SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
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 May 14,1997: 26,799,511.
OCWEN FINANCIAL CORPORATION
FORM 10-Q
I N D E X
- --------------------------------------------------------------------------------
PART 1 - FINANCIAL INFORMATION Page
----
Item 1. Interim Financial Statements (Unaudited)............................ 3
Consolidated Statements of Financial Condition
at March 31, 1997 and December 31, 1996............................. 3
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996................................ 4
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 1996 and three months
ended March 31, 1997................................................ 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996................................ 6
Notes to consolidated Financial Statements.......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................... 37
Item 6. Exhibits and Reports on Form 8-K.................................... 37
Signature................................................................... 38
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)
March 31, December 31,
1997 1996
----------- -----------
Assets
Cash and amounts due from depository institutions $ 8,966 $ 6,878
Interest bearing deposits 8,802 13,341
Federal funds sold and repurchase agreements 99,000 32,000
Securities held for trading -- 75,606
Securities available for sale, at market value 348,066 354,005
Loans available for sale, at lower of cost or market 88,511 126,366
Investment securities, net 11,201 8,901
Loan portfolio, net 422,232 402,582
Discount loan portfolio, net 1,280,972 1,060,953
Principal, interest and dividends receivable 13,566 16,821
Investments in low income housing tax credit interests 99,924 93,309
Investment in joint ventures 33,367 67,909
Real estate owned, net 98,466 103,704
Investment in real estate 46,132 41,033
Premises and equipment, net 15,518 14,619
Income taxes receivable 14,625 15,115
Deferred tax asset 3,253 5,860
Other assets 56,870 44,683
----------- -----------
$ 2,649,471 $ 2,483,685
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 2,106,829 $ 1,919,742
Advances from the Federal Home Loan Bank 399 399
Securities sold under agreements to repurchase 39,224 74,546
Notes, debentures and other interest bearing obligations 225,573 225,573
Accrued expenses, payables and other liabilities 52,290 59,829
----------- -----------
Total liabilities 2,424,315 2,280,089
----------- -----------
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;
26,799,511 and 26,744,170 shares issued and outstanding at
March 31, 1997 and December 31, 1996, respectively 268 267
Additional paid-in capital 23,109 23,258
Retained earnings 197,458 180,417
Unrealized gain on securities available for sale, net of taxes 6,648 3,486
Notes receivable on exercise of common stock options (2,327) (3,832)
----------- -----------
Total stockholders' equity 225,156 203,596
----------- -----------
$ 2,649,471 $ 2,483,685
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
3
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
For the three months ended March 31, 1997 1996
- ------------------------------------------------------- ------------ ------------
Interest income:
Federal funds sold and repurchase agreements $ 1,658 $ 769
Securities available for sale 8,173 7,781
Securities held for trading 248 --
Loans available for sale 2,851 6,597
Loans 10,692 10,010
Discount loans 30,224 22,155
Investment securities and other 681 644
------------ ------------
54,527 47,956
------------ ------------
Interest expense:
Deposits 29,894 23,001
Securities sold under agreements to repurchase 272 653
Advances from the Federal Home Loan Bank 283 1,039
Notes, debentures and other interest bearing obligations 6,715 3,439
------------ ------------
37,164 28,132
------------ ------------
Net interest income before provision for loan losses 17,363 19,824
Provision for loan losses 9,742 9,407
------------ ------------
Net interest income after provision for loan losses 7,621 10,417
------------ ------------
Non-interest income:
Servicing fees and other charges 5,236 (681)
Gains on sales of interest earning assets, net 16,778 5,017
Loss on real estate owned, net (794) (1,916)
Other income 131 872
------------ ------------
21,351 3,292
------------ ------------
Non-interest expense:
Compensation and employee benefits 14,923 6,170
Occupancy and equipment 2,829 2,045
Net operating losses on investments in real estate and certain low-
income housing tax credit interests 1,093 461
Other operating expenses 3,852 3,007
------------ ------------
22,697 11,683
------------ ------------
Equity in earnings of investment in joint venture 14,372 --
Income before income taxes 20,647 2,026
Income tax expense (benefit) 3,606 (1,003)
------------ ------------
Net income $ 17,041 $ 3,029
============ ============
Earnings per share:
Net income $ 0.63 $ 0.11
============ ============
Weighted average common shares outstanding 27,073,362 26,445,370
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
4
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
For the three months ended March 31, 1997 and the year ended December 31, 1996
Unrealized Notes
gain (loss) receivable
on securities on exercise
Common Stock Additional available of common
------------------ paid-in Retained for sale, stock
Shares Amount capital earnings net of taxes options Total
---------- ------ ---------- -------- ------------ ---------- --------
Balances at December 31, 1995 23,812,270 $ 238 $ 10,449 $130,275 $ (1,415) $ -- $139,547
Net income -- -- -- 50,142 -- -- 50,142
Repurchase of common stock options -- -- (177) -- -- -- (177)
Exercise of common stock options 2,928,830 29 12,963 -- -- -- 12,992
Directors compensation payable in common stock 3,070 -- 23 -- -- -- 23
Notes receivable on exercise of common stock
options -- -- -- -- -- (3,832) (3,832)
Change in unrealized gain on securities
available for sale, net of taxes -- -- -- -- 4,901 -- 4,901
---------- ------ ---------- -------- ----------- ---------- -------
Balances at December 31, 1996 26,744,170 267 23,258 180,417 3,486 (3,832) 203,596
---------- ------ ---------- -------- ----------- ---------- -------
Net income -- -- -- 17,041 -- -- 17,041
Repurchase of common stock options -- -- (1,870) -- -- -- (1,870)
Exercise of common stock options 55,341 1 1,721 -- -- -- 1,722
Notes receivable on exercise of common stock
options -- -- -- -- -- 1,505 1,505
Change in unrealized gain on securities
available for sale, net of taxes -- -- -- -- 3,162 -- 3,162
---------- ------ ---------- -------- ---------- --------- -------
Balances at March 31, 1997 26,799,511 $ 268 $ 23,109 $197,458 $ 6,648 $ (2,327) $225,156
========== ====== ========== ======== ========== ========== ========
The accompanying notes are an integral part of these
consolidated financial statements
5
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the three months ended March 31, 1997 1996
- ----------------------------------------------------------------------- --------- ---------
Cash flows from operating activities:
Net income $ 17,041 $ 3,029
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Net cash provided from trading activities 85,167 --
Proceeds from sales of loans available for sale 88,184 62,939
Purchases of loans available for sale (37,667) (80,648)
Originations of loans available for sale (28,164) --
Principal payments received on loans available for sale 3,010 16,481
Premium amortization (discount accretion), net 11,029 (917)
Depreciation and amortization 4,579 914
Provision for loan losses 9,742 9,407
Gains on sales of interest earning assets, net (16,778) (5,017)
Gain on sale of real estate owned, net (3,702) (3,900)
Provision for real estate losses 2,336 6,378
Decrease in principal, interest and dividends receivable 1,080 280
Decrease (increase) in income taxes receivable 918 (744)
Decrease in deferred tax asset 2,181 --
Increase in other assets (5,360) (5,180)
(Decrease) increase in accrued expenses, payables and other liabilities (9,400) 5,247
--------- ---------
Net cash provided by operating activities 124,196 8,269
--------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 14,631 37,309
Purchases of securities available for sale (21,679) (5,740)
Maturities of and principal payments received on securities available for sale 3,831 12,445
Purchase of securities held for investment (2,306) --
Maturities of and principal payments received on securities held for investments -- 10,025
Purchase of low income housing tax credit interests (9,966) (6,409)
Proceeds from sales of discount loans and loans held for investment 87,253 22,095
Purchase and originations of discount loans and loans held for investment (432,494) (58,832)
Decrease (increase) in investment in joint ventures 34,542 (32,000)
Principal payments received on discount loans and loans held for investment 67,420 100,633
Proceeds from sales of real estate owned 48,768 29,144
Other, net (2,826) (4,179)
--------- ---------
Net cash (used) provided by investing activities (212,826) 104,491
--------- ---------
(Continued on next page)
The accompanying notes are an integral part of these
consolidated financial statements
6
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
For the three months ended March 31, 1997 1996
- -------------------------------------------------------------------- --------- --------
Cash flows from financing activities:
Increase (decrease) in deposits 187,180 (4,047)
Decrease in securities sold under agreements to repurchase (35,322) (84,761)
Payments and repurchase of notes and mortgages payable -- (1,055)
Repayment of notes by executive officers 1,505
Exercise of common stock options 1,722 --
Repurchase of common stock options (1,870) --
Other, net (36) 238
--------- --------
Net cash provided (used) by financing activities 153,179 (89,625)
--------- --------
Net increase in cash and cash equivalents 64,549 23,135
Cash and cash equivalents at beginning of period 52,219 54,632
--------- --------
Cash and cash equivalents at end of period $ 116,768 $ 77,767
========= ========
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions $ 8,966 $ 6,322
Interest bearing deposits 8,802 26,445
Federal funds sold and repurchase agreements 99,000 45,000
--------- --------
$ 116,768 $ 77,767
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 36,206 $ 23,606
========= ========
Income taxes $ 509 $ 1,869
========= ========
Supplemental schedule of non-cash investing and financing activities:
Exchange of discount loans and loans available for sale for securities $ 38,062 $ --
========= ========
Real estate owned acquired through foreclosure $ 42,095 $ 15,125
========= ========
The accompanying notes are an integral part of these
consolidated financial statements
7
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollars in thousands, except share data)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of
Regulation S-X for interim financial statements. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles ("GAAP") for complete financial statements. The
consolidated financial statements include the accounts of Ocwen Financial
Corporation ("Ocwen" or the "Company") and its subsidiaries. Ocwen owns directly
and indirectly all of the outstanding common and preferred stock of its primary
subsidiaries, Ocwen Federal Bank FSB (the "Bank") and Investors Mortgage
Insurance Holding Company ("IMI").
In the opinion of management, the accompanying financial statements contain all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the Company's financial condition at March 31, 1997 and December
31, 1996, the results of its operations for the three months ended March 31,
1997 and 1996, its cash flows for the three months ended March 31, 1997 and
1996, and the changes in stockholders' equity for the year ended December 31,
1996 and the three months ended March 31, 1997. The results of operations and
other data for the three month period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for any other interim periods or
the entire year ending December 31, 1997. 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 Form 10-K for the year ended December 31, 1996. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the March 31, 1997 presentation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the statements of financial condition and revenues
and expenses for the periods covered. Actual results could differ from those
estimates and assumptions.
NOTE 2 ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". 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. In December 1996, SFAS No. 127, "Deferral of the Effective Date of
FASB Statement No. 125", was issued and delayed implementation for one year
certain provisions of SFAS 125. The adoption of SFAS No. 125 did not have any
material impact on the results of operations, financial position or cash flows
as a result of implementing these Statements.
In February 1997, SFAS No. 128, "Earnings per Share", and SFAS No. 129,
"Disclosure of Information about Capital Structure were issued. SFAS No. 128
established standards for computing and
8
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollars in thousands, except share data)
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. The SFAS No. 128 simplifies the standards
previously found in Accounting Principles Board Opinion No. 15. SFAS No. 128
is effective for financial statements for periods ending after December 15,
1997, including interim periods. Early adoption is not permitted. SFAS No.
129 is effective for financial statements for periods ending after December
15, 1997. The Company does not anticipate a material impact on its earnings per
share calculation as a result of implementing these statements.
NOTE 3 INVESTMENT IN JOINT VENTURES
The Company's investment in joint ventures include investments in BCFL, L.L.C
("BCFL"), a limited liability company formed in January 1997
between the Company and BlackRock Capital Finance L.P. ("BlackRock"), and
BCBF, L.L.C, (the "LLC"), a limited liability company formed in March 1996
between the Company and BlackRock. The Company owns a 10% interest in BCFL
and a 50% interest in the LLC. BCFL was formed to acquire multifamily loans. At
March 31, 1997, the Company's 10% investment, which is accounted for under
the cost method, amounted to $1,056.
The Company's 50% investment in the LLC, which was formed to acquire
single-family residential loans offered by the Department of Housing and
Urban Development ("HUD"), amounted to $32,311 and $67,909 at March 31,
1997 and December 31, 1996, respectively, and is net of valuation allowances of
$2,473 and $5,114, respectively. Because the LLC is a pass-through entity for
federal income tax purposes, provisions for income taxes are established by each
of the Company and its co-investor and not the LLC.
The Company's equity in earnings of the LLC of $14,372 includes 50% of the
net income of the LLC before deduction of the Bank's 50% share of loan
servicing fees which are paid 100% to the Company, and the recapture of
$2,641 of valuation allowances established in 1996 by the Company on its
equity investment in the joint venture as a result of the resolution and
securitization of loans during the first quarter of 1997. The Company has
recognized 50% of the loan servicing fees not eliminated in consolidation in
servicing fees and other charges.
9
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollars in thousands, except share data)
Set forth below is the statement of financial condition of the LLC at the dates
indicated and a statement of operations for the three months ended March 31,
1997.
BCBF, L.L.C.
STATEMENT OF FINANCIAL CONDITION
March 31, December 31,
1997 1996
-------- --------
Assets:
Cash $ 10 $ 10
Loans held for sale, at lower of cost or market value 48,586 110,702
Real estate owned, net of valuation allowance of $150 and $511
at March 31, 1997 and December 31, 1996, respectively 12,120 25,595
Other assets 9,487 10,526
-------- --------
$ 70,203 $146,833
======== ========
Liabilities and Owners' Equity
Liabilities:
Accrued expenses, payables and other liabilities $ 635 $ 787
-------- --------
Total liabilities 635 787
-------- --------
Owners' Equity:
Ocwen Federal Bank FSB 34,784 73,023
BlackRock Capital Finance L.P. 34,784 73,023
-------- --------
Total owners' equity 69,568 146,046
-------- --------
$ 70,203 $146,833
======== ========
BCBF, L.L.C.
STATEMENT OF OPERATIONS
For the three months ended March 31, 1997
Interest income $ 3,485
-------
Non-interest income:
Gain on sale of loans held for sale 18,412
Gain on real estate owned, net 1,543
Loan fees 22
-------
19,977
-------
Operating expenses:
Loan servicing fees 676
-------
Net income $22,786
=======
10
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollars in thousands, except share data)
In March, 1997, as part of a larger transaction involving the Company and an
affiliate of BlackRock, the LLC securitized 1,196 loans with an unpaid principal
balance of $51,714 and past due interest of $14,209, and a net book value of
$40,454. Proceeds from sales of such securities by the LLC amounted to $58,866.
The Company continues to service such loans and is paid a servicing fee. For
further discussion regarding this transaction, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Summary."
NOTE 4 INTEREST RATE RISK MANAGEMENT INSTRUMENTS
In managing its interest rate risk, the Company on occasion enters into swaps.
Under swaps, the Company agrees with other parties to exchange, at specified
intervals, the difference between fixed-rate and floating-rate interest amounts
calculated by reference to an agreed upon notional amount. The terms of the
swaps provide for the Company to receive a floating rate of interest based on
the London Interbank Offered Rate ("LIBOR") and to pay fixed interest rates.
The notional amount of the outstanding swap is amortized (i.e. reduced)
monthly based upon estimated prepayment rates of the mortgages underlying the
securities being hedged. The terms of the outstanding swap at March 31, 1997
and December 31, 1996 follows:
Notional LIBOR Floating Rate
Maturity Amount Index Fixed Rate at End of Period Fair Value
-------- ------ ----- ---------- ---------------- ----------
March 31, 1997 1998 $44,070 1-Month 6.18% 5.38% $(135)
December 31, 1996 1998 $45,720 1-Month 6.18% 5.67% $(103)
The 1-month LIBOR was 5.69% and 5.50% on March 31, 1997 and December 31, 1996,
respectively.
The Company also enters into short sales of Eurodollar and U.S. Treasury
interest rate futures contracts as part of its overall interest rate risk
management activity. Interest rate futures contracts are commitments to
either purchase or sell designated financial instruments at a future date for
a specified price and may be settled in cash or through delivery. U.S.
Treasury futures have been sold by the Company to hedge the risk of a
reduction in the market value of fixed-rate mortgage loans and certain
fixed-rate mortgage-backed and related securities available for sale in a
rising interest rate environment.
Terms and other information on interest rate futures contracts sold short are as
follows:
Maturity Notional Principal Fair Value
-------- ------------------ ----------
March 31, 1997
U.S. Treasury futures 1997 $ 264,300 $ 2,976
December 31, 1996:
Eurodollar futures 1997 $ 365,000 $ (558)
1998 40,000 (87)
U.S. Treasury futures 1997 165,100 498
Because interest rate futures contracts are exchange traded, holders of these
instruments look to the exchange for performance under these contracts and not
the entity holding the offsetting futures contract, thereby minimizing the risk
of nonperformance under these contracts. The Company is exposed to credit loss
in the event of nonperformance by the counterparty to the swap and controls this
risk through credit
11
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollars in thousands, except share data)
monitoring procedures. The notional principal amount does not represent the
Company's exposure to credit loss.
NOTE 5 REGULATORY REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institution subject to Office
of Thrift Supervision ("OTS") supervision. The Bank must follow specific capital
guidelines stipulated by the OTS which involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items. An institution
that fails to comply with its regulatory capital requirements must obtain OTS
approval of a capital plan and can be subject to a capital directive and certain
restrictions on its operations. At March 31, 1997, the minimum regulatory
capital requirements were:
- Tangible and core capital of 1.5 percent and 3 percent of total adjusted
assets, respectively, consisting principally of stockholders' equity, but
excluding most intangible assets, such as goodwill and any net unrealized
holding gains or losses on debt securities available for sale.
- Risk-based capital consisting of core capital plus certain subordinated
debt and other capital instruments and, subject to certain limitations,
general valuation allowances on loans receivable, equal to 8 percent of
the value of risk-weighted assets.
At March 31, 1997, the Bank was "well-capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To
be categorized as "well capitalized", the Bank must maintain minimum core
capital, Tier 1 risk-based capital and risk-based capital ratios as set forth
in the table below. The Bank's capital amounts and classification are subject
to review by federal regulators about components, risk-weightings and other
factors. There are no conditions or events since March 31, 1997 that
management believes have changed the institution's category.
12
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollars in thousands, except share data)
The following tables summarize the Bank's actual and required regulatory capital
at March 31, 1997
To Be Well Capitalized
Minimum For Capital For Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ------------------------- ----------------------
Ratio Amount Ratio Amount Ratio Amount
----- ------ ----- ------ ----- ------
Stockholders' equity, and ratio to total assets 9.73% $ 249,860
Net unrealized gain on certain available for
sale securities (6,786)
Excess mortgage servicing rights (222)
---------
Tangible capital, and ratio to
adjusted total assets 9.48% $ 242,852 1.50% $ 38,411
========= =======
Tier 1 (core) capital, and ratio to
adjusted total assets 9.48% $ 242,852 3.00% $ 76,822 5.00% $ 128,037
========= ======= =======
Tier 1 capital, and ratio to risk-weighted assets 8.80% $ 242,852 6.00% $ 165,574
========= =======
Allowance for loan and lease losses $ 21,850
Subordinated debentures 100,000
---------
Tier 2 Capital 121,850
---------
Total risk-based capital, and ratio to
risk-weighted assets 13.22% $ 364,702 8.00% $ 220,765 10.00% $ 275,956
========= ======= =======
Total regulatory assets $ 2,567,743
=========
Adjusted total assets $ 2,560,735
=========
Risk-weighted assets $ 2,759,563
=========
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 March 31, 1997. A Tier 1
association that before and after a proposed capital distribution meets or
exceeds its fully phased-in capital requirements may make capital distributions
during any calendar year equal to the greater of (i) 100% of net income for the
calendar year to date plus 50% of its "surplus capital ratio" at the beginning
of the year or (ii) 75% of its net income over the most recent four-quarter
period. In order to make these capital distributions, the Bank must submit
written notice to the OTS 30 days in advance of making the distribution.
In addition to these OTS regulations governing capital distributions, the
indenture governing the $100,000 of 12% subordinated debentures (the
"Debentures") due 2005 and issued by the Bank on June 12, 1995 limits the
declaration or payment of dividends and the purchase or redemption of common or
preferred stock in the aggregate to the sum of 50% of consolidated net income
and 100% of all capital contributions and proceeds from the issuance or sale
(other than to a subsidiary) of common stock, since the date the Debentures were
issued.
13
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollars in thousands, except share data)
Based upon recent discussions with the OTS, the Bank has determined to
maintain a core capital ratio of at least 9% and a total risk-based capital
ratio of no less than 13%. The Bank also determined to transfer its
single-family residential lending activities to non-conforming borrowers to a
non-bank subsidiary of Ocwen. The Bank believes at this time that it will
continue to be a "well-capitalized institution" under OTS regulations.
NOTE 6 COMMITMENTS AND CONTINGENCIES
At March 31, 1997 the Company had commitments to fund (i) $65,413 of loans
secured by on multi-family residential buildings, (ii) $62,948 of loans
secured by office buildings and (iii) $44,303 of loans secured by hotel
properties. Additionally, the Company had commitments of $1,292 to purchase
residential discount loans. The Company, through its investment in
subordinated securities and REMIC residuals which had a book value of $78,116
at March 31, 1997, supports senior classes of mortgage-related securities
having an outstanding balance of $1,317,804.
On October 29, 1996, Ocwen Financial Services, Inc., a wholly-owned
subsidiary of Ocwen, entered into an asset purchase agreement ("Asset
Purchase Agreement") to acquire Admiral Home Loan ("Admiral"), a California
corporation engaged in the origination of loans to credit-impaired borrowers
secured by first mortgage liens on single-family residential real property,
both through the wholesale acquisition of such loans originated by mortgage
brokers and through its retail offices, and selling of such originated loans,
servicing released, to third parties. Under the Asset Purchase Agreement, as
amended, Ocwen has agreed to pay $6,750 to acquire an 80% interest in the
assets of Admiral. Closing of the acquisition occurred on May 1, 1997.
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 Company's financial
position, results of operations, cash flows or liquidity.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company considers itself to be involved in a single business
segment of providing financial services and conducts a wide variety of
business within this segment. The Company's primary business activities
currently consist of its discounted loan acquisition, resolution and
servicing activities, single-family residential activities involving
non-conforming borrowers and various investment activities, including
investments in a wide variety of mortgage-related securities and investments
in low-income housing tax credit interests. The Company obtains funds for
investment in the foregoing and other business activities primarily from
brokered and other wholesale certificates of deposit, as well as retail
deposits obtained through its office in northern New Jersey, FHLB advances,
reverse repurchase agreements, maturities and principal repayments on
securities and loans and proceeds from the sale of securities and loans held
for sale.
At March 31, 1997, the only significant subsidiary of the Company,
other than the Bank, was IMI, which, through subsidiaries, currently owns and
manages the Westin Hotel in Columbus, Ohio and residential units in cooperative
buildings.
The Company is a registered savings and loan holding company subject
to regulation by the OTS. The Bank is subject to regulation by the OTS, as its
chartering authority, and by the Federal Deposit Insurance Corporation ("FDIC")
as a result of its membership in the Savings Association Insurance Fund ("SAIF")
which insures the Bank's deposits up to the maximum extent permitted by law. The
Bank is also subject to certain regulation by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") and currently is a member of
the FHLB of New York, one of the 12 regional bank's which comprise the FHLB
System.
The following discussion of the Company's consolidated financial
condition, results of operations, and capital resources and liquidity should be
read in conjunction with the Interim Consolidated Financial Statements and
related Notes included in Item 1 hereof.
15
Consolidated Financial Highlights
At or For the Three Months Ended March 31,
------------------------------------------
% Change
Favorable
1997 1996 (Unfavorable)
----------- ---------- -------------
(Dollars in thousands)
For The Period
Net interest income $ 17,363 $ 19,824 (12)%
Provision for loan losses 9,742 9,407 (4)
Non-interest income 21,351 3,292 549
Non-interest expense 22,697 11,683 (94)
Equity in earnings of investment in joint venture 14,372 -- --
Net income 17,041 3,029 463
Per Common Share
Net income $ 0.63 $ 0.11 473 %
Book value 8.40 7.61 10
Stock Price:
High 34.75 -- --
Low 25.25 -- --
Close 29.00 -- --
Average Balances
Interest-earning assets $2,167,601 $1,622,760 34 %
Interest-bearing liabilities 2,259,367 1,727,054 (31)
Stockholders' equity 212,706 141,374 50
Key Ratios
Interest rate spread:
Yield on interest-earning assets 10.06% 11.82% (15)%
Cost of interest-bearing liabilities 6.58 6.52 (1)
Interest rate spread 3.48 5.30 (34)
Annualized return on average assets (1) 2.61 0.62 321
Annualized return on average equity 32.05 8.57 274
Efficiency ratio (2) 42.76 50.54 15
Core capital ratio 9.48 6.99 36
Risk-based capital ratio 13.22 11.41 16
(1) Includes the Company's pro rata share of average assets held by its 50%
joint venture
(2) Before provision for loan losses and including equity in earnings of
investment in joint venture
Summary
The Company's net income amounted to $17.0 million or $0.63 per
share for the first quarter of 1997 compared to net income of $3.0 million or
$0.11 per share for the first quarter of 1996.
The 549% increase in non-interest income as compared to the first
quarter of 1996 is largely due to a $9.5 million gain in connection with the
securitization of discount mortgage loans which occurred on March 27, 1997.
On that date the Company, the LLC and an affiliate of BlackRock, completed the
securitization of 2,916 single-family residential mortgage loans with an
unpaid principal balance of $140.7 million and past due interest of $37.1
million. The loans securitized were all acquired from HUD in 1995 and 1996.
The Company continues to service the loans for a fee and has retained an
interest in the related subordinate class security.
Equity in earnings of investment in joint venture of $14.4 million
for the first quarter of 1997 includes $9.2 million representing the Company's
pro rata share of the gain recorded by the LLC in connection with the March
1997 securitization described above. The LLC, which was formed in March 1996,
did not begin operations until the second quarter of 1996.
16
Non-interest expense increased 94% as compared to the first quarter
of 1996 as the average number of employees increased to 629 from 323 and the
accrual for employee profit sharing expense increased by $3.6 million.
Average Balance and Rate Analysis. The following table sets forth,
for the periods indicated, information regarding the total amount of income from
interest-earning assets and the resultant average yields, the interest expense
associated with interest-bearing liabilities, expressed in dollars and rates,
and the net interest rate spread and net interest margin. Information is based
on daily balances during the indicated periods.
Three Months Ended March 31,
-----------------------------------------------------------------------------------
1997 1996
--------------------------------------- ----------------------------------------
Annualized Annualized
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Average Assets:
Federal funds sold and repurchase
agreements $ 132,337 $ 1,658 5.01% $ 57,191 $ 769 5.38%
Securities held for trading 13,179 248 7.53 -- -- --
Securities available for sale 338,956 8,173 9.64 322,322 7,781 9.66
Loans available for sale (1) 118,729 2,851 9.61 261,351 6,597 10.10
Investment securities and other (2) 23,032 681 11.83 37,912 644 6.79
Loan portfolio (1) 423,135 10,692 10.11 298,502 10,010 13.41
Discount loan portfolio 1,118,233 30,224 10.81 645,482 22,155 13.73
---------- ---------- ---------- ----------
Total interest-earning assets,
interest income 2,167,601 54,527 10.06 1,622,760 47,956 11.82
---------- ----------
Non-interest earning cash 11,350 6,029
Allowance for loan losses (16,515) (2,849)
Investments in low-income housing
tax credit interests 90,398 85,428
Investment in joint ventures 63,637 --
Real estate owned, net 112,227 162,988
Other assets 179,156 81,846
---------- ----------
Total assets $2,607,854 $1,956,202
========== ==========
Average Liabilities and
Stockholders' Equity:
Interest-bearing demand deposits $ 24,699 227 3.68 $ 26,302 229 3.48
Savings deposits 2,620 15 2.29 3,446 21 2.44
Certificates of deposit 1,964,020 29,652 6.04 1,465,587 22,751 6.21
---------- ---------- ---------- ----------
Total interest-bearing deposits 1,991,339 29,894 6.00 1,495,335 23,001 6.15
Notes, debentures and other 225,573 6,715 11.91 116,335 3,439 11.82
Securities sold under agreements
to repurchase 20,934 272 5.20 44,985 653 5.81
Federal Home Loan Bank advances 21,521 283 5.26 70,399 1,039 5.90
---------- ---------- ---------- ----------
Total interest-bearing liabilities,
interest expense 2,259,367 37,164 6.58 1,727,054 28,132 6.52
---------- ----------
Non-interest bearing deposits 15,543
4,323
Escrow deposits 71,713 37,167
Other liabilities 48,525 46,284
---------- ----------
Total liabilities 2,395,148 1,814,828
Stockholders' equity 212,706 141,374
---------- ----------
Total liabilities and stockholders'
equity $2,607,854 $1,956,202
========== ==========
Net interest income before provision
for loan losses $ 17,363 $19,824
========== ==========
Net interest rate spread 3.48% 5.30%
==== ==========
Net interest rate margin 3.20% 4.89%
==== ==========
Ratio of interest-earning assets to
interest-bearing liabilities 96% 94%
==== ====
(1) The average balance includes non-performing loans, interest on which is
recognized on a cash basis.
(2) Included in interest income on investment securities and other is interest
income earned on that
17
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 March 31, 1997 and 1996 would have been 11.82% and
4.47%, 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 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.
Rate Volume Total
------- -------- -------
(Dollars in thousands)
Interest-Earning Assets:
Federal funds sold and repurchase
agreement $ (56) $ 945 $ 889
Securities held for trading 248 -- 248
Securities available for sale (9) 401 392
Loans available for sale (307) (3,439) (3,746)
Loan portfolio (2,850) 3,532 682
Discount loan portfolio (5,484) 13,553 8,069
Investment securities and other 355 (318) 37
------- -------- -------
Total interest-earning assets (8,103) 14,674 6,571
------- -------- -------
Interest-Bearing Liabilities:
Interest-bearing demand deposits 12 (14) (2)
Savings deposits (1) (5) (6)
Certificates of deposit (640) 7,541 6,901
------- -------- -------
Total interest-bearing deposits (629) 7,522 6,893
Notes, debentures and other 24 3,252 3,276
Securities sold under agreements to repurchase (62) (319) (381)
Federal Home Loan Bank advances (103) (653) (756)
------- -------- -------
Total interest-bearing liabilities (770) 9,802 9,032
------- -------- -------
Increase in net interest income $(7,333) $ 4,872 $(2,461)
======= ======== =======
Three Months Ended March 31, 1997 versus Three Months Ended March 31, 1996
The Company's net interest income before provision for loan losses
of $17.4 million decreased $2.5 million or 12% during the three months ended
March 31, 1997 as compared to the comparable period in the prior year. Interest
income increased $6.6 million or 14% due to a $544.8 million or 34% increase in
the Company's average interest-earning assets from period to period offset in
part by a 176 basis point increase in the average yield earned. Interest expense
increased $9.0 million or 32% due to a $532.3 million or 31% increase in the
Company's average interest-bearing liabilities and a 6 basis point increase
in the weighted average rate paid on these liabilities.
Interest income on the discount loan portfolio increased by $8.1
million or 36% in the three months ended March 31, 1997 from the three months
ended March 31, 1996 as a result of a $472.8 million or 73% increase in the
average balance of the discount loan portfolio offset in part by a 292 basis
point decline in the
18
weighted average yield earned. The decline in the yield was primarily
attributable to a 138% increase in the average balance of single-family
discount loans held as compared to the prior year coupled with the Company's
decision to cease accretion of discount on nonperforming single-family
discount loans effective January 1, 1997. The Company believes that for the
remainder of 1997 the yield earned on its discount loan portfolio will remain
below the yield earned in the prior year due to its decision to cease
accretion of discount and its current strategy of attempting to work with
borrowers to either (i) bring their loans current, (ii) modify the terms of
their loans, (iii) enter into forbearance agreements or (iv) refinance the
loans with the Company. This resolution strategy results in lower initial
yields as compared to borrowers paying off their loans in full or in part,
and to the extent the loans are ultimately sold will result in a significant
portion of the earnings being reflected in gains on sales of interest earning
assets. In addition, the majority of the single-family HUD loans acquired by
the Company in February 1997 are currently under a HUD plan, whereby the
borrower makes payments based upon ability to pay for a specific period of
time. Once this period is over the borrower must make at least its
contractual mortgage payment or the Company can pursue foreclosure or other
actions. Virtually all the loans currently serviced by the Company under this
plan will reach the end of the grace period through July 1998. The yield on
the overall discount loan portfolio is also likely to continue to fluctuate
from quarter to quarter as a result of the timing of resolutions,
particularly the resolution of large multifamily and commercial loans, and
the mix of the overall portfolio between paying and nonpaying loans.
Interest income on the loan portfolio increased by $682,000 or 7%
in the first quarter of 1997 from the comparable period in 1996 primarily due
to an increase in the average balance of the loan portfolio for the three
months ended March 31, 1997 of $124.6 million or 42% over that of the same
period in 1996, offset in part by a 330 basis point decrease in the weighted
average yield earned. The decline in the yield was primarily due to $2.1
million of additional interest earned during the first quarter of 1996 in
connection with the repayment of hotel loans.
Interest income on loans available for sale decreased $3.7 million
or 57% in the first quarter of 1997 as compared to the first quarter of 1996
due to a decrease in the average balance of loans available for sale of $142.6
million or 55% and a 49 basis point decrease in the weighted average yield
earned.
The increase in interest expense during the three months ended March
31, 1997, as compared to the same period of 1996, reflects the Company's
continued use of certificates of deposit to fund its asset growth and the
issuance of $125.0 million of 11.875% notes in September, 1996. The average
amount of the Bank's certificates of deposit increased from $1.46 billion during
the three months ended March 31, 1996 to $1.96 billion during the three months
ended March 31, 1997.
Provisions for Loan Losses. Provisions for losses on loans are
charged to operations to maintain an allowance for losses on each of the loan
portfolio and the discount loan portfolio at a level which management
considers adequate based upon an evaluation of known and inherent risks in
such loan portfolios. Management's periodic evaluation is based upon an
analysis of each of the discount loan portfolio and the loan portfolio,
historical loss experience, current economic conditions and other relevant
factors.
Provisions for loan losses amounted to $9.7 million for the first
quarter of 1997, as compared to $9.4 for the first quarter of 1996. The 1997
provision is comprised of $8.4 million related to discount loans and $1.3
million related to the loan portfolio as compared to $8.5 million and $941,000,
respectively, for 1996. The amount provided during the first quarter of 1997
includes $2.0 million established on single-family residential loans acquired
from HUD in 1995 and 1996 which were not included in the March, 1997
securitization.
Although management utilizes its best judgment in providing for
possible loan losses, there can be no assurance that the Company will not
change its provisions for possible loan losses in subsequent periods to a
higher level from that recorded to date in 1997. 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 reasons could affect the Company's future provisions
for loan losses. In addition, the OTS, as an integral part of its examination
process, periodically reviews the adequacy of the Company's allowances for
losses on loans and discount loans. 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 provisions for loan losses, see
"Changes in Financial Condition - Allowances for Losses."
Non-Interest Income. Non-interest income increased by $18.1
million or 549% in the first quarter of 1997 as compared to 1996. The
increase in non-interest income was primarily attributable to gains from the
sale of interest-earning assets in 1997 and increased loan servicing fees.
19
The following table sets forth the principal components of the
Company's non-interest income during the periods indicated.
Quarter Ended March 31,
-----------------------
1997 1996
---------- ---------
(Dollars in Thousands)
Servicing fees and other charges $ 5,236 $ (681)
Gains on sales of interest-earning assets, net 16,778 5,017
Loss on real estate owned, net (794) (1,916)
Other income 131 872
-------- -------
Total $ 21,351 $ 3,292
======== =======
The increase in servicing fees and other charges during the first
quarter of 1997 is due to an increase in loan servicing and related fees as a
result of the Company's increase in loans (primarily non-performing) serviced
for others. The average unpaid principal balance of loans serviced for others
amounted to $2.04 billion during the first quarter of 1997 as compared to
$338.9 million during the first quarter of 1996. Included in servicing fees
and other charges during the first quarter of 1997 was $1.1 million of fees
earned in connection with the setup of loans transferred to the Company for
servicing during the quarter. In addition, during the first quarter of 1996
the Company recorded a $928,000 valuation adjustment to mortgage servicing
rights due to a significant increase in prepayments of the underlying loans
serviced resulting primarily from refinancings.
Net gains on sales of interest-earning assets in the first quarter
of 1997 were primarily comprised of $2.7 million of gains from the sales of
single-family non-conforming loans, $3.5 million of gains from sales of certain
large commercial loans in the Company's discount loan portfolio and a $9.5
million net gain in connection with the securitization completed in March 1997
of single-family residential mortgage loans acquired from HUD in 1995 and 1996.
Net gains on sales of interest-earning assets in the first quarter of 1996 were
primarily comprised of a $5.4 million gain from the sale of loans in the
Company's single-family residential discount loan portfolio which had been
brought current in accordance with their terms.
The following table sets forth the results of the Company's
investment in real estate owned, which was primarily related to the discount
loan portfolio, during the periods indicated:
Three Months Ended March 31,
1997 1996
------- -------
(Dollars In Thousands)
Gains on sales $ 3,898 $ 3,900
Provision for loss in fair value (2,337) (6,378)
Rental income (carrying costs), net (2,355) 562
------- -------
Loss on real estate owned, net $ (794) $(1,916)
======= =======
Included in gains on sales of real estate owned for the three
months ended March 31, 1997 is a gain of $430,000 on a bulk sale of 288
properties for $21.2 million.
Non-Interest Expense. Non-interest expense increased $11.0 million
or 94% in the first quarter of 1997 as compared to the same period of 1996.
Compensation and employee benefits accounted for $8.8 million of this increase.
20
The following table sets forth the principal components of the
Company's non-interest expense during the periods indicated.
Three Months Ended March 31,
-------------------------------
1997 1996
------------- --------------
(Dollars in Thousands)
Compensation and employee benefits $14,923 $ 6,170
Occupancy and equipment 2,829 2,045
Net operating loss on investments in real estate and certain low-
income housing tax credit interests 1,093 461
Other operating expenses 3,852 3,007
-------- -------
Total $22,697 $11,683
====== ======
The increase in compensation and employee benefits in the first
quarter of 1997 reflected an increase in the average number of full-time
equivalent employees from 323 in 1996 to 629 in 1997 as well as a $3.6 million
increase in profit sharing expense. Occupancy and equipment expense increased
$784,000 primarily due to an increase in data processing costs and office
equipment expenses. Net operating losses on investments in real estate and
certain low-income housing tax credit interests, which includes hotel
operations, increased $632,000 primarily as a result of net operating losses and
depreciation expense on low-income housing tax credit interests placed in
service since the first quarter of 1996. The associated tax credits on such
projects are reported as a reduction of income tax expense. See "Income Tax
Expense (Benefit)" below. Other operating expenses increased $845,000 primarily
due to a $600,000 increase in loan related expenses and a $200,000 increase in
professional fees offset by lower FDIC insurance premium expenses of $405,000.
Equity in Earnings of Investment in Joint Venture. Equity in
earnings of investment in joint venture relates to the joint venture formed
in March 1996 to acquire discount single-family residential loans from HUD.
The Company's $14.4 million of earnings from this joint venture during the
three months ended March 31, 1997 consisted of 50% of the net income of the
LLC before deduction of the Company's 50% share of loan servicing fees, which
are paid 100% to the Company, and the recapture of $2.5 million of valuation
allowances established in 1996 by the Company on its equity investment in the
joint venture as a result of the resolution and securitization of loans
during the quarter. Income of the joint venture is primarily attributable to
interest on discount loans, which had an annualized weighted average yield of
14.6% during the period and $18.4 million of gains on the sale of discount
loans, including the securitization of HUD loans in March, 1997. See Note 3
to the Interim Consolidated Financial Statements.
Income Tax Expense (Benefit). Income tax expense (benefit) amounted
to $3.6 million and $(1.0) million during the three months ended March 31, 1997
and 1996, respectively. The Company's income tax expense is reported net of tax
credits of $3.6 million and $2.4 million during the first quarter of 1997 and
1996, respectively, resulting from the Company's investment in low-income
housing tax credit interests. Exclusive of such amounts, the Company's effective
tax rate amounted to 34.74% and 37.02% during the three months ended March 31,
1997 and 1996, respectively. See "Changes in Financial Condition-Investments in
Low Income Housing Tax Credit Interests" for additional information regarding
tax credits.
Changes in Financial Condition
General. From December 31, 1996 to March 31, 1997 total assets
increased by $165.8 million or 7%. This increase was primarily due to a
$220.0 million increase in discount loans, a $19.7 million increase in the
loan portfolio and $64.5 million increase in cash and cash equivalents,
offset in part by a $75.6 million decrease in securities held for trading, a
$37.9 million decrease in loans available for sale and a $34.5 million
decrease in investment in joint ventures. Total liabilities increased by
$144.2 million from December 31, 1996
21
to March 31, 1997. This increase was primarily due to a $187.1 million increase
in deposits offset by the $35.3 million decrease in securities sold under
agreements to repurchase.
Securities Held For Trading. The Company held a $75.6 million
single-family CMO for trading at December 31, 1996. This security, which was
sold in January 1997, was acquired from the LLC in connection with the LLC's
securitization of a portion of the HUD Loans in October, 1996.
Securities Available for Sale. At March 31, 1997, an aggregate of
$6.6 million of net unrealized gains, net of related deferred taxes of $3.8
million on securities classified as available for sale were included in
stockholders' equity, as compared to $3.5 million of net unrealized gains at
December 31, 1996, net of related deferred taxes of $2.0 million. The Company's
securities available for sale were comprised of the following at the dates
indicated.
March 31, December 31,
1997 1996
--------- ---------
(Dollars in thousands)
Mortgage-related securities:
Single-family residential:
AAA-rated CMOs $ 69,664 $ 73,935
FHLMC interest only 56,475 47,571
FNMA interest only 41,104 49,380
AAA-rated interest only 1,076 1,173
Subordinates 23,197 19,164
REMIC residuals 21,566 20,560
Futures contracts (1,623) (1,921)
--------- ---------
211,459 209,862
--------- ---------
Multi-family residential and commercial:
AAA-rated interest only 77,752 83,590
Non-investment grade interest only 3,683 3,799
Subordinates 54,401 57,534
Futures contracts 771 (780)
--------- ---------
136,607 144,143
--------- ---------
Total $ 348,066 $ 354,005
========= =========
The Company's securities available for sale of $348.1 million at
March 31, 1997 decreased by $5.9 million or 2% in the first quarter due
primarily to $14.0 million of sales and $14.0 million of principal repayments
and net premium amortization, offset in part by $21.7 million of purchases
including the acquisition of a $3.8 million subordinate security in connection
with the Company's securitization of single-family residential loans in March,
1997 and sale of senior classes of securities backed by such loans.
Loans Available for Sale. The Company's loans available for sale at
March 31, 1997, which are carried at the lower of cost or fair value, decreased
by $37.9 million or 30% from December 31, 1996 and consist primarily of
single-family residential loans to sub-prime borrowers. The Company generally
intends to sell or securitize its single-family residential loans to
non-conforming borrowers and, as a result, all of such loans were classified as
available for sale at March 31, 1997 and December 31, 1996.
March 31, December 31,
1997 1996
-------- --------
(Dollars in thousands)
Single-family residential loans $ 87,847 $111,980
Multi-family residential loans -- 13,657
Consumer loans 664 729
-------- --------
$ 88,511 $126,366
======== ========
22
During the first quarter of 1997 the Company purchased and
originated $64.5 million of single-family residential loans to sub-prime
borrowers. The Company also sold $82.1 million of such loans during the first
quarter of 1997 for a gain of $2.7 million.
The following table sets forth the activity in the Company's net loans
available for sale during the periods indicated.
Three Months Ended
March 31,
1997 1996
---------------- ------------
(Dollars in thousands)
Balance at beginning of period $126,366 $251,790
Purchases:
Single-family residential 37,667 70,192
Multi-family residential -- 10,456
----------- ----------
Total loans purchased 37,667 80,648
---------- ----------
Originations:
Single-family residential 28,164 --
Sales (85,486) (62,038)
Lower of cost or market reserve 158 (1,338)
Loans transferred (to)from loan portfolio (13,694) 1,964
Principal repayments, net of
capitalized interest (2,959) (16,948)
Transfer to real estate owned (1,705) (495)
---------- ----------
Net (decrease) increase in loans (37,855) 1,793
---------- ----------
Balance at end of period $ 88,511 $253,583
========== ==========
The following table presents a summary of the Company's
non-performing loans in the loans available for sale portfolio at the dates
indicated:
March 31, December 31,
1997 1996
------------------ ------------------
(Dollars in thousands)
Non-performing loans
Single-family $13,054 $14,410
Consumer 37 36
------- -------
$13,091 $14,446
======= =======
Non-performing loans increased by $1.4 million or 9.4% from
December 31, 1996 to March 31, 1997, of which $1.1 million resulted from the
Company's loans to sub-prime borrowers. Although non-conforming loans generally
have higher levels of default than conforming loans, the Company believes that
the borrower's equity in the security property and its expertise in the area of
resolution of non-performing loans will continue to make its non-conforming
borrower loan program a profitable one notwithstanding such defaults and any
resulting losses.
Investment Securities. Investment securities increased by $2.3
million from December 31, 1996 to March 31, 1997 and consisted primarily of
required holdings of FHLB stock.
23
Discount Loan Portfolio. The following table sets forth the
composition of the Company's discount loan portfolio by type of loan at the
dates indicated.
March 31, December 31,
1997 1996
----------- -----------
(Dollars in thousands)
Single-family residential loans (1) $ 835,592 $ 504,049
Multi-family residential loans 323,553 341,796
Commercial real estate loans 401,054 465,801
Other loans 2,186 2,753
----------- -----------
Total discount loans 1,562,385 1,314,399
Unaccreted discount (264,605) (241,908)
Allowance for loan losses (16,808) (11,538)
----------- -----------
Discount loans, net $ 1,280,972 $ 1,060,953
=========== ===========
(1) Does not include the Company's 50% ownership interest in the LLC, which
held $48.6 million and $110.7 million of discount single-family
residential loans at March 31, 1997 and December 31, 1996, respectively.
See "Changes in Financial Condition - Investment in Joint Venture" below.
Inclusive of the Company's pro rata interest in such loans, the Company's
discount loans, net amounted to $1.31 billion and $1.12 billion at March
31, 1997 and December 31, 1996, respectively.
The following tables set forth the activity in the Company's gross
discount loan portfolio during the periods indicated.
Three Months Ended March 31,
-----------------------------------------------------------------------------
1997 1996
------------------------------------ ------------------------------------
No. of No. of
Balance Loans Balance Loans
---------------- --------------- ----------------- --------------
(Dollars in thousands)
Balance at beginning of period $1,314,399 5,460 $943,529 4,543
Acquisitions (1) 442,878 8,211 34,918 7
Resolutions and repayments (63,553) (194) (72,032) (285)
Loans transferred to real estate owned (51,586) (392) (25,533) (193)
Sales (79,753) (883) (26,499) (256)
---------- ------ ------- ------
Balance at end of period $1,562,385 12,202 $854,383 3,816
========= ====== ======= =====
(1) During the first quarter of 1997, acquisitions consisted of $436.8
million of single-family residential loans, $5.2 million of
multi-family residential loans, and $0.9 million of commercial real
estate loans. Included in acquisitions for the first quarter of 1997
are the Company's approximate one-half allocated share of 13,781
single-family residential loans acquired by the Company and its
co-investor at an auction by HUD with an aggregate unpaid principal
balance of $855.7 million for a purchase price of $757.4 million.
24
The following table sets forth certain information relating to the
payment status of loans in the Company's discount loan portfolio at the dates
indicated.
March 31, December 31,
1997 1996
----------- -----------
Loan status (Dollars in thousands)
Past due less than 31 days $ 535,999 $ 579,597
Past due 31 days to 89 days 40,365 22,161
Past due 90 days or more 975,517 563,077
Acquired and servicing not yet transferred 10,504 149,564
----------- -----------
$ 1,562,385 $ 1,314,399
=========== ===========
For discussion and analysis regarding the allowance for loan losses
on discount loans, see "Changes in Financial Condition - Allowance for Losses"
below.
Loan Portfolio. The following table sets forth the composition of
the Company's loan portfolio by type of loan at the dates indicated.
March 31, December 31,
1997 1996
--------- --------
(Dollars in thousands)
Single-family residential loans $ 73,118 $ 73,186
Multi-family residential loans 90,776 67,842
Commercial real estate and land loans:
Hotel 196,523 200,311
Office buildings 119,944 128,782
Land 4,566 2,332
Other 23,415 25,623
--------- --------
Total 344,448 357,048
Commercial non-mortgage 3,750 2,614
Consumer 402 424
--------- --------
Total loans 512,494 501,114
Undisbursed loan funds (80,487) (89,840)
Unaccreted discount (4,941) (5,169)
Allowance for loan losses (4,834) (3,523)
--------- --------
Loans, net $ 422,232 $402,582
========= ========
25
The following table sets forth the activity in the Company's gross
loan portfolio during the periods indicated.
The Months Ended
March 31,
----------------------
1997 1996
---------- ---------
(Dollars in thousands)
Balance at beginning of period $501,114 $ 342,649
Originations:
Single-family residential loans 1,769 4,179
Multi-family residential loans 12,680 7,410
Commercial real estate loans and land loans -- 21,000
Commercial non-mortgage and consumer loans 1,134 --
--------- ---------
Total loans originated 15,583 32,589
--------- ---------
Purchases -- --
Sales -- --
Loans transferred from (to) available for sale 13,802 (2,000)
Principal repayments, net of capitalized interest (17,652) (42,929)
Transfer to real estate owned (353) (243)
--------- ---------
Net increase(decrease) in loans 11,380 (12,583)
--------- ---------
Balance at end of period $512,494 $ 330,066
========= =========
The following table presents a summary of the Company's
non-performing loans in the loan portfolio and significant ratios at the dates
indicated:
March 31, December 31,
1997 1996
------------ ------------
(Dollars in thousands)
Non-performing loans:
Single-family residential loans $1,728 $2,123
Multi-family residential loans 7,517 106
Consumer and other loans 62 55
------ ------
$9,307 $2,284
====== ======
Non-performing loans as a percentage of:
Total loans (1) 2.15% 0.54%
Total assets 0.35% 0.10%
(1) Total loans is net of undisbursed loan proceeds.
Allowances for Losses. The Company maintains an allowance for loan
losses for each of its loan portfolio and discount loan portfolio at a level
which management considers adequate to provide for potential losses in each
portfolio based upon an evaluation of known and inherent risks in such
portfolios.
26
The following table sets forth the allocation of the Company's
allowance for loan losses at March 31, 1997 and December 31, 1996 by loan
category and the percentage of loans in each category to total loans in the
respective portfolios at the dates indicated:
March 31, 1997 December 31, 1996
------------------------------------------ -------------------------------------------
Gross Gross
Loan Loan
Allowance Balance Percent Allowance Balance Percent
--------- -------- ------- --------- ------- -------
(Dollars in thousands)
Loan portfolio:
Single-family $ 433 $ 73,118 14.3% $ 520 $ 73,186 14.6%
Multi-family 1,745 90,776 17.7% 673 67,842 13.5%
Commercial 2,610 344,448 67.2% 2,299 357,048 71.3%
Commercial non mortgage 28 3,750 0.7% 11 2,614 0.5%
Other 18 402 0.1% 20 424 0.1%
--------- ---------- --------- ----------
$ 4,834 $ 512,494 100.0% $ 3,523 $ 501,114 100.0%
========= ========== ========= ==========
Discount loan portfolio:
Single-family $ 8,522 $ 835,592 53.5% $ 3,528 $ 504,049 38.4%
Multi-family 3,464 323,553 20.7% 3,124 341,796 26.0%
Commercial 4,822 401,054 25.7% 4,886 465,801 35.4%
Other -- 2,186 0.1% -- 2,753 0.2%
--------- ---------- --------- ----------
$ 16,808 $1,562,385 100.0% $ 11,538 $1,314,399 100.0%
========= ========== ========= ==========
The allocation of the allowance to each category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any other category.
The following table summarizes activity in the allowance for loan
losses by portfolio and property type during the three months ended March 31,
1997.
Balance Balance
December 31, March 31,
1996 Additions Charge-offs Recoveries 1997
------------------- -------------- ---------------- ------------ -----------------
(Dollars in thousands)
Loan portfolio:
Single-family $ 520 $ (53) $ (34) $ $ 433
Multi-family 673 1,072 -- -- 1,745
Commercial real estate 2,299 311 -- -- 2,610
Commercial non mortgage 11 17 -- -- 28
Consumer 20 (2) -- -- 18
------- -------- ------- ------- --------
$ 3,523 $ 1,345 $ (34) $ -- $4,834
======= ======== ======== ======= ========
Discount loans:
Single-family $ 3,528 $ 6,742 $(1,795) $ 47 $8,522
Multi-family 3,124 849 (509) -- 3,464
Commercial 4,886 806 (870) -- 4,822
------- ---------- ---------- --------- -----------
$11,538 $8,397 $(3,174) $ 47 $16,808
======= ========== ========== ========= ===========
Investments in Low-Income Housing Tax Credit Interests. In 1993,
the Company commenced a program to invest in multi-family residential
projects which have been allocated low income housing tax credits under
Section 42 of the Internal Revenue Code by a state tax credit allocating
agency. At March 31, 1997 the Company had $99.9 million of investments in
low-income housing tax credit interests as compared to $93.3 million at
December 31, 1996, an increase of $6.6 million or 7%.
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 $23.7 million at March 31, 1997, are
accounted for using the equity method in accordance with the consensus of the
Emerging Issues Task Force through Issue Number 94-1. Limited partnership
investments made prior to May 18, 1995, which amounted to $52.2 million at
March 31, 1997, are accounted for under the effective yield method as a
reduction of income tax expense. Low-income housing tax credit partnerships
in which the Company invests as both a limited and, through a subsidiary,
general partner amounted to $24.0 million at March 31, 1997 and are presented
on a consolidated basis.
27
Investment in Joint Ventures. General. The Company's investment
in joint ventures decreased 50.8% from $67.9 million at December 31, 1996 to
$33.4 million at March 31, 1997. The decrease in investment in joint ventures
is primarily due to the sale of loans and real estate owned by the LLC,
including the $51.7 million securitization of loans in March 1997, offset in
part by the Company's $1.1 million investment in BCFL in January 1997. The
Company's investment in the LLC amounted to $32.3 million and $67.9 million
at March 31, 1997 and December 31, 1996, respectively, and is net of
valuation allowances of $2.5 million and $5.1 million, respectively. See Note
3 to the Interim Consolidated Financial Statements.
In connection with the LLC's acquisition of the loans from HUD
("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. All of the HUD Loans are secured by first
mortgage liens on single-family residential properties. 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.
28
The following table sets forth information relating to the payment
status of the HUD Loans at the dates indicated.
March 31, 1997 December 31, 1996
----------------------------------- -------------------------------------
Principal % of HUD Principal % of HUD
Amount Loans Amount Loans
-------------- ---------------- --------------- ----------------
HUD Loans without Forbearance Agreements:
Past due less than 31 days $ 2,255 3.06 $ 6,709 4.21
Past due 31 to 89 days 919 1.25 3,011 1.89
Past due 90 days or more 45,810 62.14 84,509 53.02
------- ------ -------- ------
Subtotal 48,984 66.45 94,229 59.12
------- ------ -------- ------
HUD Loans with Forbearance Agreements:
Past due less than 31 days 2,531 3.43 4,867 3.05
Past due 31 to 89 days 1,294 1.76 5,168 3.24
Past due 90 days or more 20,908 28.36 55,141 34.59
------- ------ -------- ------
Subtotal 24,733 33.55 65,176 40.88
======= ====== ======== ======
Total $73,717 100.00 $159,405 100.00
======= ====== ======== =======
Real Estate Owned. Properties acquired through foreclosure are
valued at the lower of the adjusted cost basis of the loan or fair value less
estimated costs of disposal of the property at the date of foreclosure.
Properties included in the Company's real estate owned are periodically
re-evaluated to determine that they are being carried at the lower of cost or
fair value less estimated costs to dispose. Rental income related to
properties is reported as earned. Holding and maintenance costs related to
properties are recorded as period costs as incurred. Decreases in market
value of foreclosed real estate subsequent to foreclosure are recognized as a
valuation allowance on a property specific basis. Subsequent increases in the
market value of the foreclosed real estate are reflected as reductions in the
valuation allowance, but not below zero. Such changes in the valuation
allowance are charged or credited to income.
The following table sets forth certain information relating to the
Company's real estate owned at the dates indicated:
March 31, December 31,
1997 1996
-------- ------------
(Dollars in thousands)
Discount loan portfolio:
Single-family residential $ 45,839 $ 49,728
Multi-family residential 10,468 14,046
Commercial real estate 40,084 36,264
-------- --------
Total 96,391 100,038
Loan portfolio 581 592
Loans available for sale portfolio 1,494 3,074
-------- --------
$ 98,466 $103,704
======== ========
29
The following schedule sets forth the activity in the valuation
allowance on real estate owned for the periods indicated.
Three Months Ended
March 31,
-------------------------
1997 1996
-------- -------
Balance at beginning of period $ 11,493 $ 4,606
Provision for loss in fair value 2,337 6,378
Charge-offs and sales (6,239) (2,394)
-------- -------
Balance at end of period $ 7,591 $ 8,590
======== =======
The following table sets forth the activity in the Company's real
estate owned during the periods indicated.
Three Months Ended March 31,
-------------------------------------------------------------------------------
1997 1996
----------------------------------- ---------------------------------------
No. of No. of
Amount Properties Amount Properties
--------------- --------------- --------------- -----------------
(Dollars in thousands)
Balance at beginning of period $103,704 825 $166,556 1,070
Properties acquired through
foreclosure or deed-in-lieu thereof. 37,653 407 16,220 200
Acquired in connection with
acquisitions of discount loans 70 3 1,197 3
Sales (46,863) (533) (28,733) (239)
Change in allowance 3,902 - (3,984) --
-------- ---- -------- -----
Balance at end of period $ 98,466 702 $151,256 1,034
======== ==== ======== =====
The following table sets forth the amount of time that the Company
had held its real estate owned at the dates indicated.
March 31, December 31,
1997 1996
-------------------- -------------------
(Dollars in thousands)
One to two months $ 32,539 $ 17,695
Three to four months 12,572 15,291
Five to six months 7,637 14,348
Seven to twelve months 12,855 13,004
Over twelve months 32,863 43,366
-------- --------
$ 98,466 $103,704
======== ========
Investment in Real Estate. In conjunction with its multi-family and
commercial real estate lending business activities, the Company has made certain
acquisition, development and construction loans in which the Company
participates in the expected residual profits of the underlying real estate and
the borrower has not made an equity contribution substantial to the overall
project. As such, the Company accounts for these loans under the equity method
of accounting as though it has made an investment in a real estate limited
partnership. The Company's investment in such loans amounted to $30.3 million at
March 31, 1997, as compared to $24.9 million at December 31, 1996. Currently,
the Company does not intend, except for commitments outstanding, to originate
new loans in which it participates in the residual profits in underlying real
estate.
30
The Company also has invested in The Westin Hotel, Columbus,
located in Columbus, Ohio. The Company's investment in such property
decreased to $15.9 million at March 31, 1997 from $16.1 million at December
31, 1996 as a result of depreciation recorded against the asset.
Deferred Tax Asset. At March 31, 1997 the deferred tax asset, net
of deferred tax liabilities, amounted to $3.3 million, a decrease of $2.6
million from the $5.9 million deferred tax asset at December 31, 1996. At
March 31, 1997, the gross deferred tax asset amounted to $16.0 million and
consisted primarily of $2.1 million of mark-to-market and reserves on real
estate owned, $4.0 million of deferred interest expense on the discount loan
portfolio, $3.8 million of valuation allowance reserve and $1.9 million of
profit sharing expense, and the gross deferred tax liability amounted to
$12.7 million and consisted primarily of $4.4 million of deferred interest
income on the discount loan portfolio, $1.5 million related to hedging
transactions, and $3.7 million of mark-to-market on securities available for
sale. At December 31, 1996, the gross deferred tax asset amounted to $15.1
million and consisted primarily of $3.7 million related to tax residuals,
$3.5 million of mark-to-market and reserves on real estate owned and $3.9
million of deferred interest expense on the discount loan portfolio, and the
gross deferred tax liability amounted to $9.2 million and consisted primarily
of $4.6 million of deferred interest income on the discount loan portfolio
and $2.1 million of mark-to-market on certain securities available for sale.
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 March 31, 1997. 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 March 31,
1997 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
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 $187.1 million during the first quarter
of 1997 primarily as a result of brokered deposits obtained through national
investment banking firms which solicit deposits from their customers, which
amounted to $1.35 billion at March 31, 1997, as compared to $1.22 billion at
December 31, 1996. The Company's deposits also increased during the first
quarter of 1997 as a result of the Company's direct solicitation and marketing
efforts to regional and local investment banking firms, institutional investors
and high net worth individuals. Deposits obtained in this manner amounted to
$607.1 million at March 31, 1997 as compared to $540.6 million at December 31,
1996. At March 31, 1997 the Company had $267.2 million of certificates of
deposit in amounts of $100,000 or more, including $138.4 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. Securities sold
under agreements to repurchase decreased $35.3 million from December 31, 1996 to
March 31, 1997. From time to time, the Company utilizes such collateralized
borrowings as additional sources of liquidity.
Notes, Debentures and Other Interest-Bearing Obligations. Notes,
debentures and other interest-bearing obligations remained unchanged from
December 31, 1996 and consist primarily of $100 million of 12% Debentures issued
in June 1995 and due June 2005, and $125.0 million of 11.875% of notes issued in
September 1996 and due September 2003.
Stockholders' Equity. Stockholders' equity increased by $21.6
million or 11% from December 31, 1996 to March 31, 1997. The increase in
stockholders' equity during this period was attributable to net income of $17.0
million, an increase of $3.2 million in the unrealized gain on securities
available for sale and a $1.5 million decrease in the outstanding balance of
loans made to certain officers and directors to fund their exercise of stock
options. See the Consolidated Statements of Changes in Stockholders' Equity in
the Interim Consolidated Financial Statements.
31
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
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. At March 31, 1997, the Company had entered into interest rate
exchange agreements with an aggregate notional amount of $44.1 million. Interest
rate exchange agreements had the effect of decreasing the Company's net interest
income by $74,000 and $0 during the three months ended March 31, 1997 and 1996,
respectively.
The Company also enters into interest rate futures contracts, which
are commitments to either purchase or sell designated financial instruments at a
future date for a specified price and may be settled in cash or through
delivery. Eurodollar futures contracts have been sold by the Company to hedge
the repricing or maturity risk of certain short duration mortgage-related
securities, and U.S. Treasury futures contracts have been sold by the Company to
offset declines in the market value of its fixed-rate loans and certain
fixed-rate mortgage-backed and related securities available for sale in the
event of an increasing interest rate environment. At March 31, 1997, the Company
had entered into U.S. Treasury futures (short) contracts with an aggregate
notional amount of $264.3 million. The Company had no outstanding Eurodollar
futures contracts at March 31, 1997. Futures contracts had the effect of
decreasing the Company's net interest income by $904,000 and $240,000 during the
three months ended March 31, 1997 and 1996, respectively. See Note 4 to the
Interim Consolidated Financial Statements.
The Asset/Liability Committee's methods for evaluating interest
rate risk include an analysis of the Company's interest rate sensitivity
"gap", which is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest-rate
sensitive assets exceeds the amount of interest-rate sensitive liabilities. A
gap is considered negative when the amount of interest-rate sensitive
liabilities exceeds interest-rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income, while a positive
gap would tend to affect net interest income adversely. Because different
types of assets and liabilities with the same or similar maturities may react
differently to changes in overall market rates or conditions, changes in
interest rates may affect net interest income positively or negatively even
if an institution were perfectly matched in each maturity category.
The following table sets forth the estimated maturity or repricing
of the Company's interest-earning assets and interest-bearing liabilities at
March 31, 1997. The amounts of assets and liabilities shown within a
32
particular period were determined in accordance with the contractual terms of
the assets and liabilities, except (i) adjustable-rate loans, performing
discount loans, securities and FHLB advances are included in the period in which
they are first scheduled to adjust and not in the period in which they mature,
(ii) fixed-rate mortgage-related securities reflect estimated prepayments, which
were estimated based on analyses of broker estimates, the results of a
prepayment model utilized by the Company and empirical data, (iii)
non-performing discount loans reflect the estimated timing of resolutions which
result in repayment to the Company, (iv) fixed-rate loans reflect scheduled
contractual amortization, with no estimated prepayments, (v) NOW and money
market checking deposits and savings deposits, which do not have contractual
maturities, reflect estimated levels of attrition, which are based on detailed
studies of each such category of deposit by the Bank, and (vi) escrow deposits
and other non-interest bearing checking accounts, which amounted to $95.2
million at March 31, 1997, 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.
March 31, 1997
-------------------------------------------------------------------------
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 $ 107,802 $ -- $ -- $ -- $ 107,802
Securities available for sale 26,688 62,190 71,831 187,357 348,066
Loans available for sale (1) 13,857 33,358 12,919 28,377 88,511
Investment securities, net 95 238 19 10,849 11,201
Loan portfolio, net (1) 118,372 86,726 53,522 163,612 422,232
Discount loan portfolio, net 201,850 446,097 291,081 341,944 1,280,972
----------- ----------- ----------- ----------- -----------
Total rate-sensitive assets 468,664 628,609 429,372 732,139 2,258,784
----------- ----------- ----------- ----------- -----------
Rate-Sensitive Liabilities:
NOW and money market checking
deposits 13,784 1,292 1,431 6,145 22,652
Savings deposits 348 266 292 1,167 2,073
Certificates of deposit 326,956 642,889 444,154 572,941 1,986,940
----------- ----------- ----------- ----------- -----------
Total interest-bearing deposits 341,088 644,447 445,877 580,253 2,011,665
FHLB advances -- 399 -- -- 399
Securities sold under agreements to
repurchase 39,224 -- -- -- 39,224
Subordinated debentures -- -- -- 225,573 225,573
----------- ----------- ----------- ----------- -----------
Total rate-sensitive liabilities 380,312 644,846 445,877 805,826 2,276,861
----------- ----------- ----------- ----------- -----------
Interest rate sensitivity gap before
off-balance sheet financial
instruments 88,352 (16,237) (16,505) (73,687) (18,077)
Off-Balance Sheet Financial
Instruments:
Futures contracts and interest rate swap 286,131 (39,595) (46,230) (200,306) --
----------- ----------- ----------- ----------- -----------
Interest rate sensitivity gap $ 374,483 $ (55,832) $ (62,735) $ (273,993) $ (18,077)
=========== =========== =========== =========== ===========
Cumulative interest rate sensitivity gap $ 374,483 $ 318,651 $ 255,916 $ (18,077)
=========== =========== =========== ===========
Cumulative interest rate sensitivity
gap as a percentage of
total rate-sensitive assets 16.58% 14.11% 11.33% (0.80)%
=========== =========== =========== ===========
(1) Balances have not been reduced for non-performing 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
33
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.
The following table sets forth at March 31, 1997 the estimated
percentage change in the Company's net interest income over a four-quarter
period and MVPE based upon the indicated changes in interest rates, assuming an
instantaneous and sustained uniform change in interest rates at all maturities.
Change Estimated Change in
(in Basis Points) ------------------------------------
in Interest Rates Net Interest Income MVPE
--------------------- ------------------------------------
+400 11.99% (7.09)%
+300 8.99 (4.44)
+200 6.00 1.27
+100 3.00 (1.19)
0 -- --
-100 (3.00) (8.81)
-200 (6.00) (22.72)
-300 (8.99) (31.56)
-400 (11.99) (36.70)
The negative estimated changes in MVPE for -100 to -400 changes
in interest rates is attributable to the Company's investments in IO stripped
mortgage-backed securities. Increased prepayments of the underlying mortgages
as a result of a decrease in market interest rates or other factors can
result in a loss of all or part of the purchase price of IO strips. The IO
strip portfolio is also adversely affected by an increase in rates due
primarily to inverse IO strips whose interest rates change inversely with,
and often as a multiple of, a specialized index such as the one-month LIBOR
rate. An increasing rate environment adversely affects the value of inverse
IO strips, because the coupons of inverse IO strips decrease in an increasing
rate environment. IO strips exhibit considerably more price volatility than
mortgage or ordinary mortgage pass-through securities, due in part to the
uncertain cash flows that result from changes in the prepayment rates of the
underlying mortgages.
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
primarily from wholesale sources. At March 31, 1997 the Company had $1.99
billion of certificates of deposit, including $1.35 billion of brokered
certificates of deposit obtained through national investment banking firms, all
of which are non-cancelable. At the same date scheduled maturities of
certificates of deposit during the 12 months ending March 31, 1998 and 1999 and
thereafter amounted to $957.4 million, $449.4 million and $580.1 million,
respectively. Brokered and other wholesale deposits generally are more
responsive to changes in interest rates than core deposits and,
34
thus, are more likely to be withdrawn from the Company upon maturity as changes
in interest rates and other factors are perceived by investors to make other
investments more attractive. Management of the Company believes that it can
adjust the rates paid on certificates of deposit to retain deposits in changing
interest rate environments, and that brokered and other wholesale deposits can
be both a relatively cost-effective and stable source of funds.
There can be no assurance that this will continue to be the case in the future,
however.
Sources of borrowings include FHLB advances, which are required to
be secured by single-family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. At March 31, 1997, the
Company had $399,000 of FHLB advances outstanding, was eligible to borrow up to
an aggregate of $167.1 million from the FHLB of New York (subject to the
availability of acceptable collateral) and had $123.4 million of single-family
residential loans, $10.5 million of multi-family residential loans and $33.2
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 $188.1 million of
unencumbered mortgage-related securities which could be used to secure such
borrowings.
The Company's operating activities provided cash flows of $124.2
million and $8.3 million during the three months ended March 31, 1997 and
1996, respectively. During the foregoing periods cash resources were provided
primarily by net income, sale of securities held for trading and proceeds
from sales of loans available for sale, and cash resources were used
primarily to purchase and originate loans available for sale.
The Company's investing activities used cash flows totaling
$212.8 million and provided cash flows of $104.5 million during the three
months ended March 31, 1997 and 1996, respectively. During the foregoing
periods, cash flows from investing activities were provided primarily by
principal payments on and sales of discount loans and loans held for investment,
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 discount loans and loans held for investment and purchase
securities available for sale.
The Company's financing activities provided $153.2 million and
used $89.6 million during the three months ended March 31, 1997 and 1996,
respectively. Cash flows from financing activities primarily relate to
changes in the Company's deposits and reverse repurchase agreements.
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 6.35% during the three months ended March 31, 1997 and amounted to
6.51% at March 31, 1997.
At March 31, 1997, the Company had $174.0 million of unfunded
commitments related to purchases and originations of loans. The Company also
had a $6.8 million commitment at March 31, 1997 to acquire an 80% interest in
the assets of Admiral. 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 1997.
For additional information relating to commitments and contingencies at March
31, 1997, see Note 6 to the Interim Consolidated Financial Statements.
In addition to commitments to extend credit, the Company is party to
various off-balance sheet financial instruments in the normal course of business
to manage its interest rate risk. See "Asset and Liability Management" above and
Note 4 to the Interim Consolidated Financial Statements.
The Company conducts business with a variety of financial
institutions and other companies in the normal course of business, including
counterparties to its off-balance sheet financial instruments. The Company is
subject to potential financial loss if the counterparty is unable to complete
an agreed upon
35
transaction. The Company seeks to limit counterparty risk through financial
analysis, dollar limits and other monitoring procedures.
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. Based
upon recent discussions with the OTS, the Bank has determined to maintain a
core capital ratio of at least 9% and a total risk-based capital ratio of no
less than 13%. The Bank also determined to transfer its single-family
residential lending activities to non-conforming borrowers to a non-bank
subsidiary of Ocwen. The Bank believes at this time that it will continue to
be a "well-capitalized insititution" under OTS regulations.
In August 1993, the OTS promulgated regulations which incorporate
an interest rate risk component into the OTS risk-based capital requirements,
and in August 1995 the OTS postponed the effectiveness of this regulation
after having previously deferred the effective date several times. Because
only institutions whose measured interest rate risk exceeds certain
parameters will be subject to the interest rate risk capital requirement,
management of the Bank does not believe that this regulation will increase
the Bank's risk-based regulatory capital requirement if it becomes effective
in its current form. For additional information relating to regulatory
capital requirements and the Bank's capital ratios, see Note 5 to the Interim
Consolidated Financial Statements.
36
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to various 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 financial
condition or operations of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the three months
ending March 31, 1997.
37
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
(On behalf of the Registrant and
as its principal financial officer)
Date: May 14, 1997
38
9
1,000
3-MOS
DEC-31-1997
JAN-01-1997
MAR-31-1997
8,966
8,802
99,000
0
348,066
11,201
0
1,791,715
21,642
2,649,471
2,106,829
39,623
52,290
225,573
0
0
268
224,888
2,649,471
43,767
9,102
1,658
54,527
29,894
37,164
17,363
9,742
10,563
22,697
20,647
20,647
0
0
17,041
0.63
0.63
10.062
811,376
0
0
0
15,061
3,208
47
21,642
21,642
0
0
TAG 17 INCLUDES LOANS AVAILABLE FOR SALE OF $88,511 LOAN PORTFOLIO
OF $422,232 AND DISCOUNT LOAN PORTFOLIO OF $ 1,280,972
TAG 18 INCLUDES ALLOWANCE FOR LOAN LOSSES ON LOAN PORTFOLIO OF
$4,834 AND ON DISCOUNT LOAN PORTFOLIO OF $16,808.
