------------ ---------
Total interest-bearing liabilities,
interest expense 1,701,987 27,217 6.40 1,356,414 22,688 6.69
--------- --------- -------
Non-interest bearing deposits 15,966 4,571
Escrow deposits 12,493 9,880
Other liabilities 50,767 66,739
----------- -----------
Total liabilities 1,781,213 1,437,604
Stockholders' equity 161,878 121,222
---------- ----------
Total liabilities and stockholders' equity $1,943,091 $1,558,826
---------- ---------
---------- ---------
Net interest income before provision
for loan losses $16,928 $ 9,801
------ -------
------ -------
Net interest rate spread 4.93% 3.92%
---- ----
---- ----
Net interest rate margin 4.34% 3.20%
---- ----
Ratio of interest-earning assets to
interest-bearing liabilities 92% 90%
----- -----
----- -----
20
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
1996 1995
------------------------------------------ ------------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE(1)
------- --------- ------------ ------- --------- -------------
(DOLLARS IN THOUSANDS)
AVERAGE ASSETS:
Federal funds sold and repurchase agreements $ 90,709 $ 3,840 5.64% $ 59,768 $ 2,913 6.50%
Securities available for sale 284,934 19,954 9.34 193,725 11,809 8.13
Loans available for sale (2) 198,941 14,169 9.50 147,332 10,973 9.93
Investment securities and other (3) 40,951 3,053 9.94 47,782 1,977 5.52
Mortgage-related securities held for investment -- -- -- 92,617 3,427 4.93
Loan portfolio (2) 305,458 26,734 11.67 103,657 7,986 10.27
Discounted loan portfolio 640,585 75,852 15.79 460,066 53,274 15.44
---------- --------- ---------- ------
Total interest-earning assets, interest
income 1,561,578 143,602 12.26 1,104,947 92,359 11.14
--------- ------- ----------- ------
Non-interest earning cash 6,461 7,908
Allowance for loan losses (9,554) (1,125)
Investments in low-income housing tax
credit interests 92,767 62,136
Investment in Joint Venture 39,442 --
Real estate owned, net 143,819 134,878
Other assets 99,561 110,121
----------- -----------
Total assets $1,934,074 $1,418,865
--------- -----------
--------- -----------
AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits $ 48,073 785 2.18 $ 52,586 778 1.97
Savings deposits 3,458 60 2.31 21,677 378 2.33
Certificates of deposit 1,455,305 67,389 6.17 1,031,575 48,542 6.27
--------- -------- --------- ------
Total interest-bearing deposits 1,506,836 68,234 6.04 1,105,838 49,698 5.99
Notes, debentures and other 115,992 10,344 11.89 63,999 5,552 11.57
Securities sold under agreements to repurchase 15,862 685 5.76 14,468 641 5.91
Securities sold but not yet purchased -- -- -- 22,718 1,156 6.78
Federal Home Loan Bank advances 70,765 2,990 5.63 4,566 321 9.37
---------- --------- ------------ --------
Total interest-bearing liabilities,
interest expense 1,709,455 82,253 6.42 1,211,589 57,368 6.31
--------- -------- --------- ------
Non-interest bearing deposits 9,352 13,219
Escrow deposits 11,452 9,680
Other liabilities 52,759 54,468
----------- -----------
Total liabilities 1,783,018 1,288,956
Stockholders' equity 151,056 129,909
---------- ----------
Total liabilities and stockholders' equity $1,934,074 $1,418,865
---------- ----------
---------- ----------
Net interest income before provision for
loan losses $ 61,349 $34,991
-------- ------
Net interest rate spread 5.84% 4.83%
---- ----
---- ----
Net interest margin 5.24% 4.22%
---- ----
---- ----
Ratio of interest-earning assets to
interest-bearing liabilities 91% 91%
----- -----
----- -----
(1) Presented on an annualized basis.
(2) The average balance includes non-performing loans, interest on which is
recognized on a cash basis.
(3) Included in interest income on investment securities and other is
interest income earned on that portion of the deferred tax asset which
relates to tax residuals. Inclusive of the average balance of the
deferred tax asset related to tax residuals as investment securities and
other, the average yield for the three months ended September 30, 1996 and
1995 would have been 7.43% and 4.69%, respectively, and the average yield
for the nine months ended September 30, 1996 and 1995 would have been
7.28% and 4.45%, respectively.
RATE/VOLUME ANALYSIS. The following table describes the extent to which
changes in interest rates and changes in volume of interest-earning assets
and interest-bearing liabilities have affected the Company's
21
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 ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1996 VS 1995 1996 VS 1995
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------------- -----------------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
----- ------- ----- ----- ------- -----
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Federal funds sold and repurchase
agreement $ (142) $ 719 $ 577 $(423) $1,350 $927
Securities available for sale 846 178 1,024 1,956 6,189 8,145
Loans available for sale (182) (952) (1,134) (498) 3,694 3,196
Mortgage-related securities held
for investment (542) (542) (1,084) (1,714) (1,713) (3,427)
Loan portfolio 367 4,552 4,919 1,224 17,524 18,748
Discounted loan portfolio (1,002) 7,996 6,994 1,228 21,350 22,578
Investment securities and other 365 (5) 360 1,393 (317) 1,076
------- --------- ------- ------- -------- -------
Total interest-earning assets (290) 11,946 11,656 3,166 48,077 51,243
------- --------- ------- ------- -------- -------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits 149 (25) 124 77 (70) 7
Savings deposits (3) (100) (103) (2) (316) (318)
Certificates of deposit (757) 5,707 4,950 (786) 19,633 18,847
------- -------- -------- ------- -------- -------
Total interest-bearing deposits (611) 5,582 4,971 (711) 19,247 18,536
Notes, debentures and other (29) (347) (376) 160 4,632 4,792
Securities sold under agreements
to repurchase (221) (221) (442) (17) 61 44
Securities sold but not yet purchased (259) (259) (518) (578) (578) (1,156)
Federal Home Loan Bank advances (35) 929 894 (178) 2,847 2,669
------- ------ ------ ------- ------ ------
Total interest-bearing liabilities (1,155) 5,684 4,529 (1,324) 26,209 24,885
------- ------ ------ ------- ------ ------
Increase in net interest income $ 865 $ 6,262 $ 7,127 $4,490 $21,868 $26,358
------- ------ ------ ----- ------ ------
------- ------ ------ ----- ------ ------
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1995
The Company's net interest income before provision for loan losses
increased by $7.1 million or 73% during the three months ended September 30,
1996 as compared to the comparable period in the prior year. The increase
resulted from a $11.7 million or 36% increase in interest income due to a
$333.5 million or 27% increase in the Company's average interest-earning
assets from period to period combined with a 72 basis point increase in the
average yield earned, offset in part by a $4.5 million or 20% increase in
interest expense due to a $345.6 million or 25% increase in the Company's
average interest-bearing liabilities net of a 29 basis point decrease in
the weighted average rate paid on these liabilities. Net interest income of
$61.3 million for the nine months ended September 30, 1996 increased $26.3
million or 75% over the comparable period of the prior year. The increase
resulted from the $456.6 million or 41% increase in average interest-earning
assets from period to period combined with a 112 basis point increase in the
weighted average yield earned on those assets, net of the $497.9 million or
41% increase in the average interest-bearing liabilities combined with a 11
basis point increase in the weighted average rate paid on those liabilities.
The increase in interest income during the nine months ended September 30,
1996, as compared to the comparable period in the prior year, reflects
substantial increases in the average balances of the discounted loan portfolio
and the loan portfolio as a result of the Company's increased emphasis on
multi-family residential and commercial real estate loans in recent periods, as
well as an increase in the average balance of loans available for sale as a
result of the Company's recent emphasis on single-family residential loans to
non- conforming borrowers. The Company's emphasis on multi-family residential
and commercial real estate loans also was a significant factor in the increase
in the weighted average yield on the loan
22
portfolio during the nine months ended September 30, 1996, as compared to the
comparable period in the prior year, which was also enhanced during 1996 by
$2.1 million of fees earned in connection with the repayment of hotel loans.
Interest income on the discounted loan portfolio increased by $7.0 million
or 42% in the three months ended September 30, 1996 from the three months ended
September 30, 1995 as a result of a $230.0 million or 50% increase in the
average amount of the discounted loan portfolio offset in part by an 83 basis
point decline in the weighted average yield earned. For the nine months ended
September 30, 1996 as compared to the same period in 1995, interest income on
the discounted loan portfolio increased $22.6 million or 42% due to a $180.5
million or 39% increase in the average amount of the discounted loan portfolio
and a 35 basis point increase in the weighted average yield. Had chargeoffs
been included as a reduction of interest income in 1996, the weighted average
yield on the discounted loan portfolio for the three and nine months ended
September 30, 1996 would have been 12.79% and 14.64%, respectively.
Interest income on the loan portfolio increased by $4.9 million or 122% in
the third quarter of 1996 from the comparable period in 1995 primarily due to an
increase in the average balance of the loan portfolio for the three months ended
September 30, 1996 of $166.5 million or 104% over that of the same period in
1995 combined with an 85 basis point increase in the weighted average yield
earned. For the nine months ended September 30, 1996, interest income on the
loan portfolio increased $18.7 million or 235% over that of the same period in
1995 as a result of $201.8 million or 195% increase in the average amount of the
loan portfolio and a 140 basis point increase in the weighted average yield
earned on the portfolio. The increase in the average balance is primarily a
result of the Company's origination of mortgage loans on hotel, office,
multi-family construction and multi-family residential properties.
As a result of the Company's continued use of certificates of deposit to
fund its asset growth, the average amount of the Company's certificates of
deposit increased from $1.09 billion during the three months ended
September 30, 1995 to $1.46 billion during the three months ended
September 30, 1996. For the nine months ended September 30, 1996, the average
amount of the certificates of deposit increased by $423.7 million over the same
period in 1995.
PROVISIONS FOR LOAN LOSSES. Provisions for loan losses amounted to $4.5
million for the third quarter of 1996, as compared to $-0- for the third quarter
of 1995. The $4.5 million provision is comprised of $0.6 million related to the
loan portfolio and $3.9 million related to discounted loans. Prior to the nine
months ended September 30, 1996, provisions for losses on loans were not
established in connection with the discounted loan portfolio because adjustments
to reduce the carrying value of discounted loans to the lower of amortized cost
or the fair market value of the properties securing the loans discounted at the
effective interest rate were recorded in interest income on discounted loans.
Beginning in 1996 the Company has recorded charge-offs on the discounted loan
portfolio against the allowance for losses on discounted loans. During the nine
months ended September 30, 1996, the Company's provision for loan losses
amounted to $18.8 million, $17.1 million related to the discounted loan
portfolio and $1.7 million related to its loan portfolio. Based on the types of
lending activities currently emphasized by the Company, the Company anticipates
that in the future it will establish provisions for loan losses on each of its
loan portfolios on a quarterly basis.
Although management utilizes its best judgment in providing for possible
loan losses, changing economic and business conditions, fluctuations in local
markets for real estate, future changes in nonperforming asset trends, large
upward movements in market interest rates or other factors could affect the
Company's future provisions for loan losses. In addition, as noted above, the
OTS, as an integral part of its examination process, periodically reviews the
adequacy of the Bank's allowances for
23
losses on loans and discounted loans and such agency may require the Company
to recognize changes to such allowances for losses based on its judgment
about information available to it at the time of examination. For further
discussion and analysis regarding the increase in the provisions, see
"Changes in Financial Condition - Allowances for Losses".
NON-INTEREST INCOME. Non-interest income for the third quarter of 1996
increased by $11.0 million or 270% from that of the third quarter of 1995.
Income on real estate owned, net of carrying costs, increased by $2.4 million
as detailed in the table below. Gains on sales of interest-earning assets,
net, increased by $8.0 million as a result of a $2.5 million gain on the
securitization and sale of sub-prime single-family residential loans held for
sale, a $2.0 million gain on the sale of a subordinated security, a $4.5
million gain on the sale of a commercial discounted loan, a $539,000 loss on
the sale of multi-family loans and a $492,000 adjustment to record delinquent
single-family residential loans to non-conforming borrowers carried as
available for sale to the lower of cost or market. Servicing fees and other
charges increased $516,000 during the third quarter of 1996 as compared to
the same period of 1995 due primarily to a $1.4 million increase in servicing
fees offset in part by a $702,000 valuation adjustment to mortgage servicing
rights as a result of an increase in prepayments of the underlying loans. The
increase in servicing fees primarily due to fees earned from the joint
venture which acquired discounted single-family residential loans from HUD in
April 1996. As of September 30, 1996 Ocwen serviced 10,432 loans for other
investors of which 7,539 were sub-performing or non-performing. In addition,
during October 1996 Ocwen entered into agreements to service approximately
13,800 loans for other investors; the majority of which are sub-performing or
NON-PERFORMING.
Non-interest income for the first nine months of 1996 as compared to the
first nine months of 1995 increased by $13.4 million or 103%. Gains on sales of
interest-earning assets increased by $14.3 million and income on real estate
owned, net of carrying costs, decreased by $1.2 million as detailed in the table
below.
The following table sets forth the results of the Company's investment in
real estate owned, which was primarily related to the discounted loan portfolio,
during the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------
1996 1995 1996 1995
--------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
Gains on sales $ 9,730 $ 4,679 $17,758 $13,816
Provision for loss in fair
value (4,013) (2,733) (13,801) (7,768)
Carrying costs, net of
rental income (222) 1,124 510 (420)
------ ------ -------- --------
Income (loss) on real
estate owned, net $ 5,495 $ 3,070 $ 4,467 $ 5,628
------ ------ -------- --------
------ ------ -------- --------
Included in gains on sales of real estate owned for the three months ended
September 30, 1996 is a gain of $4.4 million on the sale of an apartment complex
for $9.8 million and gains of $1.0 million on the sales of cooperative units.
NON-INTEREST EXPENSE. Non-interest expense increased $11.2 million in the
third quarter of 1996 as compared to the same period of 1995. The SAIF
assessment accounted for $7.1 million of this increase. Compensation and
employee benefits increased by $3.5 million or 72% during this period largely as
a result of a $1.5 million increase in the accrual for profit sharing expense
and an increase in the average number of employees by 79 from 323 in the third
quarter of 1995 to 402 in the third quarter of 1996.
Non-interest expense increased $14.9 million or 46% in the nine months
ended September 30, 1996 as compared to the same period in 1995. The SAIF
assessment accounted for $7.1 million of this increase. Compensation and
employee benefits increased by $7.6 million or 50% during this period primarily
due to a $4.2 million increase in profit-sharing expense and an increase in the
average number of employees by 17 from 351 in 1995 to 368 in 1996.
EQUITY IN EARNINGS OF JOINT VENTURE. Equity in earnings of joint venture
relates to the recently-formed joint venture to acquire discounted single-family
residential loans from HUD in April 1996. The Company's $4.1 million and $5.2
million of earnings from this joint venture during the three and nine months
ended September 30, 1996, respectively, consisted of 50% of the joint venture's
net income during these respective periods plus 50% of the loan servicing fee
received from the joint venture during these periods. (The remainder of the
loan servicing fee received from the joint venture during this period has been
included in servicing fees and other charges. Income of the joint venture is
primarily attributable to interest on discounted loans, which had an annualized
weighted average yield of 11.0% during the period
24
from the date of acquisition by the joint venture to September 30, 1996. See
note 6 to the Interim Consolidated Financial Statements.
INCOME TAX EXPENSE (BENEFIT). Income tax expense (benefit) amounted to
$157,000 and $(858,000) during the three months ended September 30, 1996 and
1995, respectively, and $2.1 million and $(98,000) during the nine months ended
September 30, 1996 and 1995, respectively. The Company's effective tax rate
amounted to 1.5% and 7.6% during the three months and nine months ended
September 30, 1996, respectively. The Company's low effective tax rates were
attributable to tax credits resulting from the Company's investment in
low-income housing tax credit interests, which amounted to $2.1 million and $1.9
million during the three months ended September 30, 1996 and 1995, respectively,
and $6.2 million and $5.7 million during the nine months ended September 30,
1996 and 1995, respectively. Exclusive of such amounts, the Company's effective
tax rate amounted to 33.4% and 29.9% during the three months ended September 30,
1996 and 1995, respectively, and 34.3% and 35.4% during the nine months ended
September 30, 1996 and 1995, respectively.
CHANGES IN FINANCIAL CONDITION
GENERAL. From December 31, 1995 to September 30, 1996 total assets
increased by $227.2 million or 12%. This increase was primarily due to a $154.8
million increase in cash and cash equivalents, a $238.3 million increase in
discounted loans, a $74.0 million increase in the loan portfolio, a $60.9
million investment in joint venture and a $22.9 million increase in investments
in low-income housing tax credit interests, offset by a $102.2 million decrease
in securities available for sale, a $181.5 million decrease in loans available
for sale, and a $51.6 million decrease in real estate owned. Total liabilities
increased by $194.1 million from December 31, 1995 to September 30, 1996. This
increase was primarily due to a $148.7 million increase in deposits and the
issuance of the $125.0 million Notes, offset by the $84.8 million decrease in
securities sold under agreements to repurchase..
SECURITIES AVAILABLE FOR SALE. At September 30, 1996, an aggregate of
$410,000 of net unrealized losses (net of related taxes) on securities
classified as available for
25
sale were included in stockholders' equity, as compared to $1.4 million of
net unrealized losses (net of related taxes) at December 31, 1995. The
Company's securities available for sale were comprised of the following at
the dates indicated.
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
(DOLLARS IN THOUSANDS)
Mortgage-related securities:
Single-family residential:
Privately issued CMOs -
AAA rated $ 80,290 $138,831
Interest only 12,833 11,774
Principal only 6,900 8,218
Subordinates -- 27,310
PAC securities -- 574
REMIC residuals 19,405 472
Futures contracts (575) (1,598)
---------- --------
118,853 185,581
--------- --------
Multi-family residential
and commercial:
Interest only 92,379 109,193
Subordinates 24,174 42,954
Futures contracts (101) (248)
---------- --------
116,452 151,899
---------- --------
Total $235,305 $337,480
------- --------
------- --------
The Company's securities available for sale of $235.3 million at September
30, 1996 decreased by $27.9 million in the third quarter and $102.2 million from
December 31, 1995 due primarily to the sales of short duration collateralized
mortgage obligations ("CMOs") and subordinate securities offset in part by the
acquisition of two REMIC residual securities from the Company's securitizations
of $219.6 million of single-family residential loans as discussed below.
LOANS AVAILABLE FOR SALE. The Company's loans available for sale at
September 30, 1996, which are carried at the lower of cost or fair value,
decreased by $181.5 million or 72.1% from December 31, 1995 and consist
primarily of single-family residential loans to sub-prime borrowers.
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(DOLLARS IN THOUSANDS)
Single-family residential $55,738 $221,927
Multi-family 13,695 28,694
Consumer 815 1,169
-------- --------
$70,248 $251,790
-------- ---------
-------- ---------
During the third quarter of 1996 the Company purchased and originated $98.2
million single-family residential loans to sub-prime borrowers. The Company
also sold $92.3 million of single-family residential loans and $14.9 million of
multi-family residential loans during the third quarter of 1996 for a gain of
$2.5 million and a loss of $539,000, respectively. Of the loans sold during the
quarter, $84.8 million were underwritten and securitized by an unaffiliated
investment banking firm.
26
The following table sets forth the activity in the Company's net loans
available for sale during the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1996 1995 1996 1995
------ ------ ----- -----
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 84,078 $130,024 $251,790 $102,293
Purchases:
Single-family residential 95,266 69,591 226,960 151,231
Multi-family residential -- -- 10,456 10,056
--------- --------- -------- --------
Total loans purchased 95,266 69,591 237,416 161,287
--------- --------- -------- --------
Originations:
Single-family residential 1,434 360 2,154 360
Multi-family residential -- -- -- 23,696
--------- --------- -------- --------
Total loans originated 1,434 360 2,154 24,056
--------- --------- -------- --------
Sales (107,267) (664) (392,440) (83,376)
Lower of cost or market reserve (492) -- (2,282) --
Loans transferred to loan portfolio --- (4,153) (9) (4,353)
Principal repayments, net of
capitalized interest (1,109) (2,647) (23,552) (7,396)
Transfer to real estate owned (1,662) -- (2,829) --
--------- --------- --------- --------
Net (decrease) increase
in loans (13,830) 62,487 (181,542) 90,218
--------- --------- --------- --------
Balance at end of period $ 70,248 $192,511 $ 70,248 $192,511
--------- --------- --------- --------
--------- --------- -------- --------
The following table presents a summary of the Company's non-performing
loans in the loans available for sale portfolio at the dates indicated:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(DOLLARS IN THOUSANDS)
Non-performing loans:
Single-family $15,251 $7,833
Consumer 180 101
------- ------
$15,431 $7,934
------- ------
------- ------
Non-performing loans increased by $7.5 million or 94% from December 31,
1995 to September 30, 1996, of which $7.2 million resulted from the Company's
loans to sub-prime borrowers. The Company's systems and procedures which are
used to resolve discounted loans are applied to delinquent loans to sub-prime
borrowers, and the Company does not expect to sell such delinquent loans in
connection with its performing loan sales.
INVESTMENT SECURITIES. Investment securities, which are held by the
Company for investment purposes, decreased by $9.8 million from December 31,
1995 to September 30, 1996 primarily due to the maturity of $10.0 million of
U.S. Treasury securities. At September 30, 1996 investment securities consisted
entirely of required holdings of FHLB stock.
DISCOUNTED LOAN PORTFOLIO.
27
The following table sets forth the composition of the Company's discounted
loan portfolio by type of loan at the dates indicated.
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
(DOLLARS IN THOUSANDS)
Single-family residential $ 354,926 $376,501
Multi-family residential 387,201 176,259
Commercial real estate 458,117 388,566
Other 2,762 2,203
---------- ---------
Total discounted loans 1,203,006 943,529
Unaccreted discount (283,318) (273,758)
Allowance for loan losses (11,604) --
---------- ---------
Discounted loans, net 908,084 669,771
Investment in LLC (1) 60,885 --
---------- ---------
Total discount loan
portfolio $ 968,969 $669,771
---------- ---------
---------- ---------
(1) The $60.9 million represents the Company's equity interest in the LLC and
does not include that portion of discounted loans held by the LLC which are
funded by third party indebtedness. Had the Company's pro rata interest in
such loans been included, Ocwen's total discounted loan portfolio would
have amounted to $1.18 billion at September 30, 1996. See "Changes in
Financial Condition - Investment in Joint Venture" below.
The following tables set forth the activity in the Company's gross
discounted loan portfolio during the periods indicated.
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1996 1995
---------------------- ---------------------
NO. OF NO. OF
BALANCE LOANS BALANCE LOANS
------- ------- ------- ------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $830,321 3,344 $626,999 3,898
Acquisitions (1) 509,819 2,507 170,006 362
Resolutions and repayments (76,380) (310) (56,467) (269)
Loans transferred to real
estate owned (47,767) (232) (67,394) (233)
Sales (12,987) (3) -- --
---------- ------- --------- -------
Balance at end of period $1,203,006 5,306 $673,144 3,758
----------- ------- --------- -------
----------- ------- --------- -------
28
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
1996 1995
----------------------- --------------------
NO. OF NO. OF
BALANCE LOANS BALANCE LOANS
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Balance at beginning of period$ 943,529 4,543 $785,434 3,894
Acquisitions (1) 671,630 2,651 364,547 1,486
Resolutions and repayments (265,160) (952) (203,356) (644)
Loans transferred to real
estate owned (107,380) (676) (240,379) (794)
Sales (39,613) (260) (33,102) (184)
---------- ------ -------- ------
Balance at end of period $1,203,006 5,306 $673,144 3,758
---------- ------ -------- -----
---------- ------ -------- -----
(1) The purchase price of loans acquired was $408,677 and $122,861 for the
three months ended September 30, 1996 and 1995, respectively, and $529,267
and $247,558 for the nine months ended September 30, 1996 and 1995,
respectively.
Significant discounted loan acquisitions during the third quarter of 1996
included the acquisition in August 1996 of discounted multi-family residential
loans with an unpaid principal balance of $225.0 million from HUD and discounted
commercial real estate loans with an unpaid principal balance of $138.7 million
from another third party. In addition to the foregoing, in September 1996 the
Company and a co-investor acquired 4,591 single-family residential loans with an
aggregate unpaid principal balance of $258.1 million auctioned by HUD. The
Company acquired $112.9 million of such loans and the right to service all of
such loans.
Of the $671.6 million of principal balance of discounted loans purchased
during the nine months ended September 30, 1996, 22% were secured by
single-family residential properties, 44% were secured by multi-family
residential properties and 34% were secured by other commercial properties.
The following table sets forth certain information relating to the payment
status of loans in the Company's discounted loan portfolio at the dates
indicated.
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
(DOLLARS IN THOUSANDS)
LOAN STATUS:
Current $ 645,899 $351,630
Less than 90 days past due 44,406 86,838
Greater than 90 days past due 512,701 385,112
Acquired and servicing not
yet transferred -- 119,949
------- --------
$1,203,006 $943,529
--------- ---------
--------- ---------
For discussion and analysis regarding the allowance for loan losses on
discounted loans, see "Changes in Financial Condition - Allowance for Losses"
below.
29
LOAN PORTFOLIO. The following table sets forth the composition of the
Company's loan portfolio by type of loan at the dates indicated.
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
Single-family residential $76,166 $75,928
Multi-family residential:
Permanent 46,948 41,306
Construction 84,167 7,741
-------- --------
Total multi-family
residential 131,115 49,047
-------- --------
Commercial real estate:
Hotel:
Permanent 133,399 125,791
Construction 26,387 --
Office 101,361 61,262
Land 10,961 24,904
Other 26,853 2,494
-------- --------
Total commercial
real estate 298,961 214,451
-------- ---------
Commercial 1,500 --
Consumer 456 3,223
-------- ---------
Total loans 508,198 342,649
Undisbursed loan funds (129,424) (39,721)
Unaccreted discount (5,723) (5,376)
Allowance for loan losses (3,400) (1,947)
-------- ---------
Loans, net $369,651 $295,605
------- ---------
------- ---------
30
The following table sets forth the activity in the Company's gross loan
portfolio during the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1996 1995 1996 1995
-------- ------ ------ ------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $389,124 $133,696 $342,649 $ 61,194
Originations:
Single-family residential 3,125 8,284 10,681 9,767
Multi-family residential 67,515 8,492 112,764 23,243
Commercial real estate 80,595 21,306 135,511 78,954
Commercial loan 1,500 -- 1,500 --
------- -------- ------- -------
Total loans originated 152,735 38,082 258,456 111,964
------- -------- ------- -------
Purchases:
Single-family residential 278 18,555 278 18,555
Commercial real estate -- -- -- 2,245
Consumer -- 1,818 -- 1,966
------- -------- ------- -------
Total loans purchased 278 20,373 278 22,766
------- -------- ------- -------
Loans transferred from
available for sale -- 4,153 6 4,353
Principal repayments, net of
capitalized interest (33,332) (6,318) (92,026) (10,240)
Transfer to REO (607) -- (1,165) (51)
------- -------- ------- -------
Net increase in loans 119,074 56,290 165,549 128,792
------- -------- ------- -------
Balance at end of period: $508,198 $189,986 $508,198 $189,986
------- -------- ------- -------
------- -------- ------- -------
The following table presents a summary of the Company's non-performing loans
in the loan portfolio and significant ratios at the dates indicated:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
Non-performing loans:
Single-family $2,447 $2,923
Multi-family 174 731
Consumer 54 202
------- ------
$2,675 $3,856
------- ------
------- ------
Significant ratios:
Non-performing loans as a
percentage of:
Loans .71% 1.27%
Total assets .12% .20%
Allowances for loan losses
as a percentage of:
Loans .91% 0.65%
Non-performing
loans 127.10% 50.49%
ALLOWANCES FOR LOSSES. The allowance for estimated loan losses on the
Company's loan portfolio is maintained at a level that management, based upon an
evaluation of known and inherent risks in the portfolio,
31
considers adequate to provide for potential losses. Specific valuation
allowances are established for impaired loans in the amount by which the
carrying value, before allowance for estimated losses, exceeds the fair value
of collateral less costs to dispose. Valuation allowances are also
established for the inherent risks in the loan portfolio which have yet to be
specifically identified. The Company considers a loan to be impaired when,
based upon current information and events, it believes that it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement on a timely basis. Management's
periodic evaluation of the allowance for estimated losses is based upon
analysis of the portfolio, historical loss experience, economic conditions
and trends, collateral values and other relevant factors. Future adjustments
to the allowance may be necessary if economic conditions and trends,
collateral values and other relevant factors differ substantially from the
assumptions used in making the evaluation.
As a result of the historical and expected future growth in the discounted
loan portfolio and associated real estate owned, particularly in the commercial
segment, and as requested by the OTS, the Company has modified its methodology
for valuing its assets held for disposition and resolution beginning in the
first quarter of 1996. This methodology results in a valuation allowance which
supplements the Company's practice of adjusting discounted loans to the lower of
the recorded investment or the net present value of expected cash flow
discounted at the effective yield through direct charges to interest income.
Beginning in 1996 the Bank has recorded charge-offs on the discounted loan
portfolio against the allowance for loan losses. Prior to such date these
amounts were deducted from interest income. The Company established an aggregate
of $17.1 million of provisions for losses on discounted loans during the nine
months ended September 30, 1996 pursuant to this change in methodology.
The following table sets forth the allocation of the Company's allowance for
loan losses at September 30, 1996 and December 31, 1995 by loan category and
property type:
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------------------ --------------------------------------
PERCENT OF PERCENT OF
GROSS LOAN ALLOWANCE TO GROSS LOAN ALLOWANCE TO
ALLOWANCE BALANCE LOAN BALANCE ALLOWANCE BALANCE LOAN BALANCE
--------- --------- ------------ --------- ---------- -------------
(DOLLARS IN THOUSANDS)
Loan portfolio:
Single-family $ 383 $ 74,762 .51% $346 $74,401 .47%
Multi-family 1,245 69,547 1.79% 683 45,818 1.49%
Commercial 1,751 228,648 .77% 875 175,052 .50%
Consumer 21 94 22.34% 43 2,281 1.89%
------- -------- -------- --------
$ 3,400 $373,051 .91% $1,947 $297,552 .65%
------- -------- ------ --------
------- -------- ------ --------
Discounted loans:
Single-family $ 3,872 $279,960 1.38% $ -- $271,246 --%
Multi-family 3,459 299,638 1.15% -- 128,718 --%
Commercial 4,273 340,090 1.26% -- 269,807 --%
------- ------- ------ --------
$11,604 $919,688 1.26% $ -- $669,771 --%
------- ------- ------ --------
------- ------- ------ --------
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
32
The following table summarizes activity in the allowance for loan
losses by portfolio and property type during the nine months ended September
30, 1996.
BALANCE BALANCE
DECEMBER 31, SEPTEMBER 30,
1995 ADDITIONS CHARGE-OFFS RECOVERIES 1996
------------ --------- ----------- ---------- -------------
(DOLLARS IN THOUSANDS)
Loan portfolio:
Single-family $ 346 $ 247 $ (210) $ -- $ 383
Multi-family 683 569 (7) -- 1,245
Commercial 875 876 -- -- 1,751
Consumer 43 7 (29) -- 21
------ ----- ------ ------- -----
$1,947 $ 1,699 $(246) $ -- $3,400
------ ----- ------ ------- -----
------ ----- ------ ------- -----
Discounted loans:
Single-family $ -- $ 7,714 $(3,936) $ 94 $3,872
Multi-family -- 4,070 (611) -- 3,459
Commercial -- 5,356 (1,083) -- 4,273
------ ----- ------ ------- -----
$ -- $17,140 $(5,630) $ 94 $11,604
------ ----- ------ ------- -----
------ ----- ------ ------- -----
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. At September
30, 1996 the Company had $104.2 million of investments in low-income housing
tax credit interests as compared to $81.4 million at December 31, 1995, an
increase of $22.9 million or 28%.
Investments by the Company in low-income housing tax credit interests
made on or after May 18, 1995 in which the Company invests solely as a
limited partner, which amounted to $10.5 million at September 30, 1996, are
accounted for using the equity method in accordance with the consensus of the
Emerging Issues Task Force through issue number 94-1. For the Company's
limited partnership investments made prior to this date, which amounted to
$56.6 million at September 30, 1996, the Company records its receipt of tax
credits and other tax benefits on a level yield basis over the 15-year
obligation period and reports the earned tax credits and tax benefits as a
reduction of income tax expense. Low-income housing tax credit partnerships
in which the Company invests as both a limited and, through a subsidiary,
general partner amounted to $37.1 million at September 30, 1996 and are
presented on a consolidated basis.
The Company's investments in low-income housing tax credit interests
provide tax credits, which can be claimed over a ten-year period on a
straight-line basis once the underlying multi-family residential properties are
placed in service, to reduce the Company's tax payments computed based upon
taxable income to not less than the alternative minimum tax computed for that
year or any year not more than three years before or 15 years after the year the
tax credit is earned.
INVESTMENT IN JOINT VENTURE. GENERAL. On March 22, 1996, the Company was
notified by HUD that the LLC in which the Company and a co-investor each have a
50% interest was the successful bidder to purchase 16,196 single-family
residential loans offered by HUD at an auction (the "HUD Loans"), and on April
10, 1996 the LLC consummated the acquisition of the HUD Loans. Many of the
loans, which had an aggregate unpaid principal balance of $741.2 million, were
not performing in accordance with the terms of the loans or an applicable
forbearance agreement.
33
In connection with the LLC's acquisition of the HUD Loans the Company
entered into an agreement with the LLC to service the HUD Loans in accordance
with its loan servicing and loan default resolution procedures. In return for
such servicing, the Company receives specified fees which are payable on a
monthly basis. The Company did not pay any additional amount to acquire these
servicing rights and, as a result, the acquisition of the right to service the
HUD Loans for the LLC did not result in the Company's recording capitalized
mortgage servicing rights for financial reporting purposes. In addition, all
intercompany transactions between the Company and the LLC are eliminated for
financial reporting purposes to the extent of the Company's ownership in the
LLC.
On October 15, 1996, the LLC completed a $502.6 million securitization of
the majority of the loans purchased from HUD. The Company sold a portion of its
share of the securities totaling approximately $136.1 million and recognized
a gain of approximately $22.0 million which will impact fourth quarter net
income by approximately $11.6 million. The Company continues to service such
loans and is paid a servicing fee.
DESCRIPTION OF THE HUD LOANS. All of the HUD Loans are secured by first
mortgage liens on single-family residential properties. The HUD Loans were
acquired by HUD pursuant to various assignment programs of the FHA. Under
programs of the FHA, a lending institution may assign a FHA-insured loan to HUD
because of an economic hardship on the part of the borrower which precludes the
borrower from making the scheduled principal and interest payment on the loan.
FHA-insured loans also are automatically assigned to HUD upon the 20th
anniversary of the mortgage loan. In most cases, loans assigned to HUD after
this 20-year period are performing under the original terms of the loan. Once a
loan is assigned to HUD, the FHA insurance has been paid and the loan is no
longer insured. As a result, none of the HUD Loans acquired by the LLC are
insured by the FHA.
HUD assistance to borrowers is provided in the form of forbearance
agreements under which the borrower either makes a monthly payment less than or
equal to the original monthly payment or makes a monthly payment more than the
original monthly payment to make up for arrearages. Forbearance agreements are
12 months in duration and the borrower may be granted up to a maximum of three
consecutive 12-month plans. Under the terms of the contract governing the sale
of the HUD Loans, the LLC and the Company, as the servicer of the HUD Loans, are
obligated to comply with the terms of the forbearance agreements, which may be
written or verbal in nature, until the term of the forbearance agreement expires
or there is a default under the forbearance agreement.
The following table sets forth information relating to the payment status
of the HUD Loans as of the date indicated.
SEPTEMBER 30, 1996
------------------------
% OF HUD
AMOUNT LOANS
------ --------
(DOLLARS IN THOUSANDS)
HUD Loans without Forbearance Agreements:
Current $ 70,186 11.2%
Past due less than 90 days 7,626 1.2
Past due 90 days or more 150,955 24.0
--------- -----
228,767 36.4
--------- -----
HUD Loans with Forbearance Agreements:
Current 13,641 2.2
Past due less than 90 days 9,255 1.5
Past due 90 days or more 376,817 59.9
-------- ------
399,713 63.6
-------- ------
Total $628,480 100.0%
-------- ------
-------- ------
34
Discounted loans, net, of the LLC consist of the following (dollars in
thousands):
SEPTEMBER 30, 1996
------------------
Single-family residential $ 628,480
Unaccreted discount (91,843)
Allowance for losses (2,697)
---------
Discounted loans, net $ 533,940
The following table sets forth the activity in the gross discounted loan
portfolio of the LLC during the periods indicated.
THREE MONTHS ENDED APRIL 10, 1996 THROUGH
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
-------------------- -----------------------
NO. OF NO. OF
BALANCE LOANS BALANCE LOANS
------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $660,946 14,209 $ -- --
Acquisitions -- -- 741,176 16,196
Resolutions and repayments (22,993) (454) (41,205) (808)
Loans transferred to real
estate owned (9,473) (151) (9,606) (153)
Sales -- -- (61,885) (1,631)
-------- -------- -------- --------
Balance at end of period $628,480 13,604 $628,480 13,604
-------- -------- -------- --------
-------- -------- -------- --------
In connection with the acquisition of the HUD Loans, the LLC established an
allowance for loan losses based primarily on the Company's evaluation of credit
risk inherent in the HUD loans and the methodology adopted by the Company during
1996 for establishing an allowance for loan losses related to its discounted
loan portfolio. Provisions for loan losses are based on numerous factors,
including the state of national and regional economies, real estate values in
the areas in which the properties which secure the HUD loans are located and the
performance of the HUD loans.
The following table summarizes activity in the allowance for loan losses of
the LLC during the following periods (dollars in thousands):
THREE MONTHS ENDED APRIL 10, 1996 THROUGH
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------ ----------------------
Balance at beginning of period 2,819 --
Additions 8 $2,921
Charge-offs (130) (224)
Recoveries -- --
Balance at end of period 2,697 2,697
------- --------
------- --------
REAL ESTATE OWNED ("REO"). Properties acquired through foreclosure or by
deed-in-lieu thereof are valued at the lower of amortized cost or fair value.
Properties included in the Company's real estate owned are periodically
re-evaluated to determine that they are being carried at the lower of cost or
fair value less estimated costs to sell. Holding and maintenance costs related
to properties are recorded as expenses in the period incurred. Deficiencies
resulting from valuation adjustments to real estate owned subsequent to
acquisition are recognized as a valuation allowance. Subsequent increases
related to the valuation of real estate owned are reflected as a reduction in
the valuation allowance, but not below zero. Increases and decreases in the
valuation allowance are charged or credited to income, respectively. In
addition, beginning in 1996, the Company has also established a $2.9 million
general valuation allowance to supplement its existing policy for valuing real
estate owned, to account for the inherent imprecision in the estimation of fair
value on individual properties.
35
Real estate owned, net of specific market valuation allowances, is held for
sale and was comprised of the following at the dates indicated:
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(DOLLARS IN THOUSANDS)
Discounted loan portfolio:
Single-family residential $ 56,245 $ 75,144
Multi-family 19,430 59,932
Commercial real estate 36,478 31,218
------ --------
Total discounted loan
portfolio 112,153 166,294
Loan portfolio 600 262
Loans available for sale
portfolio 2,215 --
------ --------
$114,968 $166,556
------- ------
------- ------
The following schedule presents the activity in the valuation allowance on
real estate owned for the periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 9,736 $ 3,874 $4,606 $3,937
Provision for loss in fair value 4,013 2,733 13,801 7,768
Charge-offs and sales (2,776) (1,654) (7,434) (6,752)
------- -------- ------ ------
Balance at end of period $10,973 $ 4,953 $10,973 $ 4,953
------- -------- ------- ------
------- -------- ------- ------
The following table sets forth the activity in the real estate owned
portfolio during the periods indicated.
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995
------------------- --------------------
NO. OF NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES
------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $133,604 1,024 $152,489 1,153
Properties acquired through
foreclosure or deed-in-lieu
thereof 35,559 253 42,725 243
Acquired in connection with
acquisitions of discounted loans 674 4 3,454 27
Sales (53,632) (373) (30,574) (250)
Change in allowance (1,237) -- (1,079) --
------ ------ ------ ------
Balance at end of period $114,968 908 $167,015 1,173
------ ------ -------- ------
------ ------ -------- ------
36
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1996 1995
------------------- -------------------
NO. OF NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES
------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
Balance at beginning of
period $166,556 1,070 $96,667 1,018
Properties acquired through
foreclosure or deed-in-lieu
thereof 78,818 716 157,761 827
Acquired in connection with
acquisitions of discounted
loans 2,314 7 16,872 236
Sales (126,353) (885) (103,269) (908)
Change in allowance (6,367) -- (1,016) --
--------- ------- -------- ------
Balance at end of period $114,968 908 $167,015 1,173
--------- ------- -------- -------
--------- ------- -------- -------
The following table sets forth the amount of time that the Company had held
its real estate owned at the dates indicated.
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
One to two months $ 28,719 $ 25,398
Three to four months 12,218 22,671
Five to six months 11,638 25,742
Seven to twelve months 17,107 76,817
Over twelve months 45,286 15,928
------- --------
$114,968 $166,556
------- --------
------- --------
DEFERRED TAX ASSET. At September 30, 1996 the deferred tax asset, net
of deferred tax liabilities, amounted to $18.2 million, a decrease of $4.1
million from the $22.3 million net deferred tax asset at December 31, 1995.
Beginning in the second quarter of 1996, the Company reclassified its
deferred tax assets associated with its tax residuals as deferred tax assets.
Previously such amounts were included as mortgage-related securities. The
statement of financial condition at December 31, 1995 has also been restated
to reflect this change. At September 30, 1996, the gross deferred tax asset
amounted to $32.0 million and consisted primarily of $19.8 million related to
tax residuals and deferred income thereon, $2.1 million mark-to-market
adjustments and reserves related to real estate owned, and $2.1 million of
deferred interest expense on the discounted loan portfolio, $1.9 million of
net deferred state taxes, $1.5 million mark-to-market on securities available
for sale, and the gross deferred tax liability amounted to $13.8 million and
consisted primarily of $4.9 million of bad debt reserves established for tax
purposes in excess of book reserves and $6.7 million of deferred interest
income on the discounted loan portfolio. At December 31, 1995, the gross
deferred tax asset amounted to $30.6 million, of which $26.3 million related
to tax residuals and deferred income thereon, and the gross deferred
liability amounted to $9.6 million and consisted primarily of $6.8 million of
bad debt reserves established for tax purposes in excess of book reserves and
$2.4 million of deferred interest income on the discounted loan portfolio.
As a result of the Company's earnings history, current tax position and
taxable income projections, management believes that the Company will generate
sufficient taxable income in future years to realize the deferred tax asset
which existed at September 30, 1996. In evaluating the expectation of
sufficient future taxable income, management considered future reversals of
temporary differences and available tax planning strategies that could be
implemented, if required. A valuation allowance was not required at September
30, 1996 because it was management's assessment that, based on available
information, it is more likely than not that all of the deferred tax asset will
be realized. A valuation allowance will be established in the future to the
37
extent of a change in management's assessment of the amount of the net deferred
tax asset that is expected to be realized.
DEPOSITS. Deposits increased by $148.7 million or 10% from December 31,
1995 to September 30, 1996. Of the Company's $1.65 billion of deposits at
September 30, 1996, $1.10 billion or 67% were certificates of deposit originated
through investment banking firms while $421.5 million or 26% were certificates
of deposit originated internally on a direct and co-broker basis to
institutional investors. At September 30, 1996 the Company had $132.0 million
of certificates of deposit in amounts of $100,000 or more, including $33.2
million of deposits of states and political subdivisions in the U.S. which are
secured or collateralized as required under state law. For additional
information, see "-Liquidity, Commitments and Off-Balance Sheet Risks" below.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Although securities sold
under agreements to repurchase averaged $15.9 million during the nine months
ended September 30, 1996 and had a maximum month-end balance of $84.3 million
during the nine months ended September 30, 1996, the Company had no reverse
repurchase agreements outstanding at September 30, 1996.
NOTES AND SUBORDINATED DEBENTURES. On September 25, 1996, Ocwen completed
the public offering of $125.0 million of 11.875% Notes due 2003 at 100% with
interest payable semi-annually on April 1 and October 1 of each year, commencing
April 1, 1997. Proceeds from the offering of the Notes amounted to
approximately $120,156 (net of underwriting discount). On September 30, 1996,
$50.0 million of the proceeds were contributed to the Bank to support future
growth. The remainder of the proceeds retained by the Company are available for
general corporate purposes. For additional information, see Note 8 to the
Interim Consolidated Financial Statements.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $33.1 million or
24% from December 31, 1995 to September 30, 1996. The increase in stockholders'
equity during this period was primarily attributable to net income of $25.1
million for the first nine months of 1996, a decrease of $1.0 million in the
unrealized loss on securities available for sale, a $13.0 increase in common
stock and additional paid-in capital due to the issuance of 2,928,200 shares of
common stock in connection with the exercise of vested stock options by certain
of the Company's and Bank's current and former officers and directors offset
by the issuance of $5.8 million of loans to certain of these officers and
directors to fund their exercise of such options. See Note 9 and the
Consolidated Statements of Changes in Stockholders' Equity in the Interim
Consolidated Financial Statements.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude
of the repricing of assets and liabilities. It is the objective of the Company
to attempt to control risks associated with interest rate movements. In
general, management's strategy is to match asset and liability balances within
maturity categories to limit the Company's exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time. The Company's asset and liability management strategy is formulated and
monitored by the Asset/Liability Committee, which is composed of directors and
officers of the Company and the Bank, in accordance with policies approved by
the Board of Directors of the Bank. The Asset/Liability Committee meets
regularly to review, among other things, the sensitivity of the Company's assets
and liabilities to interest rate changes, the book and market values of assets
and liabilities, unrealized gains and losses, including those attributable to
hedging transactions, purchase and sale activity, and maturities of investments
and borrowings. The Asset/Liability Committee also approves and establishes
pricing and funding decisions with respect to overall asset and liability
composition.
The Asset/Liability Committee is authorized to utilize a wide variety of
off-balance sheet financial techniques to assist it in the management of
interest rate risk. These techniques include interest rate exchange
38
agreements, pursuant to which the parties exchange the difference between
fixed-rate and floating-rate interest payments on a specified principal
amount (referred to as the "notional amount") for a specified period without
the exchange of the underlying principal amount. Interest rate exchange
agreements are utilized by the Company to protect against the decrease in
value of a fixed-rate asset or the increase in borrowing cost from a
short-term, fixed-rate liability, such as reverse repurchase agreements, in
an increasing interest-rate environment. Although the Company had no interest
rate exchange agreements outstanding during 1996, interest rate exchange
agreements had the effect of increasing the Company's net interest income by
$31,000 and $334,000 during the three and nine months ended September 30,
1995.
In recent periods, the Company also entered into interest rate futures
contracts, which are commitments to either purchase or sell designated financial
instruments at a future date for a specified price and may be settled in cash or
through delivery. Eurodollar futures contracts have been sold by the Company to
hedge the repricing or maturity risk of certain adjustable-rate mortgage-backed
securities and short duration mortgage-related securities, and U.S. Treasury
futures contracts have been sold by the Company to offset declines in the market
value of its fixed-rate multi-family residential loans and certain fixed-rate
mortgage-backed and related securities available for sale in the event of an
increasing interest rate environment. At September 30, 1996, the Company had
entered into Eurodollar futures (short) contracts with an aggregate notional
amount of $492.0 million and U.S. Treasury futures (short) contracts with an
aggregate notional amount of $385.4 million. Futures contracts had the effect
of decreasing the Company's net interest income by $159,000 and $540,000 during
the three and nine months ended September 30, 1996, respectively, and increasing
the Company's net interest income by $155,000 and $162,000 during the three and
nine months ended September 30, 1995.
The Asset/Liability Committee's methods for evaluating interest rate risk
include an analysis of the Company's interest rate sensitivity "gap", which is
defined as the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
the amount of interest-rate sensitive liabilities. A gap is considered negative
when the amount of interest-rate sensitive liabilities exceeds interest-rate
sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a positive gap would
tend to result in an increase in net interest income. During a period of
falling interest rates, a negative gap would tend to result in an increase in
net interest income, while a positive gap would tend to affect net interest
income adversely. Because different types of assets and liabilities with the
same or similar maturities may react differently to changes in overall market
rates or conditions, changes in interest rates may affect net interest income
positively or negatively even if an institution were perfectly matched in each
maturity category.
The following table sets forth the estimated maturity or repricing of the
Company's interest-earning assets and interest-bearing liabilities at September
30, 1996. The amounts of assets and liabilities shown within a particular
period were determined in accordance with the contractual terms of the assets
and liabilities, except (i) adjustable-rate loans, performing discounted loans,
securities and FHLB advances are included in the period in which they are first
scheduled to adjust and not in the period in which they mature, (ii) fixed-rate
mortgage-related securities reflect estimated prepayments, which were estimated
based on analyses of broker estimates, the results of a prepayment model
utilized by the Company and empirical data, (iii) non-performing discounted
loans reflect the estimated timing of resolutions which result in repayment to
the Company, (iv) fixed-rate loans reflect scheduled contractual amortization,
with no estimated prepayments, (v) NOW and money market checking deposits and
savings deposits, which do not have contractual maturities, reflect estimated
levels of attrition, which are based on detailed studies of each such category
of deposit by the Company, and (vi) escrow deposits and other non-interest
bearing checking accounts, which amounted to $27.8 million at September 30,
1996, are excluded. Management believes that these assumptions approximate
actual experience and considers them reasonable; however, the interest rate
sensitivity of the Company's assets and liabilities in the table could vary
substantially if different assumptions were used or actual experience differs
from the historical experience on which the assumptions are based.
39
SEPTEMBER 30, 1996
------------------------------------------------------------------------------------
WITHIN MORE THAN 1 3 YEARS AND
3 MONTHS 4 TO 12 MONTHS YEAR TO 3 YEARS OVER TOTAL
-------- -------------- --------------- ---- -----
(DOLLARS IN THOUSANDS)
Rate-Sensitive Assets:
Interest-earning cash, federal funds sold
and repurchase agreements $202,173 $ -- $ -- $ -- $ 202,173
Securities available for sale 15,780 45,329 52,720 121,476 235,305
Loans available for sale(1) 4,750 34,510 4,958 26,030 70,248
Investment securities, net -- -- -- 8,902 8,902
Loan portfolio, net(1) 133,689 80,191 53,317 102,454 369,651
Discounted loan portfolio, net 268,305 261,548 92,908 285,323 908,084
------- ------- ------ ------- -------
Total rate-sensitive assets 624,697 421,578 203,903 544,185 1,794,363
------- ------- ------- ------- ---------
Rate-Sensitive Liabilities:
NOW and money market checking
deposits 29,329 3,369 3,818 19,132 55,648
Savings deposits 379 431 474 1,894 3,178
Certificates of deposit 379,282 444,773 329,149 413,393 1,563,597
------- ------- ------- ------- ---------
Total interest-bearing deposits 405,990 448,573 333,441 434,419 1,622,423
FHLB advances 70,000 399 -- -- 70,399
Notes, debentures and other -- -- -- 100,000 100,000
Other interest-bearing obligations 7,365 -- -- 133,304 140,669
------- ------- ------- ------- ---------
Total rate-sensitive liabilities 483,355 448,972 333,441 667,723 1,933,491
------- ------- ------- ------- ---------
Interest rate sensitivity gap before
off-balance sheet financial instruments 141,342 (27,394) (129,538) (123,538) (139,128)
Off-Balance Sheet Financial
Instruments:
Futures contracts 800,791 (187,055) (181,788) (431,948) --
-------- --------- --------- --------- ---------
Interest rate sensitivity gap $942,133 $(214,449) $(311,326) $(555,486) $(139,128)
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Cumulative interest rate sensitivity gap $942,133 $ 727,684 $ 416,358 $(139,128)
-------- --------- --------- ---------
-------- --------- --------- ---------
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets 52.51% 40.55% 23.20% (7.75)%
----- ----- ----- ------
----- ----- ----- ------
(1) Balances have not been reduced for non-performing loans.
The Company's rate-sensitive liabilities exceeded its rate-sensitive assets
at September 30, 1996 primarily because rate-sensitive assets do not include
$104.2 million of investments in low-income housing tax credit interests, a
$60.9 million investment in joint venture and $115.0 million of real estate
owned.
Exclusive of futures contracts, the Company's cumulative one-year interest
rate sensitivity gap was $113.9 million or 6% of total rate-sensitive assets
at September 30, 1996. The Company's futures contracts generally are intended
to maintain the values of certain assets, primarily securities available for
sale, in increasing interest rate environments. Also included in off-balance
sheet financial instruments is $162.5 million of futures contracts related to
the Company's investment in a joint venture formed to acquire discounted loans.
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As
a result, and as required by OTS regulations, the Asset/Liability Committee also
regularly reviews interest rate risk by forecasting the impact of alternative
interest rate environments on net interest income and market value of portfolio
equity ("MVPE"), which is defined as the net present value of an institution's
existing assets, liabilities and off-balance sheet instruments, and evaluating
such impacts against the maximum potential changes in net interest income and
MVPE that is authorized by the Board of Directors of the Bank. At September 30,
1996, management estimates that the estimated percentage change in the Company's
net interest income over the ensuing four quarter period as a result of a 200
basis point increase or decrease in interest rates would be an approximately
10.6% increase or decrease, respectively. In addition, at
40
September 30, 1996, management estimates that the estimated percentage change
in the Company's MVPE over the ensuing four quarter period as a result of a
200 basis point increase or decrease in interest rates would be an
approximate 2.5% decrease and 0.7% increase, respectively. The maximum
potential changes in MVPE and net interest income authorized by the Board of
Directors of the Company in the event of a 200 basis point change in interest
rates is 30% and, thus, the Company's asset and liability position currently
is in compliance with the policy adopted by its Board of Directors.
Management of the Company believes that the assumptions used by it to
evaluate the vulnerability of the Company's operations to changes in interest
rates approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities and the
estimated effects of changes in interest rates on the Company's net interest
income and MVPE could vary substantially if different assumptions were used or
actual experience differs from the historical experience on which they are
based.
LIQUIDITY, COMMITMENTS AND OFF-BALANCE SHEET RISKS
Liquidity is a measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to fund deposit withdrawals, repay
borrowings, fund investment, loan acquisition and lending activities and for
other general business purposes. The primary sources of funds for liquidity
consist of deposits, FHLB advances, reverse repurchase agreements and maturities
and principal payments on loans and securities and proceeds from sales thereof.
Sources of liquidity include certificates of deposit obtained from
wholesale and retail sources. At September 30, 1996 the Company had $1.56
billion of certificates of deposit, including $1.10 billion of brokered
certificates of deposit. At the same date scheduled maturities of certificates
of deposit during the 12 months ending September 30, 1997 and 1998 and
thereafter amounted to $815.1 million, $332.9 million and $415.6 million,
respectively. Brokered and other wholesale deposits generally are more
responsive to changes in interest rates than core deposits and, thus, are more
likely to be withdrawn from the Company upon maturity as changes in interest
rates and other factors are perceived by investors to make other investments
more attractive. Management of the Company believes that it can adjust the rates
paid on certificates of deposit to retain deposits in changing interest rate
environments, however, and that brokered and other wholesale deposits can be
both a relatively cost-effective and stable source of funds. There can be no
assurance that this will continue to be the case in the future. The Company's
non-interest-bearing checking accounts, escrow deposits, NOW and money market
checking accounts and savings accounts amounted to $86.7 million or 5% of the
Company's total deposits at September 30, 1996, as compared to $69.1 million
or 5% of total deposits at December 31, 1995.
Sources of borrowings include FHLB advances, which are required to be
secured by single-family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. At September 30,
1996, the Company had $70.4 million of FHLB advances outstanding, was eligible
to borrow up to an aggregate of $660.2 million from the FHLB of New York to the
extent assets are available to be pledged as security pursuant to the policies
and programs in effect at that bank and had $79.2 million of single-family
residential loans, $10.5 million of multi-family residential loans and $33.6
million of loans secured by hotel properties which could be pledged as security
for such advances. At the same date, the Company had contractual relationships
with 12 brokerage firms and the FHLB of New York pursuant to which it could
obtain funds from reverse repurchase agreements and had $189.2 million of
unencumbered mortgage-related securities which could be used to secure such
borrowings.
The Company's operating activities provided cash flows of $188.5 million
and used cash flows of $124.1 million during the nine months ended September 30,
1996 and 1995, respectively. During the foregoing periods cash resources were
provided primarily by net income and proceeds from sales of loans available for
sale, and cash resources were used primarily to purchase and originate loans
available for sale.
41
The Company's investing activities used cash flows totaling $228.2 million
and $151.3 million during the nine months ended September 30, 1996 and 1995,
respectively. During the foregoing periods, cash flows from investing
activities were provided primarily by principal payments on discounted loans and
loans held for investment, proceeds from sales of securities available for sale
and real estate owned, and cash flows from investing activities were primarily
utilized to purchase and originate discounted loans and loans held for
investment and purchase securities available for sale.
The Company's financing activities provided $194.6 million and $305.0
million during the nine months ended September 30, 1996 and 1995, respectively.
Cash flows from financing activities primarily relate to changes in the
Company's deposits, issuance of the Notes in 1996 by the Company and issuance
of the Debentures by the Bank in 1995.
On a parent-only basis, the principal source of funds of the Company has
been and will continue to be the receipt of dividends and other distributions
from the Bank. The Bank is permitted, subject to certain limitations under
federal regulations and restrictions contained in the indenture related the
Company's issuance of the Debentures, to pay dividends to the Company. At
September 30, 1996, the Bank could have distributed $48.1 million to the
Company under the terms of the indenture, with 30 day's notice to the OTS.
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 5% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less than 1%. Monetary penalties may be
imposed for failure to meet applicable liquidity requirements. The Bank's
liquidity, as measured for regulatory purposes, averaged 9.63% during the nine
months ended September 30, 1996, respectively, and amounted to 8.38% at
September 30, 1996.
At September 30, 1996, the Company had $218.0 million of unfunded
commitments related to purchases and originations of loans. Management of the
Company believes that the Company has adequate resources to fund all of its
commitments to the extent required and that substantially all of such
commitments will be funded during 1996. For additional information relating to
commitments and contingencies at September 30, 1996, see Note 11 to the Interim
Consolidated Financial Statements.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured savings associations such as the Bank are required to
maintain minimum levels of regulatory capital. These standards generally must
be as stringent as the comparable capital requirements imposed on national
banks. The OTS also is authorized to impose capital requirements in excess of
these standards on individual associations on a case-by-case basis.
The following table sets forth the regulatory capital ratios of the Bank at
September 30, 1996.
REQUIRED ACTUAL EXCESS
--------------------- -------------------- ---------------------
PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT
---------- ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
Tangible capital 1.50% $34,620 8.65% $199,676 7.15% $165,056
Core (leverage)
capital 3.00% 69,239 8.65% 199,676 5.65% 130,437
Risk-based
capital (1) 8.00% 185,027 13.64% 315,431 5.64% 130,404
(1) Reflects the inclusion of $100 million principal amount of the
Debentures and $15.8 million of general loan valuation allowances in
supplementary capital.
42
For a reconciliation of the Bank's regulatory capital and its
stockholders' equity under generally accepted accounting principles at
September 30, 1996, see Note 10 to the Interim Consolidated Financial
Statements.
43
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various pending legal proceedings.
Management, after reviewing these claims with legal counsel, is of the
opinion that the resolution of these claims will not
have a material effect on the consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on July 12, 1996,
the following individuals were elected to the Board of Directors:
Votes
Votes for Withheld
----------- --------
William C. Erbey 19,637,070 0
W. C. Martin 19,637,070 0
Howard H. Simon 19,637,070 0
Barry N. Wish 19,637,070 0
The following proposals were approved at the Company's Annual Meeting:
Affirmative Negative
Votes Votes Abstentions
----------- -------- -----------
1. Amendment of the Company's Articles
of Incorporation to (i) increase
the number of authorized shares of
Common Stock to 200,000,000,
(ii) increase the number of
authorized shares of Preferred
Stock to 20,000,000 and (iii)
decrease the par value of the
authorized Preferred Stock to $0.01
per share 19,637,070 0 0
2. Approve the Company's 1991
Non-Qualified Stock Option Plan 19,632,670 4,400 0
3. Approve the Company's 1996 Stock
Plan for Directors 19,632,670 4,400 0
4. Ratify the appointment of Price
Waterhouse LLP as independent
auditors for the fiscal year ending
December 31, 1996 19,637,070 0 0
ITEM 5. OTHER INFORMATION
On July 30, 1996, the Company's Board of Directors declared a
ten-for-one split of the Common Stock in the form of a stock
dividend which was paid to holders of record on July 31, 1996.
44
PART II - OTHER INFORMATION (CONT'D)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 Ocwen Financial Corporation 1996 Stock Plan for Directors
(replaces copy of Plan previously filed as Exhibit 10.3 to
the Company's Registration Statement on Form S-1, File
No. 333-05153).
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ending
September 30, 1996.
45
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Ocwen Financial Corporation
By: /s/ Christine A. Reich
---------------------------
Christine A. Reich,
Managing Director and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Date: November 13, 1996
46
EXHIBIT 10
OCWEN FINANCIAL CORPORATION
1996 STOCK PLAN FOR DIRECTORS
SECTION 1. INTRODUCTION
1.1 ESTABLISHMENT. Ocwen Financial Corporation, a Florida
corporation (the "Company"), has established the 1996 Stock Plan for
Directors (the "Plan") for all Directors of the Company, including Directors
who are officers or employees of the Company or its subsidiaries. The Plan
provides, among other things, for the payment of the Annual Director's Fee in
the form of Restricted Stock and for the payment of the Annual Committee
Chair's Fee in the form of Restricted Stock. Unless otherwise provided for
herein, the term Company includes Ocwen Financial Corporation and its
subsidiaries.
1.2 PURPOSES. The purposes of the Plan are to encourage
Directors to own shares of the Company's stock and thereby to align their
interests more closely with the interests of the other shareholders of the
Company, to encourage the highest level of Director performance and to
provide a financial incentive that will help attract and retain the most
qualified Directors.
SECTION 2. DEFINITIONS
2.1 DEFINITIONS. The following terms shall have the
meanings set forth below:
(a) "ANNUAL COMMITTEE CHAIR'S FEE" means the annual amount
established from time to time by the Board as the annual fee to be paid to
Directors for their services as chairs of standing committees of the Board.
(b) "ANNUAL DIRECTOR'S FEE" means the annual amount (which
may be prorated for a Director serving less than a full one year term, as in
the case of a Director who will be retiring or not standing for reelection at
the annual meeting of shareholders or a Director joining the Board after the
annual meeting of shareholders) established from time to time by the Board as
the annual fee to be paid to Directors for their services as directors.
(c) "ATTENDANCE PERCENTAGE" for a Director with respect to a
particular Grant Year means the percentage of the aggregate of all meetings
of the Board and committees of which the Director was a member held during
the Grant Year (or, for Directors who are elected after the beginning of the
Grant Year, Directors who retire at the next annual meeting of shareholders,
Directors who do not stand for reelection at the next annual meeting of
shareholders or Directors who die during the Grant Year, the aggregate of all
such meetings held for the portion of the Grant Year during which the
Director served as a director), which were attended by the Director. In the
event that a Director ceases to be a director at any time during the Grant
Year for any reason other than retirement at the annual meeting of
shareholders, not standing for reelection at the annual meeting of
shareholders, or death, all meetings held during the Grant Year of the
1
Board and committees of which he was a member at the time of termination of
service will continue to be included as meetings when calculating the
Attendance Percentage.
(d) "BOARD" means the Board of Directors of the Company.
(e) "CAUSE" means any act of (a) fraud or intentional
misrepresentation or (b) embezzlement, misappropriation or conversion of
assets or opportunities of the Company or any of its direct or indirect
majority-owned subsidiaries.
(f) "CHANGE IN CONTROL" shall have the meaning assigned to it
in Section 6.2 hereof.
(g) "COMMITTEE" means the Compensation Committee of the Board
or any successor established by the Board.
(h) "DIRECTOR" means a member of the Board, including a
member who is an officer or an employee of the Company.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended from time to time.
(j) "EXISTING PRINCIPAL STOCKHOLDERS" means, individually or
collectively, William C. Erbey, Barry N. Wish and Harold D. Price and their
respective estates, spouses, heirs, ancestors, lineal descendants, legatees
and legal representatives of any of the foregoing, the trustee of any bona
fide trust of which one or more of the foregoing are the trustees or the
majority beneficiaries, and any entity of which any of the foregoing,
individually or collectively, beneficially owns more than fifty percent (50%)
of the voting securities thereof.
(k) "FAIR MARKET VALUE" means the mean of the high and low
prices of the Stock as reported by the Nasdaq National Market (or such
successor reporting system as shall be selected by the Committee) on the
relevant date or, if no sale of the Stock shall have been reported for that
day, the average of such prices on the next preceding day and the next
following day for which there were reported sales.
(l) "GRANT DATE" means the date of grant pursuant to
Section 5.1.
(m) "GRANT YEAR" means, as to a particular award, the 12 full
calendar months following the date on which the award was granted.
(n) "INTERNAL REVENUE CODE" means the Internal Revenue Code
of 1986, as amended from time to time.
(o) "RESTRICTED STOCK" means shares of Stock awarded to a
Director pursuant to Section 5 and subject to certain restrictions in
accordance with the Plan.
(p) "RESTRICTED STOCK AWARD" means an award of shares of
Restricted Stock granted to a Director pursuant to Section 5 of the Plan.
2
(q) "STOCK" means the common stock, $0.01 par value, of the
Company.
2.2 GENDER AND NUMBER. Except when otherwise indicated by
the context, the masculine gender shall also include the feminine gender, and
the definition of any term herein in the singular shall also include the
plural.
SECTION 3. PLAN ADMINISTRATION
(a) The Plan shall be administered by the Committee. The
members of the Committee shall be members of the Board appointed by the
Board, and any vacancy on the Committee shall be filled by the Board.
The Committee shall keep minutes of its meetings and of any
action taken by it without a meeting. A majority of the Committee shall
constitute a quorum, and the acts of a majority of the members present at any
meeting at which a quorum is present shall be the acts of the Committee. Any
action that may be taken at a meeting of the Committee may be taken without a
meeting if a consent or consents in writing setting forth the action so taken
shall be signed by all of the members of the Committee. The Committee shall
make appropriate reports to the Board concerning the operations of the Plan.
(b) Subject to the limitations of the Plan, the Committee
shall have the sole and complete authority: (i) to impose such limitations,
restrictions and conditions upon such awards as it shall deem appropriate;
(ii) to interpret the Plan and to adopt, amend and rescind administrative
guidelines and other rules and regulations relating to the Plan; and (iii) to
make all other determinations and to take all other actions necessary or
advisable for the implementation and administration of the Plan.
Notwithstanding the foregoing, the Committee shall have no authority,
discretion or power to select the Directors who will receive awards pursuant
to the Plan, determine the awards to be granted pursuant to the Plan, the
number of shares of Stock to be issued thereunder or the price thereof or the
time at which such awards are to be granted, establish the duration and
nature of awards or alter any other terms or conditions specified in the
Plan, except in the sense of administering the Plan subject to the provisions
of the Plan. The Committee's determinations on matters within its authority
shall be conclusive and binding upon the Company and all other persons. The
Plan shall be interpreted and implemented in a manner so that Directors will
not fail, by reason of the Plan or its implementation, to be "disinterested
persons" within the meaning of Rule 16b-3 under Section 16 of the Exchange
Act, as such rule may be amended, or any successor rule.
(c) Notwithstanding anything to the contrary contained in the
Plan, the Plan also may be administered by the Board until such time as the
Stock is registered under the Exchange Act, following which time the Plan
also may be administered by the Board only to the extent permitted by Rule
16b-3 of the Exchange Act, as such rule may be amended, or any successor
rule. In the event of such administration by the Board, all references to
the Committee in the Plan shall be deemed to refer to the Board.
3
(d) The Company shall be the sponsor of the Plan. All
expenses associated with the Plan shall be borne by the Company.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. 25,000 shares of Stock are authorized
for issuance under the Plan in accordance with the provisions of the Plan,
subject to adjustment and substitution as set forth in this Section 4. This
authorization may be increased from time to time by approval of the Board
and, if such approval is required, by the shareholders of the Company. The
Company shall at all times during the term of the Plan retain as authorized
and unissued Stock at least the number of shares from time to time required
under the provisions of the Plan, or otherwise assure itself of its ability
to perform its obligations hereunder.
4.2 OTHER SHARES OF STOCK. Any shares of Stock that are
subject to a Restricted Stock Award and which are forfeited, and any shares
of Stock that for any other reason are not issued to a Director, shall
automatically become available again for use under the Plan if Rule 16b-3
under the Exchange Act, as such rule may be amended, or any successor rule,
and interpretations thereof by the Securities and Exchange Commission or its
staff permit such share replenishment.
4.3 ADJUSTMENTS UPON CHANGES IN STOCK. If after adoption of
the Plan by the Board there shall be any change in the Stock of the Company,
through merger, consolidation, division, share exchange, combination,
reorganization, recapitalization, stock dividend, stock split, spinoff, split
up, dividend in kind or other change in the corporate structure or
distribution to the shareholders, appropriate adjustments may be made by the
Committee (or, if the Company is not the surviving corporation in any such
transaction, the board of directors of the surviving corporation) in the
aggregate number and kind of shares subject to the Plan, and the number and
kind of shares which may be issued under the Plan. Appropriate adjustments
may also be made by the Committee in the terms of any awards under the Plan
to reflect such changes and to modify any other terms of outstanding awards
on an equitable basis as the Committee in its discretion determines.
SECTION 5. RESTRICTED STOCK AWARDS.
5.1 GRANTS OF RESTRICTED STOCK AWARDS.
(a) Each Director will receive the value of his Annual
Director's Fee in the form of a Restricted Stock Award. Such Restricted
Stock shall be granted automatically each year immediately following the
annual meeting of shareholders and the organization meeting of the Board
related to such annual meeting of shareholders, beginning with the annual
meeting of shareholders and related organization meeting held in 1996, to
each Director who is elected to the Board. If a person is elected to the
Board at any time other than the annual meeting of shareholders, whether by
action of the shareholders of the Company or the Board, such person upon
becoming a Director shall be granted automatically the value of his or her
Annual Director's Fee for that period remaining prior to the next annual
meeting of shareholders in the form of a Restricted Stock Award immediately
following such person's election to the Board.
4
(b) Each Director who is the chair of a standing committee of
the Board will receive the value of his Annual Committee Chair's Fee in the
form of a Restricted Stock Award. Such Restricted Stock shall be granted
automatically each year immediately following the annual meeting of
shareholders and the organization meeting of the Board related to such annual
meeting of shareholders, beginning with the annual meeting of shareholders
and related organization meeting held in 1996, to each Director who is
elected at such organization meeting to serve as the chair of a standing
committee of the Board.
(c) The total number of shares of Stock representing any such
Restricted Stock Award will be the number of shares determined by dividing
the amount of the Annual Director's Fee or the Annual Committee Chair's Fee,
as the case may be, to be paid in the form of a Restricted Stock Award by the
Fair Market Value of a share of Stock on the Grant Date, rounded up to the
nearest whole share.
(d) Notwithstanding anything to the contrary contained in the
Plan, (i) each Director elected at the annual meeting of shareholders held in
1996 shall receive the value of his Annual Director's Fee and each Director
who is elected as the chair of a standing committee of the Board at the
related organization meeting held in 1996 shall receive the value of his
Annual Committee Chair's Fee in the form of a Restricted Stock Award granted
automatically on the date on which the Stock is registered under the Exchange
Act, and (ii) the Grant Date for each Restricted Stock Award granted under
Section 5.1(d)(i) shall for all purposes under the Plan be deemed to be the
date of the annual meeting of shareholders held in 1996.
(e) Restricted Stock granted pursuant to Section 5.1 shall be
subject to adjustment as provided in Section 4.3.
5.2 TERMS AND CONDITIONS OF RESTRICTED STOCK. Restricted
Stock granted under the Plan shall be subject to the following terms and
conditions:
(a) RESTRICTION PERIOD. Restricted Stock will be subject to
a Restriction Period ("Restriction Period") beginning on the Grant Date and
continuing through last day of the Grant Year.
(b) VESTING.
(1) Except as set forth in Section 5.2(b)(3), a Director's
right to ownership in shares of Restricted Stock granted to a Director
pursuant to Section 5.1(a) will vest on the first day of the month
immediately following the expiration of the Restriction Period for such
shares (the "Restricted Stock Vesting Date") if the Director has an
Attendance Percentage of at least seventy-five percent (75%) for the Grant
Year. In the event that a Director has an Attendance Percentage of less than
seventy-five percent (75%) for the Grant Year, a number of shares of
Restricted Stock equal to the Director's Attendance Percentage for the Grant
Year multiplied by the total number of shares of Restricted Stock granted
pursuant to Section 5.1(a) during the Grant Year (rounded up to the nearest
whole share) will vest on the Restricted Stock Vesting Date and
5
the remaining shares of Restricted Stock granted pursuant to Section 5.1(a)
during the Grant Year will be forfeited as of the Restricted Stock Vesting
Date.
(2) Except as set forth in Section 5.2(b)(3), a Director's
right to ownership in shares of Restricted Stock granted to a committee chair
pursuant to Section 5.1(b) will vest on the Restricted Stock Vesting Date.
(3) Notwithstanding anything to the contrary herein, (i) in
the event that a director is removed from office for Cause prior to the
Restricted Stock Vesting Date, all of such Director's shares of Restricted
Stock that have not yet vested will be forfeited immediately as of the time
the grantee is so removed from office and the Company will have the right to
complete the blank stock power described below with respect to such shares,
and (ii) upon the occurrence of a Change in Control, all shares of Restricted
Stock that have not yet vested will immediately vest.
(c) ISSUANCE OF SHARES. On the Grant Date, a certificate
representing the shares of Restricted Stock will be registered in the
Director's name and deposited by the Director, together with a stock power
endorsed in blank, with the Company. Subject to the transfer restrictions
set forth in Section 5.2(d) and to the last sentence of this Section 5.2(c),
the Director as owner of shares of Restricted Stock will have the rights of
the holder of such Restricted Stock during the Restriction Period. Following
expiration of the Restriction Period, on the Restricted Stock Vesting Date,
vested shares of Restricted Stock will be redelivered by the Company to the
Director and nonvested shares of Restricted Stock will be forfeited and the
Company will have the right to complete the blank stock power with respect to
such shares. For shares of Restricted Stock granted prior to the effective
date of the Plan as set forth in Section 11, no certificate will be issued,
such shares will not be issued and outstanding, and the Director will not
have any of the rights of the owner of the shares until such effective date
has occurred.
(d) TRANSFER RESTRICTIONS; MANDATORY HOLDING OF STOCK.
Except as otherwise provided in Section 5.5 or Section 7, shares of
Restricted Stock are not transferable during the Restriction Period. Once
the Restriction Period lapses and shares vest, except as otherwise provided
in Section 5.5 or Section 7, shares acquired as a Restricted Stock Award must
be held by the grantee for a minimum of: (1) three years from the Grant Date,
(2) two years from the date the grantee ceases to be a director of the
Company, or (3) until the occurrence of a Change in Control, whichever first
occurs (the "Restricted Shares Holding Period").
(e) RESTRICTED STOCK AGREEMENT. All Restricted Stock Awards
will be confirmed by an agreement, or an amendment thereto, which will be
executed on behalf of the Company by the Chief Executive Officer, the
President, any Managing Director, any Senior Vice President or any Vice
President and the grantee.
(f) GENERAL RESTRICTIONS.
(1) The obligation of the Company to issue shares of
Restricted Stock under the Plan shall be subject to the condition that, if at
any time the Company shall determine that (a) the listing, registration or
qualification of shares of Restricted Stock upon any securities market or
exchange or under any state or federal law, or (b) the consent or approval of
any government or
6
regulatory body is necessary or desirable, then such
Restricted Stock shall not be issued unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free
from any conditions not acceptable to the Company.
(2) Shares of Stock for use under the provisions of this
Section 5 shall not be issued until they have been duly listed, upon official
notice of issuance, upon the Nasdaq system and/or such other markets or
exchanges, if any, as the Board shall determine, and a registration statement
under the Securities Act of 1933 with respect to such shares shall have
become, and be, effective.
Subject to the foregoing provisions of this Section 5.2 and
the other provisions of the Plan, any shares of Restricted Stock granted
under the Plan shall be subject to such restrictions and other terms and
conditions, if any, as shall be determined by the Committee, in its
discretion, and set forth in the agreement referred to in Section 5.2(e), or
an amendment thereto; provided, however, that in no event shall the Committee
or the Board have any power or authority which would cause the Directors to
cease to be "disinterested persons" or would cause transactions pursuant to
the Plan to cease to be exempt from the provisions of Section 16(b) of the
Exchange Act pursuant to Rule 16b-3, as such rule may be amended, or any
successor rule.
5.3 ANNUAL STATEMENT. A statement will be sent to each
Director as to the status of his Restricted Stock at least once each calendar
year.
5.4 DESIGNATION OF A BENEFICIARY. A Director may designate a
beneficiary to hold shares of Restricted Stock in accordance with the Plan in
the event of the Director's death.
5.5 HOLDING PERIOD APPLICABLE TO A DECEASED GRANTEE'S ESTATE.
As long as at least six months have elapsed since the Grant Date, a properly
designated beneficiary, or a person holding shares of Restricted Stock under
a deceased grantee's will or under the applicable laws of descent or
distribution, will not be subject to the Restricted Shares Holding Period
with respect to such shares of Restricted Stock.
SECTION 6. CHANGE IN CONTROL
6.1 SETTLEMENT OF COMPENSATION. In the event of a Change in
Control of the Company as defined herein, to the extent not already vested,
all Stock Option Awards, Restricted Stock Awards and other benefits hereunder
shall be vested immediately.
6.2 DEFINITION OF CHANGE IN CONTROL. A Change in Control
shall mean the occurrence of one or more of the following events:
(a) there shall be consummated (i) any consolidation or
merger of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's Stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's Stock immediately prior to the
merger have the same proportionate ownership of common stock of the surviving
corporation
7
immediately after the merger, or (ii) any sale, lease, exchange
or other transfer (in one transaction or a series of related transactions) of
all, or substantially all, of the assets of the Company; or
(b) the shareholders of the Company shall approve of any plan
or proposal for the liquidation or dissolution of the Company; or
(c)(i) any person (as such term is defined in Section 13(d)
of the Exchange Act), corporation or other entity shall purchase any Stock
of the Company (or securities convertible into the Company's Stock) for cash,
securities or any other consideration pursuant to a tender offer or exchange
offer, unless, prior to the making of such purchase of Stock (or securities
convertible into Stock), the Board shall determine that the making of such
purchase shall not constitute a Change in Control, or (ii) any person (as
such term is defined in Section 13(d) of the Exchange Act), corporation or
other entity (other than the Existing Principal Stockholders, the Company or
any benefit plan sponsored by the Company or any of its subsidiaries) shall
become the "beneficial owner" (as such term is defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing forty percent (40%) or more of the combined voting power of the
Company's then outstanding securities ordinarily (and apart from any rights
accruing under special circumstances) having the right to vote in the
election of directors (calculated as provided in Rule 13d-3(d) in the case of
rights to acquire any such securities), unless, prior to such person so
becoming such beneficial owner, the Board shall determine that such person so
becoming such beneficial owner shall not constitute a Change in Control; or
(d) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board, or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the Directors then still in office who were either
Directors at the beginning of such period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority of the Directors then in office.
SECTION 7. ASSIGNABILITY
The right to receive payments or distributions hereunder
(including any "derivative security" issued pursuant to the Plan, as such
term is defined by the rules promulgated under Section 16 of the Exchange
Act) and any shares of Restricted Stock granted hereunder during the
Restriction Period shall not be transferable or assignable by a director
other than by will, by the laws of descent and distribution, to a properly
designated beneficiary in the event of death, or pursuant to a domestic
relations order as defined by Section 414(p)(1)(B) of the Internal Revenue
Code or the rules thereunder that satisfies Section 414(p)(1)(A) of the
Internal Revenue Code or the rules thereunder. In addition, Stock acquired
as Restricted Stock shall not be transferable prior to the end of the
applicable Restricted Shares Holding Period, if any, set forth in Sections
5.2(d) and 5.5, in either case other than by will, by transfer to a properly
designated beneficiary in the event of death, by the applicable laws of
descent and distribution or pursuant to a domestic relations order as defined
by Section 414(p)(1)(B) of the Internal Revenue Code or the rules thereunder
that satisfies Section 414(p)(1)(A) of the Internal Revenue Code or the rules
thereunder.
8
SECTION 8. RETENTION; WITHHOLDING OF TAX
8.1 RETENTION. Nothing contained in the Plan or in any
Restricted Stock Award granted under the Plan shall interfere with or limit
in any way the right of the Company to remove any director from the Board
pursuant to the Articles of Incorporation and the Bylaws of the Company, nor
confer upon any director any right to continue in the service of the Company.
8.2 WITHHOLDING OF TAX. To the extent required by applicable
law and regulation, each director must arrange with the Company for the
payment of any federal, state or local income or other tax applicable to any
payment or any delivery of Stock hereunder before the Company shall be
required to make such payment, issue or, in the case of Restricted Stock,
deliver such shares under the Plan.
SECTION 9. PLAN AMENDMENT, MODIFICATION AND TERMINATION
The Board may at any time terminate, and from time to time may
amend or modify, the Plan; provided, however, that no amendment or
modification may become effective without approval of the amendment or
modification by the shareholders if shareholder approval is required to
enable the Plan to satisfy any applicable statutory or regulatory
requirements and provide further, that, unless otherwise permitted by the
rules under Section 16 of the Exchange Act, no amendment or modification
shall be made more than once every six months that would change the amount,
price, or timing of the Restricted Stock Awards hereunder, other than to
comport with changes in the Internal Revenue Code, the Employee Retirement
Income Security Act of 1974, as amended, or the rules promulgated thereunder.
SECTION 10. REQUIREMENTS OF LAW
10.1 FEDERAL SECURITIES LAW REQUIREMENTS. Implementation and
interpretations of, and transactions pursuant to, the Plan shall be subject
to all conditions required under Rule 16b-3, as such rule may be amended, or
any successor rule, to qualify such transactions for any exemption from the
provisions of Section 16(b) of the Exchange Act available under that rule, or
any successor rule, and to permit the Directors to be "disinterested persons"
within the meaning of that rule, or any successor rule, insofar as the Plan
or its implementation shall impact such disinterested status.
10.2 GOVERNING LAW. The Plan and all agreements hereunder
shall be construed in accordance with and governed by the laws of the State
of Florida.
SECTION 11. EFFECTIVE DATE OF AMENDMENT
The Plan shall be effective on the date on which the Stock is
registered under the Exchange Act. The Plan shall not preclude the adoption
by appropriate means of any other compensation or deferral plan for directors.
9
9
1,000
9-MOS
DEC-31-1996
JAN-01-1996
SEP-30-1996
7,278
17,173
185,000
0
235,305
8,902
0
1,347,983
16,200
2,200,772
1,650,323
0
137,113
240,669
0
0
267
172,400
2,200,772
116,755
23,007
3,840
143,602
68,234
82,253
61,349
18,839
17,580
47,038
27,149
25,082
0
0
25,082
0.94
0.94
12.259
332,352
50,264
110,348
0
2,271
5,875
94
16,200
16,200
0
0
Includes Loans Available for sale of $70,248, Loan Portfolio of $369,651, and
Discounted Loan Portfolio of $908,084.
Includes Allowance for Loan Losses on Loans Available for sale of $1,196, on
Loan Portfolio of $3,400 and on Discounted Loan Portfolio of $11,604.
