Exhibit 13.1
FINANCIAL TABLE OF CONTENTS
SELECTED CONSOLIDATED FINANCIAL INFORMATION............................... 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................. 13
REPORT OF MANAGEMENT...................................................... 62
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........................ 63
CONSOLIDATED FINANCIAL STATEMENTS......................................... 64
SHAREHOLDER INFORMATION................................................... 117
9
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables present selected consolidated financial information
of Ocwen Financial Corporation and its subsidiaries at the dates and for the
years indicated. Our historical operations and balance sheet data at and for the
years ended December 31, 2001, 2000, 1999, 1998 and 1997 have been derived from
our financial statements audited by PricewaterhouseCoopers LLP, independent
certified public accountants. We have classified certain amounts included in the
2000, 1999, 1998 and 1997 selected consolidated financial information to conform
to the 2001 presentation. The selected consolidated financial information should
be read in conjunction with, and is qualified in its entirety by reference to,
the information we have provided in our Consolidated Financial Statements and
the Notes to Consolidated Financial Statements on pages 64 to 116.
For the Year Ended December 31,
-------------------------------------------------------------
2001 2000 1999(1) 1998(1) 1997
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
Operations Data:
Interest income ............................................... $ 83,371 $ 184,816 $ 253,224 $ 307,694 $ 272,531
Interest expense .............................................. 93,329 169,090 155,542 184,893 156,289
--------- --------- --------- --------- ---------
Net interest income (expense) before provision for loan
losses .................................................... (9,958) 15,726 97,682 122,801 116,242
Provision for loan losses ..................................... 15,666 15,177 6,710 18,509 32,218
--------- --------- --------- --------- ---------
Net interest income (expense) after provision for loan
losses .................................................... (25,624) 549 90,972 104,292 84,024
--------- --------- --------- --------- ---------
Servicing and other fees ...................................... 134,597 97,080 76,018 59,163 25,962
Gain (loss) on interest-earning assets, net (2) ............... (3,949) 17,625 44,298 129,988 82,212
Gain (loss) on trading and match funded securities, net (3) ... 16,330 (3,971) -- -- --
Impairment charges on securities available for sale (3) ....... -- (11,597) (58,777) (129,714) --
Gain (loss) on real estate owned, net ......................... (9,256) (14,904) (3,957) 13,429 7,276
Gain (loss) on other non-interest earning assets, net (4) ..... (1,054) 45,517 58,693 17,702 6,052
Net operating gains (losses) on investments in real
estate (5) .................................................. 5,581 27,579 820 (1,112) 144
Amortization of excess of net assets acquired over
purchase price (1) .......................................... 18,333 14,112 3,201 -- --
Other income .................................................. 8,759 6,084 24,346 21,994 2,446
--------- --------- --------- --------- ---------
Total non-interest income ................................... 169,341 177,525 144,642 111,450 124,092
--------- --------- --------- --------- ---------
Non-interest expense .......................................... 182,446 170,009 195,068 226,529 127,017
Distributions on Company-obligated, mandatorily redeemable
securities of subsidiary trust holding solely junior
subordinated debentures of the Company ...................... 7,132 11,380 13,111 13,594 5,249
Equity in income (losses) of investments in unconsolidated
entities (6) ................................................ 304 (5,249) (12,616) (7,985) 23,688
--------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary gain ...... (45,557) (8,564) 14,819 (32,366) 99,538
Income tax expense (benefit) (7) .............................. 81,587 7,957 2,608 (30,699) 21,309
Minority interest in net loss of consolidated subsidiary ...... -- -- (638) (467) (703)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary gain ....................... (127,144) (16,521) 12,849 (1,200) 78,932
Extraordinary gain on repurchase of debt, net of taxes ........ 2,362 18,713 6,983 -- --
--------- --------- --------- --------- ---------
Net income (loss) ............................................. $(124,782) $ 2,192 $ 19,832 $ (1,200) $ 78,932
========= ========= ========= ========= =========
Income (loss) before extraordinary gain per share:
Basic ....................................................... $ (1.89) $ (0.25) $ 0.20 $ (0.02) $ 1.40
Diluted ..................................................... $ (1.89) $ (0.25) $ 0.20 $ (0.02) $ 1.39
Net income (loss) per share:
Basic ....................................................... $ (1.86) $ 0.03 $ 0.31 $ (0.02) $ 1.40
Diluted ..................................................... $ (1.86) $ 0.03 $ 0.31 $ (0.02) $ 1.39
10
At or For the Year Ended December 31,
----------------------------------------------------------------------
2001 2000 1999(1) 1998 1997
----------- ----------- ----------- ----------- -----------
Balance Sheet Data: (Dollars in thousands)
Total assets ............................................. $ 1,711,150 $ 2,249,420 $ 3,281,674 $ 3,301,083 $ 3,048,149
Trading securities, at fair value (3) .................... 226,249 390,242 -- -- --
Securities available for sale, at fair value (3) ......... -- -- 587,518 593,347 441,638
Loans available for sale, at lower of cost or market (8).. 1,040 10,610 45,213 177,847 177,041
Affordable housing properties (9) ........................ 102,069 142,812 150,989 144,164 128,614
Loan portfolio, net ...................................... 64,925 93,414 157,408 230,312 266,299
Discount loan portfolio .................................. 119,327 536,028 913,229 1,026,511 1,434,176
Match funded assets, net (10) ............................ 174,351 116,987 157,794 -- --
Investments in unconsolidated entities ................... 1,067 430 37,118 86,893 38,684
Real estate owned, net ................................... 110,465 146,419 167,506 201,551 167,265
Investments in real estate and real estate held for
sale (11) ............................................. 130,314 145,431 268,241 36,860 76,340
Advances on loans and loans serviced for others .......... 283,183 277,055 162,548 108,078 51,061
Mortgage servicing rights ................................ 101,107 51,426 11,683 7,060 5,739
Deposits ................................................. 730,443 1,258,360 1,814,647 2,168,791 1,965,844
Bonds-match funded agreements (12) ....................... 156,908 107,050 141,515 -- --
Borrowings and other interest-bearing obligations (13) ... 324,014 206,263 552,804 476,336 453,529
Company-obligated mandatorily redeemable securities
of subsidiary trust holding solely junior subordinated
debentures of the Company ............................. 61,159 79,530 110,000 125,000 125,000
Stockholders' equity (14) ................................ 379,109 503,426 509,442 436,376 419,692
Other Data:
Average assets ........................................... $ 1,988,321 $ 3,095,021 $ 3,187,683 $ 3,574,780 $ 2,835,514
Average equity ........................................... 448,752 495,430 462,216 427,512 290,030
Return on average assets:
Income (loss) before extraordinary gain ............... (6.39)% (0.53)% 0.40% (0.03)% 2.78%
Net income (loss) ..................................... (6.28) 0.07 0.62 (0.03) 2.78
Return on average equity:
Income (loss) before extraordinary gain ............... (28.33) (3.33) 2.78 (0.28) 27.22
Net income (loss) ..................................... (27.81) 0.44 4.29 (0.28) 27.22
Average equity to average assets ......................... 22.52 16.01 14.50 11.96 10.23
Net interest spread ...................................... 1.25 2.06 4.57 3.90 4.81
Net interest margin ...................................... (1.01) 0.81 4.39 4.30 4.91
Efficiency ratio (15) .................................... 69.93 90.43 84.92 100.12 48.11
Bank regulatory capital ratios at end of period:
Tangible .............................................. 13.43 13.83 10.67 9.07 10.66
Core (Leverage) ....................................... 13.64 13.83 10.67 9.07 10.66
Risk-based ............................................ 23.33 21.83 19.12 17.26 14.83
Number of full-service offices at end of period .......... 1 1 1 1 1
11
Notes to Selected Consolidated Financial Information
(1) Financial data we have presented for 1999 and 1998 included our
wholly-owned UK subsidiary, Ocwen UK Limited, formerly known as Ocwen UK
plc ("Ocwen UK"). Ocwen UK was engaged in the subprime mortgage loan
origination and servicing business, began operations on April 24, 1998 and
was sold on September 30, 1999. Beginning in 1999, the financial data
presented also included Ocwen Asset Investment Corp. ("OAC"), which was
acquired on October 7, 1999 for a total purchase price of $101,271. Our
acquisition of OAC resulted in an excess of net assets acquired over the
purchase price of $60,042, which we have amortized to earnings on a
straight-line basis. Previously, we accounted for our investment in OAC
and its operating partnership subsidiary, Ocwen Partnership L.P. ("OPLP"),
under the equity method.
(2) We recognized $36,804, $109,601, and $71,933 of net gains in connection
with the securitization of loans during 1999, 1998, and 1997,
respectively. During the third quarter of 1999, we decided to structure
future securitizations as financing transactions, thereby precluding our
use of gain-on-sale accounting.
(3) On September 30, 2000 we changed our policy for securities available for
sale and match funded securities to account for these securities as
trading. For these securities, changes in fair value are reported in
income in the period of change. Previously, we accounted for our
securities as available for sale, and the unrealized gains and losses for
these securities were reported as a separate component of accumulated
other comprehensive income in stockholders' equity.
(4) Net gains earned in 1999 included a $50,371 gain from the sale of Ocwen
UK. Net gains for 2000 included a gain of $20,025 from the sale of our
unconsolidated investment in Kensington Group plc ("Kensington") on
November 22, 2000. Kensington was engaged in the subprime mortgage loan
origination business in the UK.
(5) Gains for 2001 and 2000, and to a lesser extent 1999, included operating
income from real estate properties acquired as a result of our acquisition
of OAC. Gains for 2001 and 2000 also included equity in earnings related
to certain loans acquired during the first quarter of 2000 which we
account for as investments in real estate under the equity method.
(6) Losses we incurred for 2000 related primarily to our investment in
Kensington. Losses for 1999 and 1998 related primarily to our investment
in Kensington and our equity investments in OAC and OPLP, before their
acquisition on October 7, 1999. Income earned for 1997 resulted from our
investment in BCBF, L.L.C. (the "LLC"), a joint venture formed to acquire
loans from the Department of Housing and Urban Development in April 1996.
The LLC distributed all of its assets on December 12, 1997.
(7) Income tax expense we recorded for 2001, 2000 and 1999 included $83,000,
$17,500 and $2,500, respectively, of net provisions to increase the
valuation allowance on our deferred tax asset.
(8) Loans available for sale at December 31, 1998 included $87,644 of subprime
loans held by Ocwen UK. The decline in our investment in loans available
for sale also reflects our closing of our subprime origination business in
August 1999.
(9) Balance at December 31, 2001 and 2000 included $54,688 and $93,210,
respectively, of affordable housing properties that we have entered into
agreements to sell. Although these agreements resulted in the transfer of
tax credits and operating results for these properties to the purchaser,
they did not qualify as sales for accounting purposes.
(10) Match funded assets at December 31, 1999 and 2000 were comprised of
securitized loans and securities. Match funded assets at December 31, 2001
also included $101,963 of loan servicing advances which were sold but did
not qualify as a sale for accounting purposes. We have accounted for these
transactions as secured borrowings with pledges of collateral. We acquired
the match funded loans as a result of our acquisition of OAC.
(11) Balance at December 31, 2001, 2000 and 1999 included $78,544, $75,080 and
$252,604, respectively, of properties that we acquired as a result of our
acquisition of OAC.
(12) Balances included bonds-match funded agreements we assumed as a result of
our acquisition of OAC and at December 31, 2001 also included $91,766
collateralized by loan servicing advances. See (10) above.
(13) Balance at December 31, 1999 included $140,487 of 11.5% Notes and $159,170
of lines of credit we acquired in connection with our acquisition of OAC.
During 2000, we repurchased our 11.5% Notes and paid down lines of credit
significantly as a result of real estate sales.
(14) Reflects our issuance of 12,371,750 shares of common stock in the amount
of $96,809 in connection with our acquisition of OAC. We repurchased
1,388,300 shares of common stock for an aggregate of $8,996 and 4,611,700
of common stock shares for an aggregate of $30,691 during 2000 and 1999,
respectively. Additionally, we completed a secondary stock offering to the
public of 6,900,000 shares of our common stock in 1997.
(15) The efficiency ratio represents non-interest expense divided by the sum of
net interest income before provision for loan losses, non-interest income
and equity in earnings of investment in unconsolidated entities.
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
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The following discussion of our results of operations, consolidated
financial condition and capital resources and liquidity should be read in
conjunction with our Selected Consolidated Financial Information, Consolidated
Financial Statements and the related notes, all included elsewhere herein.
Overview of Risks and Related Critical Accounting Policies
For the past several years, we have been undergoing a fundamental
transition in the nature of our business. We are exiting our capital-intensive
businesses and growing our fee-based revenue sources. Both of these strategies
are affected by risks in the marketplace, and our ability to measure and report
our operating results and financial position is heavily impacted by the need to
estimate the impact or outcome of these risks or other future events. Our
critical accounting policies are those that relate to the estimation and
measurement of these risks; an understanding of these policies is fundamental to
understanding Management's Discussion and Analysis of Results of Operations and
Financial Condition. Our significant accounting policies are discussed in detail
in Note 1 of our Consolidated Financial Statements (which are incorporated
herein by reference). The following is a summary of our more subjective and
complex accounting policies, as they relate to our overall business strategy.
Our exit from our capital intensive discount loan, real estate and
affordable housing businesses is largely focused on the orderly disposition or
resolution of the assets associated with these lines of business. The critical
accounting policies that affect the measurement of these businesses are those
that determine the valuation of real estate and affordable housing assets as
well as the determination of the allowance for loan losses.
Real estate-related assets include real estate owned, investments in real
estate, and investments in affordable housing properties. These assets are
carried at different bases by asset class and at different amounts within each
asset class, depending on whether the assets are classified as held for
investment or held for sale. In addition, all of these assets are subject to
ongoing impairment tests using various impairment methodologies that differ by
asset class. In general, none of the assets have readily determinable fair
values based on quoted market prices. In certain cases, we utilize appraisals or
other market value estimates, in conjunction with estimates of completion costs
or costs of disposition, to determine asset values. In other cases, we value
these assets based on future cash flow analyses. These cash flow analyses
involve assumptions such as discount rates, anticipated rents received, etc.
that are highly subject to management judgment and estimation. Our task of
estimation is even more challenging given the current risks in the economic
environment, which can result in material and sometimes rapid changes in
valuation estimates. Individual assumptions between and within asset classes can
vary significantly, with variances in assumptions resulting in substantially
different asset values.
The allowance for loan losses is established and maintained at levels we
deem adequate to cover losses resulting from the inability of borrowers to make
contractually required loan payments. Estimates for loan losses are developed by
analyzing historical loan losses, current trends in delinquencies and charge
offs, plans for problem loan administration and resolution, the views of our
regulators, changes in the size and composition of the loan portfolio, and peer
group information. Where there is a question as to the impairment of specific
loans, we obtain valuations of the property or other collateral securing the
loan, and, if applicable, the borrower's current financial information. We also
include in our estimates of inherent probable loan losses the impact of economic
events, the outcome of which are uncertain. These events may include, but are
not limited to, deterioration in general economic conditions, increases or
decreases in overall lending rates, political conditions, legislation that
directly and indirectly affects the banking industry, and regional economic
conditions affecting specific geographical areas in which we conduct business.
Our most significant area of growth during the past year has been our
residential loan servicing business, which virtually doubled the transaction
volumes processed during the course of 2001. Inherent in our growth of this
business has been an increase in purchased mortgage servicing rights, an
intangible asset representing the present value of the right to service loans in
a portfolio. Therefore, the most critical accounting policy for this business
line is the methodology we use to determine the valuation of mortgage servicing
rights. Application of this methodology requires the development of a number of
estimates, including anticipated amortization and periodic revaluation. Both our
initial and ongoing valuations and the rate of amortization of mortgage
servicing rights are significantly affected by interest rates, prepayment speeds
and the payment performance of the underlying loans. In general, during periods
of declining interest rates, the value of mortgage servicing assets declines due
to increasing prepayments attributable to increased mortgage refinance activity.
We amortize mortgage servicing rights over the period of estimated net servicing
income based on our projections of the amount and timing of future cash flows.
The amount and timing of servicing asset amortization is adjusted periodically
based on actual results and updated projections.
Our other core business line is Ocwen Technology Xchange ("OTX"), our
technology solutions business. At December 31, 2001 we had goodwill and
intellectual property recorded as a result of the acquisitions of three
predecessor technology companies, as well as
13
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
capitalized software development costs for the period of early development,
which ended in 1999. These assets are subject to periodic impairment tests,
under which the determination of realization is dependent upon projected future
income. The realizability of these assets is based primarily on
product-by-product projections of future income, which involve a comparison of
the projected undiscounted cash flows of the underlying software products to the
carrying amounts of the assets. Effective January 1, 2002 we adopted Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangibles. SFAS 142 prescribes a new methodology for performing the impairment
analyses for goodwill and other intangibles, which changes to an approach based
on fair value of the assets rather than undiscounted cash flows as used prior to
adoption. We are in the process of performing this analysis using our previously
developed projections of future income discounted at a market rate. The
determination of market discount rates is also subjective and may vary by
product based on the type of product, stage of development and sales to date. We
have not yet completed this impairment analysis.
Another risk factor affecting all of our business lines is the
determination of our overall tax provision. This is a complex task and requires
extensive judgment, particularly in evaluating the realizability of the gross
deferred tax assets in the near term. During 2001 we recorded a substantial
increase to our valuation allowance, and as of December 31, 2001 our remaining
net deferred tax asset amounted to $8,411. The evaluation of the need for a
valuation allowance takes into consideration our recent earnings history,
current tax position, and estimates of taxable income in the near term. The tax
character (ordinary versus capital) and the carryforward periods of certain tax
attributes (e.g., capital losses and tax credits) must also be considered.
Significant judgment is required in considering the relative impact of negative
and positive evidence related to realizability of the deferred tax assets. The
determination of the amount of the aggregate valuation allowance is based on
scenario analyses of the projected results of operations by line of business
resulting in a range of potential valuation allowances, within which a final
amount is determined.
Results of Operations
General. We recorded a net loss of $(124,782) for 2001, as compared to net
income of $2,192 and $19,832 for 2000 and 1999, respectively. Our loss per share
was $(1.86) for 2001, as compared with earnings per share of $0.03 and $0.31 for
2000 and 1999, respectively. During 2001, we continued our transition in
business strategy from capital-intensive businesses to fee-based businesses:
loan servicing and technology solutions for the mortgage and real estate
industries. Our results for 2001, 2000 and 1999, reflect growth in our
residential loan servicing businesses, continued investment in the development
of our technology products, cessation of loan origination and acquisition
activities, continuing sales of those assets not associated with our loan
servicing and technology businesses, our acquisition of OAC in 1999 and our exit
from the UK subprime loan business in 1999 and 2000. Key factors contributing to
our annual results for 2001, 2000 and 1999 include:
o Pre-tax income we earned from our residential loan servicing business
improved to $34,591 for 2001 as compared to $19,609 for 2000 and $20,515 for
1999, reflecting our continued growth of this fee-based business. We serviced
residential loans for others with an unpaid principal balance of $21,943,417
at December 31, 2001 as compared to $10,494,684 at December 31, 2000.
o We incurred pre-tax losses of $(36,392) in our OTX segment for 2001 as
compared to $(33,951) for 2000 and $(18,343) for 1999, reflecting our
continuing investment in the development of our technology fee-based
businesses.
o During 2001, we recorded provisions for losses on our loans and real estate
owned of $15,666 and $17,766, respectively, significantly strengthening our
reserves on those assets as a percent of asset value at December 31, 2001.
o Net losses of $(3,949) were incurred in 2001 on sales of our interest-earning
assets as compared to gains of $17,625 in 2000 and $44,298 in 1999. This
trend primarily reflects our decision in the third quarter of 1999 to
discontinue our practice of structuring securitizations as sales
transactions, thus precluding our recognition of gain-on-sale accounting.
o We recorded gains on our trading securities of $16,330 in 2001 as compared to
losses of $(3,971) in 2000. These amounts include both realized and
unrealized gains and losses. Previously, we accounted for our securities as
available for sale, and we reported the unrealized gains and losses for those
securities as a separate component of accumulated other comprehensive income
in stockholders' equity. See "Results of Operations - Non-Interest Income,
Gain (Loss) on Trading and Match Funded Securities." Primarily as a result of
sales, the value of our subordinate and residual securities has declined to
$65,058 at December 31, 2001.
o We recorded impairment charges on our available for sale securities portfolio
of $11,597 and $58,777 during 2000 and 1999, respectively, prior to the
change in our policy on September 30, 2000 noted above.
o We realized a gain of $50,371 from the sale of Ocwen UK on September 30,
1999.
o We realized a gain of $20,025 from the sale of our investment in Kensington
on November 22, 2000.
o We realized gains on our sale of investments in real estate of $45 in 2001 as
compared to $22,949 in 2000 and $1,753 in 1999. These results reflect
significant sales during 2000 of real estate we acquired in connection with
our acquisition of OAC in October 1999.
14
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
o We recorded impairment charges on affordable housing properties of $15,587,
$6,448 and $700 during 2001, 2000 and 1999, respectively, to provide for
estimated losses from the sale of these assets. Of the $102,069 of properties
remaining, $54,688 are subject to sales contracts although they have not yet
satisfied all of the accounting criteria for sales treatment.
o We recorded net provisions of $83,000, $17,500 and $2,500 during 2001, 2000
and 1999, respectively, to increase the valuation allowance on our deferred
tax asset based on our evaluation of the realizability of the deferred tax
asset in the near future. Our net deferred tax asset had been reduced to
$8,411 at December 31, 2001.
o Extraordinary gains on our debt repurchases amounted to $2,362 in 2001 as
compared to $18,713 in 2000 and $6,983 in 1999. The decline in gains we
earned during 2001 reflects a reduction in the volume of these transactions
in light of available pricing levels. We continue to evaluate additional debt
repurchases.
Segment Profitability.
The following table presents the pre-tax income (loss) and total assets
for each of our reportable segments at and for the dates indicated:
Pre-Tax Income (Loss) Total Assets
For the Years Ended December 31, December 31,
-------------------------------------- ------------------------
2001 2000 1999 2001 2000
---------- ---------- ---------- ---------- ----------
Residential Loan Servicing.......................... $ 34,591 $ 19,609 $ 20,515 $ 420,134 $ 218,981
OTX................................................. (36,392) (33,951) (18,343) 13,231 20,462
Ocwen Realty Advisors............................... 944 (86) -- 1,351 1,625
Unsecured Collections............................... (5,020) (14,398) (6,750) -- 8,417
Residential Discount Loans.......................... (4,396) 21,154 (20,451) 115,691 396,305
Commercial Loans.................................... (22,236) 648 28,404 280,220 555,040
Affordable Housing.................................. (29,917) (23,664) (17,934) 132,724 171,070
Commercial Real Estate.............................. 1,222 16,530 (3,336) 83,794 80,561
Subprime Residential Lending........................ 13,549 (24,532) (30,103) 83,599 135,617
Corporate Items and Others.......................... 2,098 30,126 62,817 580,406 661,342
---------- ---------- ---------- ---------- ----------
$ (45,557) $ (8,564) $ 14,819 $1,711,150 $2,249,420
========== ========== ========== ========== ==========
The following is a discussion of the pre-tax income (loss) for each of our
reportable business segments.
o Residential Loan Servicing. Total non-interest income for this segment
increased by $35,366 during 2001 and by $24,261 during 2000. Included in
non-interest income were residential servicing and other fees amounting to
$117,583, $82,020 and $59,900 during 2001, 2000 and 1999, respectively,
reflecting continued growth in residential loans we service for others. The
average balance of residential loans we service for others grew to
$15,727,659 during 2001 from $9,835,132 during 2000 and $8,802,444 during
1999. Net interest income decreased by $10,773 during 2001 and by $11,386
during 2000 primarily as a result of an increase in the average balance of
advances and servicing rights, which do not earn interest. Non-interest
expense increased to $68,383 in 2001 as compared to $58,773 for 2000 and
$44,990 for 1999. See "Results of Operations - Non-Interest Income."
o OTX. The increase in net losses incurred by this segment, which began in
1998, is a result of our continuing investment in the development and
marketing of our technology businesses. Our losses for 2001 included $4,620
of one-time expenses, including $3,185 for a payment due in connection with
an acquisition of a subsidiary in 1997. Through this segment we provide
technology solutions for the mortgage and real estate industries. OTX
products include both a residential and commercial loan servicing software
platform and an internet-based mortgage loan processing application and
vendor management system. Our losses for 1999 included a $3,367 charge
reflecting the impact of a reduction in the estimated useful life of the
goodwill associated with the acquisitions previously made by OTX. See Note 2
to our Consolidated Financial Statements (which is incorporated herein by
reference).
o Ocwen Realty Advisors. Through this segment we provide property valuation
services and real estate research for residential and commercial properties,
including those that we own or service for others.
o Unsecured Collections. This segment is primarily comprised of activities
related to our charged-off unsecured credit card receivables, which we
acquired at a discount, as well as collections we make on behalf of others.
We account for our collections of unsecured credit card receivables under the
cost recovery method. At December 31, 2001, the net book value of our
unsecured receivables had been reduced to zero as a result of collections and
additional reserves. We recorded provisions for losses of $1,176, $6,867 and
$870
15
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
during 2001, 2000 and 1999, respectively. Our servicing fees for this
segment amounted to $2,500, $1,485 and $18 during 2001, 2000 and 1999,
respectively.
o Residential Discount Loans. The decline in profitability for this segment in
2001 as compared to 2000 was primarily due to a decline in gains we earned
from sales of loans, a decline in net interest income and an increase in the
provision for loan losses, offset in part by a decline in losses from our
real estate owned. Gains (losses) from the sale of loans amounted to $(545)
and $15,720 during 2001 and 2000, respectively. This compares to
securitization gains during 1999 of $22,763. We have not securitized loans
since 1999 and have not acquired any discount loans since 2000. Provision for
loan losses was $6,060, $(637) and $8,435 in 2001, 2000 and 1999
respectively. Losses from the sale and operation of our real estate owned
declined to $(6,623) in 2001 from $(11,164) and $(9,071) in 2000 and 1999,
respectively. Net realized and unrealized trading gains on subordinate
securities amounted to $1,868 and $3,352 during 2001 and 2000, respectively.
The loss for 1999 included impairment charges of $27,342 on our portfolio of
residential subordinate securities. See "Results of Operations - Non-Interest
Income - Gain (Loss) on Trading and Match Funded Securities."
o Commercial Loans. Profitability declined for this segment in 2001 as compared
to 2000 primarily as a result of a decline in gains on our investments in
real estate and a decline in net interest income. Equity in earnings related
to certain loans, which we acquired in 2000 and which we account for as
investments in real estate, declined to $3,338 in 2001 from $12,427 in 2000.
The decline in equity in earnings is primarily due to repayments we received
on loans during 2000, which generated significant gains. Gains on the
repayment of discount loans, which we report as interest income, have also
declined and amounted to $2,257, $9,369 and $16,919 for 2001, 2000 and 1999,
respectively. The decline in profitability during 2000 as compared to 1999
was primarily due to declines in net interest income, gains from sales of
loans, gains from our real estate owned and an increase in the provision for
loan losses, offset in part by equity in earnings from our investments in
real estate (see above) and a decline in operating expenses. Gains (losses)
we earned from sales of loans were $(3,487), $(1,559) and $4,746 during 2001,
2000 and 1999, respectively. Gains (losses) we earned from the sale and
operation of our real estate owned amounted to $(2,143), $(1,869) and $3,769
during 2001, 2000 and 1999, respectively. The provision for loan losses
amounted to $7,223, $9,195 and $4,610, during 2001, 2000 and 1999,
respectively. The increase in the provision in 2000 was principally related
to our commercial discount loans.
o Affordable Housing. Losses have increased during 2001 and 2000 primarily due
to a decline in gains from sales of our properties and an increase in
impairment charges, offset in part by a decline in operating losses as a
result of sales. The net book value of our remaining properties amounted to
$102,069 at December 31, 2001, of which $54,688 are subject to sales
contracts although they have not yet qualified as sales for accounting
purposes. Gains (losses) from the sales were $(956), $497 and $6,591 for
2001, 2000 and 1999, respectively. Net operating losses from properties in
service amounted to $16,580, $9,931 and $6,291 during 2001, 2000 and 1999,
respectively. Net operating losses included impairment charges of $15,587,
$6,448 and $700 for estimated losses on the sale of the properties. During
2000, we began reducing our investment in affordable housing properties both
as part of our shift in strategy to fee-based businesses and because the
volume of tax credits being generated was exceeding our ability to utilize
them effectively. See "Changes in Financial Condition - Affordable Housing
Properties." On February 4, 2002 we were notified by the California Tax
Credit Allocation Committee of a challenge to our receipt of previously
allocated federal low-income housing tax credits for a recently constructed
affordable housing development in which we invested. We intend to contest
this challenge, which stems from an issue regarding a determination of the
date the development was made available for occupancy. If the Committee
prevails in its challenge, we could incur a loss of up to $7,500.
o Commercial Real Estate. The results of this segment principally represent the
activities of our commercial real estate investments acquired in connection
with our acquisition of OAC in October 1999. The decline in income for 2001
as compared to 2000 is primarily the result of $21,024 of gains from our
sales of real estate during 2000 and a decline in operating income from our
real estate, partially offset by a decline in interest expense on our lines
of credit. Net operating gains we earned on our investments in real estate
amounted to 4,775, $13,415 and $1,881 for 2001, 2000 and 1999, respectively.
The decline in operating income for 2001 is the result of the sales of our
real estate properties during 2000. Interest expense on lines of credit used
to fund our real estate investments declined to $1,997 for 2001 as compared
to $11,046 and $2,789 incurred for 2000 and 1999, respectively. Income for
2000 also included $2,768 of gains from the sale of securities available for
sale.
o Subprime Residential Lending. In August 1999, we closed our domestic subprime
origination business, which we had previously conducted primarily through our
subsidiary Ocwen Financial Services, Inc. ("OFS"). Assets remaining in this
segment at December 31, 2001 are primarily comprised of subprime residual
trading securities with a fair value of $60,051 and match funded securities
with a fair value of $19,435. We recorded net realized and unrealized trading
gains of $14,247 in 2001 on our subprime residual and match funded securities
as compared to losses of $(8,483) for 2000. Losses for 2000 and 1999 included
$10,930 and $31,216, respectively, of impairment charges on subprime
subordinate and residual securities available for sale. Also, we recorded
gains of $3,834 during 1999 in connection with our securitization of loans.
16
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
o Corporate Items and Other. Pre-tax results for this segment consists of
amortization of the excess of net assets we acquired over purchase price, UK
operations, our business activities that are individually insignificant,
amounts we do not allocate to our operating segments, distributions on our
Capital Securities, transfer pricing mismatches, other general corporate
expenses and the results of our collateralized mortgage obligation ("CMO")
trading portfolio. Our UK operations generated pre-tax income of $13,467 and
$59,450 for 2000 and 1999, respectively. On September 30, 1999, we sold all
of the shares of our wholly-owned subsidiary, Ocwen UK, for a gain of
$50,371. Ocwen UK had commenced operations on April 24, 1998. Ocwen UK
securitization gains during 1999 totaled $10,207. On November 22, 2000, we
sold our equity investment in Kensington for a gain of $20,025. Equity in
losses of Kensington of $(5,280) and $(9,154) were recognized for 2000 and
1999, respectively.
See Note 29 to our Consolidated Financial Statements (which is
incorporated herein by reference) for additional information related to our
operating segments.
Net Interest Income: 2001 versus 2000 and 2000 versus 1999. Net interest
income (expense) is the difference between the interest income earned from our
interest-earning assets and interest expense incurred on our interest-bearing
liabilities. Net interest income (expense) is determined by net interest spread
(i.e., the difference between the yield earned on our interest-earning assets
and the rates incurred on our interest-bearing liabilities), the relative amount
of interest-earning assets and interest-bearing liabilities and the degree of
mismatch in the maturity and repricing characteristics of our interest-earning
assets and interest-bearing liabilities.
The following table sets forth, for the years indicated, information
regarding the total amount of income from our interest-earning assets and the
resultant average yields, the interest expense associated with our
interest-bearing liabilities, expressed in dollars and rates, and the net
interest spread and net interest margin. Information is based on average daily
balances during the indicated years:
17
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ----------------------------- ------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
Average Assets:
Federal funds sold and repurchase
agreements..................... $ 200,329 $ 7,328 3.66% $ 128,079 $ 8,700 6.79% $ 174,495 $ 8,847 5.07%
Trading Securities (1):
CMOs (AAA-rated)............... 125,640 7,465 5.94 83,543 5,568 6.66 -- -- --
Subordinates, residuals and
other....................... 97,217 11,400 11.73 24,177 2,631 10.88 -- -- --
Securities available for sale (1):
CMOs (AAA-rated)............... -- -- -- 427,821 27,693 6.47 366,343 20,914 5.71
Subordinates, residuals and
other....................... -- -- -- 113,833 14,815 13.01 227,056 41,784 18.40
Loans available for sale (2)...... 7,138 526 7.37 31,050 2,474 7.97 238,747 25,724 10.77
Investment securities and other... 11,008 743 6.75 23,677 1,501 6.34 29,340 2,181 7.43
Loan portfolio (2)................ 82,125 6,807 8.29 143,906 20,586 14.31 181,445 28,683 15.81
Discount loan portfolio (2)....... 358,246 38,757 10.82 819,262 89,826 10.96 975,436 121,854 12.49
Match funded loans and
securities (2)................. 103,594 10,345 9.99 143,452 11,022 7.68 30,483 3,237 10.62
---------- -------- ---------- -------- ---------- --------
Total interest earning assets.. 985,297 83,371 8.46 1,938,800 184,816 9.53 2,223,345 253,224 11.39
-------- -------- --------
Non-interest earning cash......... 69,029 44,517 80,335
Allowance for loan losses......... (22,235) (27,695) (26,597)
Real estate held for sale......... 22,457 114,891 --
Affordable housing properties..... 123,793 147,054 166,600
Investment in unconsolidated
entities....................... 408 28,832 76,146
Real estate owned, net............ 128,371 176,828 191,694
Investment in real estate......... 113,883 204,288 90,494
Advances on loans and loans
serviced for others............ 303,382 191,642 133,408
Mortgage servicing rights......... 76,145 18,337 8,462
Other assets...................... 187,791 257,527 243,796
---------- ---------- ----------
Total assets................... $1,988,321 $3,095,021 $3,187,683
========== ========== ==========
Average Liabilities and
Stockholders' Equity:
Interest-bearing demand deposits.. $ 14,655 393 2.68% $ 12,169 532 4.37% $ 37,247 1,313 3.53%
Savings deposits.................. 1,388 29 2.09 1,527 37 2.42 1,588 38 2.39
Certificates of deposit........... 920,668 59,545 6.47 1,520,493 97,655 6.42 1,590,553 97,019 6.10
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits.................... 936,711 59,967 6.40 1,534,189 98,224 6.40 1,629,388 98,370 6.04
Securities sold under agreements
to repurchase.................. 19,500 529 2.71 167,337 10,729 6.41 107,622 7,456 6.93
Bonds-match funded agreements..... 85,924 7,315 8.51 123,856 11,484 9.27 28,904 2,101 7.27
Obligations outstanding under
lines of credit................ 82,604 5,511 6.67 152,424 13,881 9.11 256,300 16,319 6.37
Notes, debentures and other....... 170,123 20,007 11.76 284,634 34,772 12.22 257,219 31,296 12.17
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities................. 1,294,862 93,329 7.21 2,262,440 169,090 7.47 2,279,433 155,542 6.82
-------- -------- --------
Non-interest bearing deposits..... 12,813 7,118 15,594
Escrow deposits................... 73,326 114,254 218,607
Excess of net assets acquired
over purchase price............ 28,866 51,486 13,720
Other liabilities................. 64,726 60,584 76,016
---------- ---------- ----------
Total liabilities.............. 1,474,593 2,495,882 2,603,370
Capital securities................ 64,976 103,709 122,097
Stockholders' equity.............. 448,752 495,430 462,216
---------- ---------- ----------
Total liabilities and
stockholders' equity......... $1,988,321 $3,095,021 $3,187,683
========== ========== ==========
Net interest income (expense)..... $ (9,958) $ 15,726 $ 97,682
======== ======== ========
Net interest spread............... 1.25% 2.06% 4.57%
Net interest margin............... (1.01)% 0.81% 4.39%
Ratio of interest-earning assets
to interest-bearing
liabilities.................... 76% 86% 98%
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
(1) Excludes effect of unrealized gains or losses on securities.
(2) The average balances include non-performing loans, interest on which we
recognize on a cash basis.
The following table describes the extent to which changes in interest
rates and changes in volume of our interest-earning assets and interest-bearing
liabilities have affected our interest income and expense during the periods
indicated. For each category of our interest-earning assets and interest-bearing
liabilities, we have provided information 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. We have allocated changes attributable to both volume and rate
proportionately to the change due to volume and the change due to rate.
Year Ended December 31,
-------------------------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
------------------------------------- -------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
------------------------------------- -------------------------------------
Rate Volume Total Rate Volume Total
--------- --------- --------- --------- --------- ---------
Interest-Earning Assets:
Federal funds sold and repurchase
agreements.......................... $ (5,034) $ 3,662 $ (1,372) $ 2,557 $ (2,704) $ (147)
Trading securities:
CMOs (AAA-rated).................... (498) 2,395 1,897 2,358 3,210 5,568
Subordinates, residuals and other... (324) 9,093 8,769 (4,972) 7,603 2,631
Securities available for sale:
CMOs (AAA-rated).................... (2,101) (25,592) (27,693) 3,386 3,393 6,779
Subordinates, residuals and other... (1,335) (13,480) (14,815) (12,147) (14,822) (26,969)
Loans available for sale............... (173) (1,775) (1,948) (5,358) (17,892) (23,250)
Investment securities and other........ 91 (849) (758) (294) (386) (680)
Loan portfolio......................... (6,819) (6,960) (13,779) (2,549) (5,548) (8,097)
Discount loan portfolio................ (1,178) (49,891) (51,069) (13,871) (18,157) (32,028)
Match funded loans and securities...... 2,827 (3,504) (677) (1,125) 8,910 7,785
--------- --------- --------- --------- --------- ---------
Total interest-earning assets....... (14,544) (86,901) (101,445) (32,015) (36,393) (68,408)
--------- --------- --------- --------- --------- ---------
Interest-Bearing Liabilities:
Interest-bearing demand deposits....... (233) 94 (139) 259 (1,040) (781)
Savings deposits....................... (5) (3) (8) -- (1) (1)
Certificates of deposit................ 679 (38,789) (38,110) 5,012 (4,376) 636
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits..... 441 (38,698) (38,257) 5,271 (5,417) (146)
Securities sold under agreements to
repurchase.......................... (4,029) (6,171) (10,200) (592) 3,865 3,273
Bonds-match funded agreements.......... (879) (3,290) (4,169) 726 8,657 9,383
Obligations outstanding under lines of
credit.............................. (3,085) (5,285) (8,370) 5,556 (7,994) (2,438)
Notes, debentures and other interest-
bearing obligations................. (1,254) (13,511) (14,765) 127 3,349 3,476
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities (8,806) (66,955) (75,761) 11,088 2,460 13,548
--------- --------- --------- --------- --------- ---------
(Decrease) increase in net interest
income.............................. $ (5,738) $ (19,946) $ (25,684) $ (43,103) $ (38,853) $ (81,956)
========= ========= ========= ========= ========= =========
2001 versus 2000:
We incurred net interest expense before provision for loan losses of $(9,958)
for the year ended December 31, 2001 as compared to net interest income of
$15,726 earned for the year ended December 31, 2000, a decline of $25,684 or
163%. The decrease was due to a decrease in the balance of our average
interest-earning assets and a decrease in the net interest spread, offset by a
decrease in the balance of our average interest-bearing liabilities. The average
balance of our interest-earning assets decreased by $953,503 or 49% during 2001
and reduced interest income by $86,901. The average balance of our
interest-bearing liabilities decreased by $967,578 or 43% during 2001 and
decreased interest expense by $66,955. The net impact of these volume changes
resulted in a $19,946 decrease in net interest income. The net interest spread
decreased 81 basis points as a result of a 107 basis-point decrease in
19
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
the weighted average rate on our interest-earning assets, offset by a 26
basis-point decrease in the weighted average rate on our interest-bearing
liabilities. The net impact of these rate changes resulted in a $5,738 decrease
in net interest income. The increases in the average balance of our non-interest
earning assets, primarily our servicing advances and servicing rights, that we
fund with interest-bearing liabilities, have contributed to the decline in the
net interest spread.
The following table presents the change in average balances and yields for
2001 as compared to 2000 for each of our interest-earning asset categories:
Average Balance Increase Average Yield Increase
------------------------- (Decrease) ------------------------- (Decrease)
For the Year Ended December 31, 2001 2000 $ 2001 2000 Basis Points
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Federal funds sold and repurchase
agreements ........................ $ 200,329 $ 128,079 $ 72,250 3.66% 6.79% (313)
Trading securities:
CMOs (AAA-rated) .................. 125,640 83,543 42,097 5.94 6.66 (72)
Subordinates and residuals ........ 97,217 24,177 73,040 11.73 10.88 85
Securities available for sale:
CMOs (AAA-rated) .................. -- 427,821 (427,821) -- 6.47 (647)
Subordinates and residuals ........ -- 113,833 (113,833) -- 13.01 (1,301)
Loans available for sale ............ 7,138 31,050 (23,912) 7.37 7.97 (60)
Investment securities and other ..... 11,008 23,677 (12,669) 6.75 6.34 41
Loan portfolio ...................... 82,125 143,906 (61,781) 8.29 14.31 (602)
Discount loan portfolio ............. 358,246 819,262 (461,016) 10.82 10.96 (14)
Match funded loans and securities ... 103,594 143,452 (39,858) 9.99 7.68 231
----------- ----------- -----------
$ 985,297 $ 1,938,800 $ (953,503) 8.46% 9.53% (107)
=========== =========== ===========
We earned interest income on our trading securities of $18,865 during 2001
as compared to $8,199 during 2000. Interest income we earned on securities
available for sale amounted to $0 during 2001 as compared to $42,508 for 2000.
On September 30, 2000 we changed our policy for securities available for sale
and transferred those securities to the trading category. We believe that this
treatment more appropriately reflects the impact on our results of operations
arising from changes in the fair value of securities. The following presents the
results of our securities portfolio, both trading and available for sale, on a
combined basis for 2001 and 2000:
CMOs Subordinates and Residuals Total
------------------------------ ------------------------------ ------------------------------
Average Interest Average Interest Average Interest
Balance Income Yield Balance Income Yield Balance Income Yield
--------- -------- --------- --------- -------- --------- --------- -------- ---------
2001:
Trading securities.............. $125,640 $7,465 5.94% $ 97,217 $11,400 11.73% $222,857 $18,865 8.47%
======== ====== ======== ======= ======== ======
2000:
Trading securities.............. $ 83,543 5,568 6.66% $ 24,177 $ 2,631 10.88% $107,720 $ 8,199 7.61%
Securities available for sale... 427,821 27,693 6.47 113,833 14,815 13.01 541,654 42,508 7.85
-------- ------ -------- ------- -------- -------
$511,364 33,261 6.50% $138,010 $17,446 12.64% $649,374 $50,707 7.81%
======== ====== ======== ======= ======== =======
As presented in the table above, interest income we earned from our
securities portfolio on a combined basis declined from $50,707 in 2000 to
$18,865 in 2001, a $31,842 or 63% decline. The decline in interest income is
primarily due to a $385,724 or 75% decline in our average investment in CMOs and
a $40,793 or 30% decline in our average investment in subordinates and
residuals. The decline in the average balance of our CMOs during 2001 reflects
our planned reduction in the use of these securities to meet the Qualified
Thrift Lender requirements. The decline in the average balance of our
subordinate and residuals during 2001 was primarily due to sales of subprime
residuals and amortization. Because CMOs have less cash flow variability, their
average lives and yields to maturity are more stable, and therefore, CMOs are
priced to yield less than classes of mortgage-related securities such as
subordinates and residuals that are less stable. Yield on the total portfolio of
trading securities increased in 2001 as compared to 2000 because lower-yielding
CMOs comprised a greater proportion of the portfolio in 2000.
Interest income we earned on our loan portfolio decreased by $13,779 or
67% during 2001 as compared to 2000 due to a $61,781 or 43% decrease in the
average balance of our portfolio and a 602 basis-point decrease in the average
yield. The decline in the
20
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
average balance of our portfolio is primarily due to sales and repayments.
During 1999, we ceased origination of multifamily and commercial loans. See
"Changes in Financial Condition - Loan Portfolio, Net."
Interest income we earned on our discount loans decreased by $51,069 or
57% during 2001 as compared to 2000 as a result of a $461,016 or 56% decline in
the average balance of our investment and a 14 basis-point decrease in the
average yield. Sales, foreclosures, resolutions and the absence of acquisitions
have resulted in the declines in the average balance of our discount loans
during 2001. The yield on our discount loan portfolio is likely to fluctuate
from period to period as a result of the timing of resolutions, particularly the
resolution of large multi-family residential and commercial real estate loans,
and the mix of the overall portfolio between performing and non-performing
loans. See "Changes in Financial Condition - Discount Loan Portfolio, Net."
The following table presents the change in average balances and rates for
2001 as compared to 2000 for each of our interest-bearing liability categories:
Increase Increase
Average Balance (Decrease) Average Rate (Decrease)
----------- ----------- ---------- ------------------ ------------
For the Year Ended December 31, 2001 2000 $ 2001 2000 Basis Points
- ------------------------------- ----------- ----------- ---------- -------- -------- ------------
Interest-bearing deposits........................ $ 936,711 $ 1,534,189 $ (597,478) 6.40% 6.40% --
Securities sold under agreements to repurchase... 19,500 167,337 (147,837) 2.71 6.41 (370)
Bonds-match funded agreements.................... 85,924 123,856 (37,932) 8.51 9.27 (76)
Obligations outstanding under lines of credit.... 82,604 152,424 (69,820) 6.67 9.11 (244)
Notes, debentures and other...................... 170,123 284,634 (114,511) 11.76 12.22 (46)
----------- ----------- ----------
$ 1,294,862 $ 2,262,440 $ (967,578) 7.21% 7.47% (26)
=========== =========== ==========
Interest expense we incurred on our interest-bearing deposits decreased
$38,257 or 39% during 2001 as compared to 2000 due to a $597,478 or 39% decrease
in the average balance. The decline in the average balance resulted primarily
from maturing brokered certificates of deposit. We did not issue any new
brokered certificates of deposit during 2001 and, at this time, do not intend to
issue any such deposits in the foreseeable future. The decline in average
deposits is consistent with the 36% decline in average total assets as we
continue our transition in business strategy from capital-intensive businesses
to fee-based businesses. See "Changes in Financial Condition - Deposits."
Interest expense we incurred on securities we sold under agreements to
repurchase declined $10,200 or 95% during 2001 as a result of a $147,837 or 88%
decrease in the average balance and a 370 basis-point decline in the average
rate. We have used securities sold under agreements to repurchase primarily to
fund our purchases of CMOs, the average balance of which has declined
significantly during 2001.
Interest expense we incurred on bonds-match funded agreements declined
$4,169 or 36% during 2001 as compared to 2000 primarily as a result of a $37,932
or 31% decline in the average balance outstanding. Interest expense on our
bonds-match funded agreements is primarily comprised of interest we incurred on
bonds-match funded agreements acquired as a result of our acquisition of OAC in
October 1999 and on non-recourse notes, which resulted from our transfer of four
unrated residual securities in December 1999 in exchange for non-recourse notes.
We have accounted for these transactions, which did not qualify as sales for
accounting purposes, as secured borrowings with pledges of collateral. See
"Changes in Financial Condition - Bonds - Match Funded Agreements."
Interest expense we incurred on obligations outstanding under our lines of
credit decreased $8,370 or 60% during 2001 as compared to 2000 due to a $69,820
or 46% decrease in the average balance and a 244 basis-point decline in the
average rate. During 2001, we used lines of credit to fund real estate
investments and commercial construction loans and, beginning in the second
quarter of 2001, to fund servicing advances that were purchased in connection
with the acquisition of loans serviced for others. Average balances outstanding
under our lines of credit decreased during 2001 primarily because of sales of
our real estate properties and commercial loans, offset in part by the funding
of our residential loan servicing advances under new lines. See "Changes in
Financial Condition - Obligations Outstanding Under Lines of Credit."
Interest expense we incurred on notes, debentures and other interest
bearing obligations decreased $14,765 or 42% during 2001 as compared to 2000
primarily due to a $114,511 or 40% decrease in the average balance. The decrease
in the average balance is primarily due to repurchases of debt we made during
2001 and 2000. See "Changes in Financial Condition - Notes, Debentures and Other
Interest-Bearing Obligations."
21
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
2000 versus 1999:
Our net interest income before provision for loan losses of $15,726 decreased
$81,956 or 84% during 2000 as compared to the prior year. The decline was
primarily due to a decrease in the average balance of our interest-earning
assets and a decrease in the net interest spread. Our average interest-earning
assets decreased by $284,545 or 13% during 2000 and reduced interest income by
$36,393. The net impact of volume changes resulted in a $38,853 decrease in net
interest income. The net interest spread decreased 251 basis points during 2000
as a result of a 186 basis-point decrease in the weighted average yield on
interest-earning assets and a 65 basis-point increase in the weighted average
rate on interest-bearing liabilities. The impact of these rate changes resulted
in a $43,103 decrease in net interest income. The sale of Ocwen UK, which
generated a high net interest spread in 1999, contributed to the overall decline
in the net interest spread. Additionally, the average balance of our
non-interest earning assets, which are largely funded by interest bearing
liabilities, increased during 2000, primarily due to an increase in real estate
assets resulting from our acquisition of OAC and an increase in our servicing
advances and servicing rights.
The following table presents the change in average balances and yields for
2000 as compared to 1999 for each of our interest-earning asset categories:
Average Balance Increase Average Yield Increase
------------------------- (Decrease) ------------------------ (Decrease)
For the Year Ended December 31, 2000 1999 $ 2000 1999 Basis Points
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Federal funds sold and repurchase
agreements .......................... $ 128,079 $ 174,495 $ (46,416) 6.79% 5.07% 172
Trading Securities:
CMOs (AAA-rated) .................... 83,543 -- 83,543 6.66 -- 666
Subordinates, residuals and other ... 24,177 -- 24,177 10.88 -- 1,088
Securities available for sale:
CMOs (AAA-rated) .................... 427,821 366,343 61,478 6.47 5.71 76
Subordinates, residuals and other ... 113,833 227,056 (113,223) 13.01 18.40 (539)
Loans available for sale (1) .......... 31,050 238,747 (207,697) 7.97 10.77 (280)
Investment securities and other ....... 23,677 29,340 (5,663) 6.34 7.43 (109)
Loan portfolio ........................ 143,906 181,445 (37,539) 14.31 15.81 (150)
Discount loan portfolio ............... 819,262 975,436 (156,174) 10.96 12.49 (153)
Match funded loans and securities ..... 143,452 30,483 112,969 7.68 10.62 (294)
----------- ----------- -----------
$ 1,938,800 $ 2,223,345 $ (284,545) 9.53% 11.39% (186)
=========== =========== ===========
<FN>
(1) Included subprime loans with an average balance of $132,066 and an average
yield earned of 12.28% held by Ocwen UK during 1999 prior to its sale.
</FN>
Interest income we earned on our trading securities amounted to $8,199 as
compared to $0 for 1999. Interest income on our securities available for sale
amounted to $42,508 during 2000 as compared to $62,698 during 1999. On September
30, 2000, we changed our policy for securities available for sale and
transferred those securities to the trading category. Our sale of Ocwen UK and
its subprime residuals contributed to the decline in the average balance and
average yield. The following presents the results of our securities portfolio,
both trading and available for sale, on a combined basis for 2000 and 1999:
Subordinates
CMOs and Residuals(1) Total
---------------------------- ---------------------------- ----------------------------
Average Interest Average Interest Average Interest
Balance Income Yield Balance Income Yield Balance Income Yield
-------- -------- ------- -------- -------- ------- -------- -------- -------
2000:
Trading securities............... $ 83,543 $ 5,568 6.66% $ 24,177 $ 2,631 10.88% $107,720 $ 8,199 7.61%
Securities available for sale.... 427,821 27,693 6.47 113,833 14,815 13.01 541,654 42,508 7.85
-------- ------ -------- -------- -------- --------
$511,364 $ 33,261 6.50% $138,010 $ 17,446 12.64% $649,374 $ 50,707 7.81%
======== ======== ======== ======== ======== ========
1999:
Securities available for sale....
$366,343 $ 20,914 5.71% $227,056 $ 41,784 18.40% $593,399 $ 62,698 10.57%
======== ======== ======== ======== ======== ========
<FN>
(1) Included subprime residuals with an average balance of $60,736 and an
average yield earned of 24.45% held by Ocwen UK during 1999 prior to its
sale.
</FN>
22
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Interest income we earned on our loans available for sale decreased
$23,250 or 90% during 2000 as compared to 1999 as a result of a $207,697 or 87%
decrease in the average balance and a 280 basis-point decline in weighted
average yield earned. The decrease in the average balance reflects the closure
of our domestic subprime origination business and our sale of Ocwen UK. The
decline in the average yield is also largely due to our sale of Ocwen UK. See
"Changes in Financial Condition - Loans Available for Sale."
Interest income we earned on our loan portfolio decreased by $8,097 or 28%
in 2000 versus 1999 due to a $37,539 or 21% decrease in the average balance and
a 150 basis-point decrease in the average yield. The decrease in the average
yield is due in part to a decline in the amount of additional interest we
received in connection with the repayment of loans. Such additional interest
amounted to $96 and $8,121 during 2000 and 1999, respectively. During 1999, we
ceased origination of multi-family and commercial loans. See "Changes in
Financial Condition - Loan Portfolio, Net."
Interest income we earned on our discount loans decreased by $32,028 or
26% during 2000 as a result of a $156,174 or 16% decrease in the average balance
and a 153 basis-point decline in the average yield. Sales, resolutions,
foreclosures and a decline in acquisition volume have contributed significantly
to the decline in the average balance. See "Changes in Financial Condition -
Discount Loan Portfolio, Net." The yield on the discount loan portfolio is
likely to fluctuate from period to period as a result of the timing of
resolutions, particularly the resolution of large multi-family residential and
commercial real estate loans, and the mix of the overall portfolio between
performing and non-performing loans.
Interest income we earned on our match funded loans and securities is
comprised of income earned on loans we acquired in connection with our
acquisition of OAC in October 1999 and on four unrated residual securities
transferred by us in December 1999 in exchange for non-recourse notes. OAC
previously securitized the loans under a securitization we accounted for as a
secured borrowing with pledge of collateral. See "Changes in Financial Condition
- - Match Funded Assets."
The following table presents the change in average balances and rates for
2000 as compared to 1999 for each of our interest-bearing liability categories:
Average Balance Increase Average Rate Increase
------------------------- (Decrease) ------------------ (Decrease)
For the Year Ended December 31, 2000 1999 $ 2000 1999 Basis Points
- ------------------------------- ----------- ----------- ---------- -------- -------- ------------
Interest-bearing deposits........................ $ 1,534,189 $ 1,629,388 $ (95,199) 6.40% 6.04% 36
Securities sold under agreements to
repurchase (1)................................ 167,337 107,622 59,715 6.41 6.93 (52)
Bonds-match funded agreements.................... 123,856 28,904 94,952 9.27 7.27 200
Obligations outstanding under lines of credit (2) 152,424 256,300 (103,876) 9.11 6.37 274
Notes, debentures and other...................... 284,634 257,219 27,415 12.22 12.17 5
----------- ------------ ----------
$ 2,262,440 $ 2,279,433 $ (16,993) 7.47% 6.82% 65
=========== ============ ==========
<FN>
(1) Included an average balance of $22,908 with an average yield of 7.64%
for 1999 related to Ocwen UK.
(2) Included an average balance of $130,437 with an average yield of 6.16%
for 1999 related to Ocwen UK.
</FN>
Interest expense we incurred on our securities sold under agreements to
repurchase increased $3,273 or 44% primarily due to a $59,715 or 55% increase in
the average balance.
Interest expense we incurred on our bonds-match funded agreements is
comprised of interest incurred on bonds-match funded agreements acquired as a
result of our acquisition of OAC in October 1999 and on non-recourse notes which
resulted from our transfer of four unrated residual securities in December 1999
in exchange for non-recourse notes. See "Changes in Financial Condition - Bonds
Match Funded Agreements."
Interest expense we incurred on our obligations outstanding under lines of
credit decreased $2,438 or 15% during 2000 as compared to 1999 due to a $103,876
or 41% decrease in the average balance, which was partially offset by a 274
basis-point increase in the weighted average interest rate. During 1999, we used
our lines of credit primarily to fund the acquisition and origination of
subprime single family loans at OFS and Ocwen UK. The net decrease in the
average balance reflects our closure of the domestic subprime origination
business and our sale of Ocwen UK, offset by our assumption of lines as a result
of our acquisition of OAC. The average
23
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
balance of the OAC lines, which are collateralized by our investments in real
estate and commercial loans, declined during 2000 as a result of collateral
sales. See "Changes in Financial Condition - Obligations Outstanding Under Lines
of Credit."
Interest expense we incurred on our notes, debentures and other increased
$3,476 or 11% during 2000 primarily due to a $27,415 or 11% increase in the
average balance. The increase in the average balance is primarily due to our
assumption of $140,487 of 11.5% Redeemable Notes as a result of our acquisition
of OAC in October 1999, offset in part by our repurchase of substantially all of
this debt in December 2000. See "Changes in Financial Condition - Notes,
Debentures and Other Interest-Bearing Obligations."
Provisions for Loan Losses. Provisions we record for losses on our loans
are charged to operations to maintain an allowance for losses on the loan
portfolio, the discount loan portfolio and the match funded loans at a level
which we consider adequate based upon an evaluation of known and inherent risks
in such portfolios. Our ongoing evaluation is based on an analysis of our
discount loan portfolio, loan portfolio and match funded loans, historical loss
experience, current economic conditions and trends, collateral values and other
relevant factors.
The following table presents the provisions for loan losses for our
discount loan portfolio, loan portfolio and the match funded loans for the years
indicated:
2001 2000 1999
------- ------- -------
Discount loan portfolio................. $12,960 $15,266 $ 5,434
Loan portfolio.......................... 2,518 4 1,636
Match funded loans...................... 188 (93) (360)
------- ------- -------
$15,666 $15,177 $ 6,710
======= ======= =======
The provision for losses on our discount loans included $1,567, $7,503 and
$1,267 related to our unsecured credit card receivables during 2001, 2000 and
1999, respectively, which we had fully reserved at December 31, 2001. As
indicated in the table below, our allowances as a percentage of loan value have
been increased for both our loan and discount loan portfolios at December 31,
2001. Those increases are primarily in response to increases in our
non-performing loans as a percentage of loan value See "Changes in Financial
Condition - Loan Portfolio, Net," "Match Funded Assets" and "Discount Loan
Portfolio, Net."
The following table sets forth the allowance for loan losses as a
percentage of our respective loan balances at the dates indicated:
Allowance
as a %
Loan of Loan
Allowance Balance Balance
--------- ---------- ---------
December 31, 2001:
Discount loan portfolio (1)............ $ 17,554 $ 136,881 12.82%
Loan portfolio......................... 3,197 68,122 4.69%
Match funded loans..................... 170 53,123 0.32%
--------- ---------
$ 20,921 $ 258,126 8.11%
========= ==========
December 31, 2000:
Discount loan portfolio................ $ 20,871 $ 556,899 3.75%
Loan portfolio......................... 2,408 95,822 2.51%
Match funded loans..................... 285 80,834 0.35%
--------- ----------
$ 23,564 $ 733,555 3.21%
========= ==========
December 31, 1999:
Discount loan portfolio................ $ 19,181 $ 932,410 2.06%
Loan portfolio......................... 7,259 164,667 4.41%
Match funded loans..................... 495 105,596 0.47%
--------- ----------
$ 26,935 $1,202,673 2.24%
========= ==========
(1) Included unsecured credit card receivables with a loan balance of $10,337
and allowance of $10,337, or 100%, at December 31, 2001. Excluding these
receivables, the allowance as a percentage of total discount loans was
5.70%, 2.24% and 1.96% at December 31, 2001, 2000 and 1999, respectively.
24
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
For additional information regarding our allowance for loan losses on the
above portfolios, see "Changes in Financial Condition - Allowances for Loan
Losses." For information relating to our valuation allowance on real estate
owned, see "Changes in Financial Condition - Real Estate Owned, Net."
Non-Interest Income. The following table sets forth the principal
components of our non-interest income during the years indicated:
2001 2000 1999
--------- --------- ---------
Servicing and other fees ............................................. $ 134,597 $ 97,080 $ 76,018
Gain (loss) on interest-earning assets, net .......................... (3,949) 17,625 44,298
Gain (loss) on trading and match funded securities, net .............. 16,330 (3,971) --
Impairment charges on securities available for sale .................. -- (11,597) (58,777)
Gain (loss) on real estate owned, net ................................ (9,256) (14,904) (3,957)
Gain (loss)on other non-interest earning assets, net ................. (1,054) 45,517 58,693
Net operating gains (losses) on investments in real estate ........... 5,581 27,579 820
Amortization of excess of net assets acquired over purchase price .... 18,333 14,112 3,201
Other income ......................................................... 8,759 6,084 24,346
--------- --------- ---------
$ 169,341 $ 177,525 $ 144,642
========= ========= =========
Servicing and Other Fees. Our servicing and other fees are primarily
comprised of fees we earned from investors for servicing residential mortgage
loans on their behalf. The increase in servicing fees is largely due to the
growth in residential loans we service for others. Excluding Ocwen UK from 1999,
the average unpaid principal balance of loans we service for others amounted to
$16,738,3377, $10,798,857 and $10,060,673 during 2001, 2000 and 1999,
respectively. The following table sets forth the principal components of our
servicing and other fees for the years indicated:
2001 2000 1999 (1)
-------- -------- --------
Loan servicing and related fees:
Loan servicing fees........................ $ 95,569 $ 47,334 $ 49,304
Late charges............................... 21,326 14,890 10,076
Interest on custodial accounts (2)......... 8,530 6,523 68
Special servicing fees (3)................. 8,494 10,420 12,164
Other...................................... 8,924 9,554 6,207
Amortization of servicing rights........... (29,841) (10,036) (4,595)
-------- -------- --------
113,002 78,685 73,224
Other fees:
Property valuation fees (ORA).............. 11,789 10,630 582
Default servicing fees..................... 3,917 3,040 782
Retail banking fees........................ 2,689 1,526 1,044
Other...................................... 3,200 3,199 386
-------- -------- --------
$134,597 $ 97,080 $ 76,018
======== ======== ========
(1) Loan servicing fees earned by Ocwen UK amounted to $9,691 during 1999
prior to its sale.
(2) Interest we earned on custodial accounts during the holding period between
collection of borrower payments and remittance to investors.
(3) Fees we earned under special servicing arrangements wherein we act as a
special servicer for third parties, typically as part of a securitization.
Under these arrangements, we service loans that become greater than 90
days past due and receive base special servicing fees plus incentive fees
to the extent we achieve certain loss mitigation parameters.
25
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth our loans serviced for others at the dates
indicated:
Subprime Loans (1) Other Loans Total
------------------------- ------------------------- -------------------------
No. of No. of No. of
Amount Loans Amount Loans Amount Loans
----------- ----------- ----------- ----------- ----------- -----------
December 31, 2001:
Performing:
Residential loans ...................... $18,068,542 242,664 $ 919,639 18,074 $18,988,181 260,738
Commercial loans and other ............. -- -- 1,062,345 1,962 1,062,345 1,962
----------- ----------- ----------- ----------- ----------- -----------
$18,068,542 242,664 $ 1,981,984 20,036 $20,050,526 262,700
=========== =========== =========== =========== =========== ===========
Non-performing:
Residential loans (3) .................. $ 2,638,235 35,585 $ 317,001 5,021 $ 2,955,236 40,606
Commercial loans (3) ................... -- -- 158,250 247 158,250 247
----------- ----------- ----------- ----------- ----------- -----------
$ 2,638,235 35,585 $ 475,251 5,268 $ 3,113,486 40,853
=========== =========== =========== =========== =========== ===========
Total loans serviced for others:
Residential loans ...................... $20,706,777 278,249 $ 1,236,640 23,095 $21,943,417 301,344
Commercial loans and other ............. -- -- 1,220,595 2,209 1,220,595 2,209
----------- ----------- ----------- ----------- ----------- -----------
$20,706,777 278,249 $ 2,457,235 25,304 $23,164,012 303,553
=========== =========== =========== =========== =========== ===========
December 31, 2000 (2):
Performing:
Residential loans ...................... $ 7,499,361 118,174 $ 1,170,782 22,162 $ 8,670,143 140,336
Commercial loans and other ............. -- -- 798,873 278 798,873 278
----------- ----------- ----------- ----------- ----------- -----------
$ 7,499,361 118,174 $ 1,969,655 22,440 $ 9,469,016 140,614
=========== =========== =========== =========== =========== ===========
Non-performing:
Residential loans (3) .................. $ 1,430,528 18,246 $ 394,013 5,869 $ 1,824,541 24,115
Commercial loans and other (3) ......... -- -- 66,967 24 66,967 24
----------- ----------- ----------- ----------- ----------- -----------
$ 1,430,528 18,246 $ 460,980 5,893 $ 1,891,508 24,139
=========== =========== =========== =========== =========== ===========
Total loans serviced for others:
Residential loans ...................... $ 8,929,889 136,420 $ 1,564,795 28,031 $10,494,684 164,451
Commercial loans ....................... -- -- 865,840 302 865,840 302
----------- ----------- ----------- ----------- ----------- -----------
$ 8,929,889 136,420 $ 2,430,635 28,333 $11,360,524 164,753
=========== =========== =========== =========== =========== ===========
December 31, 1999:
Performing:
Residential loans ...................... $ 6,830,385 82,612 $ 1,446,836 26,707 $ 8,277,221 109,319
Commercial loans and other ............. -- -- 939,422 218 939,422 218
----------- ----------- ----------- ----------- ----------- -----------
$ 6,830,385 82,612 $ 2,386,258 26,925 $ 9,216,643 109,537
=========== =========== =========== =========== =========== ===========
Non-performing:
Residential loans (3) .................. $ 1,341,009 16,147 $ 481,556 6,863 $ 1,822,565 23,010
Commercial loans and other ............. -- -- 66,075 123 66,075 123
----------- ----------- ----------- ----------- ----------- -----------
$ 1,341,009 16,147 $ 547,631 6,986 $ 1,888,640 23,133
=========== =========== =========== =========== =========== ===========
Total loans serviced for others:
Residential loans ...................... $ 8,171,394 98,759 $ 1,928,392 33,570 $10,099,786 132,329
Commercial loans and other ............. -- -- 1,005,497 341 1,005,497 341
----------- ----------- ----------- ----------- ----------- -----------
$ 8,171,394 98,759 $ 2,933,889 33,911 $11,105,283 132,670
=========== =========== =========== =========== =========== ===========
<FN>
(1) Subprime loans represent loans we service which were made by others to
borrowers who did not qualify under guidelines of the FNMA and FHLMC
("nonconforming loans").
(2) Does not include approximately 38,500 loans with an unpaid principal
balance of approximately $1,027,600 that we acquired on December 31, 2000
but which we did not board in our loan servicing system until 2001.
</FN>
26
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
(3) The following table presents loans which we service under special
servicing agreements, included in the table above, and the total pool of
loans for which we are designated as special servicer should those loans
become greater than 90 days past due:
Designated
Loans Special Serviced Special Servicing
by OCN Loan Pools
------------------------- -------------------------
Amount No. of Loans Amount No. of Loans
----------- ------------ ----------- ------------
December 31, 2001:
Residential loans ....... $ 1,647,837 19,469 $ 4,894,376 53,098
Commercial loans ........ 34,703 169 814,820 295
----------- ----------- ----------- -----------
$ 1,682,540 19,638 $ 5,709,196 53,393
=========== =========== =========== ===========
December 31, 2000:
Residential loans ....... $ 2,399,842 26,755 $12,795,282 126,065
Commercial loans ........ 84,155 118 952,070 336
----------- ----------- ----------- -----------
$ 2,483,997 26,873 $13,747,352 126,401
=========== =========== =========== ===========
December 31, 1999
Residential loans ....... $ 878,284 9,319 $ 8,057,768 82,630
Commercial loans ........ 123,924 151 994,230 422
----------- ----------- ----------- -----------
$ 1,002,208 9,470 $ 9,051,998 83,052
=========== =========== =========== ===========
Gain (Loss) on Interest Earning Assets. The following table sets for the
principal components of net gains (losses) we earned on our interest earning
assets for the years indicated:
2001 2000 1999
-------- -------- --------
Gain (loss) on loan sales (1)............. $ (4,380) $ 12,084 $ 40,380
Gain on security sales (2)................ -- 4,983 4,968
Other..................................... 431 558 (1,050)
-------- -------- --------
$ (3,949) $ 17,625 $ 44,298
======== ======== ========
(1) During the third quarter of 1999, we made a strategic decision to
structure future securitizations as financing transactions which precluded
our use of gain-on-sale accounting. Gains we earned for 1999 include
$36,804 from securitizations as detailed in the table below. See "Changes
in Financial Condition - Match Funded Assets."
(2) Prior to the transfer of our securities from available for sale to trading
on September 30, 2000.
The following table sets forth details of our net gains recognized in
connection with the securitization of loans during 1999:
Book Value of
Loans Securitized Securities
- ----------------------------------------------------------------------- Retained
Types of Loans Principal No. of Loans Net Gain (Non-Cash Gain) Cash Gain
- --------------------------------------- ----------- ------------ ----------- --------------- -----------
1999:
Single family discount................ $ 227,303 3,137 $ 22,763 $ 4,040 $ 18,723
Single family subprime:
Domestic......................... 235,572 2,192 3,834 12,091 --
Foreign (Ocwen UK)............... 295,157 8,983 10,207 34,452 --
----------- ----------- ----------- -------------- -----------
530,729 11,175 14,041 46,543 --
----------- ----------- ----------- -------------- -----------
$ 758,032 14,312 $ 36,804 $ 50,583 $ 18,723
=========== =========== =========== ============== ===========
Gain (Loss) on Trading and Match Funded Securities. The gain (loss)
recorded on trading and match funded securities during 2001 and 2000 resulted
from our change in our policy for securities available for sale and match-funded
securities to account for them as trading securities effective September 30,
2000. See Notes 1 and 4 to our Consolidated Financial Statements (which are
incorporated herein by reference).
27
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Impairment Charges on Securities Available for Sale. Prior to our transfer
of securities available for sale to trading on September 30, 2000, we recorded
impairment charges on securities available as a result of declines in fair value
that we deemed to be other-than-temporary. See "Changes in Financial Condition -
Trading Securities" and Note 1 to our Consolidated Financial Statements (which
is incorporated herein by reference).
Gain (Loss) on Real Estate Owned, Net. The following table sets forth the
results of our real estate owned (which does not include investments in real
estate, as discussed below) during the years indicated:
2001 2000 1999
---------- ---------- ----------
Gains on sales............................ $ 14,111 $ 22,515 $ 36,265
Provision for losses in fair value........ (17,766) (26,674) (28,008)
Carrying costs, net....................... (5,601) (10,745) (12,214)
---------- ---------- ----------
(Loss) gain on real estate owned, net..... $ (9,256) $ (14,904) $ (3,957)
========== ========== ==========
See "Changes in Financial Condition - Real Estate Owned, Net" for
additional information regarding real estate owned and the related provision for
losses in fair value.
Gain (Loss) on Other Non-Interest Earning Assets. The following table sets
forth the principal components of net gains (losses) we recorded on other
non-interest earning assets for the years indicated:
2001 2000 1999
---------- ---------- ----------
Gain on sale of investments in real
estate (1).............................. $ 45 $ 22,949 $ 1,753
Gain (loss) on sale of affordable housing (956) 497 6,591
properties................................
Gain on sale of Kensington................ -- 20,025 --
Gain on sale of Ocwen UK.................. -- -- 50,371
Other..................................... (143) 2,046 (22)
---------- ---------- ----------
$ (1,054) $ 45,517 $ 58,693
========== ========== ==========
<FN>
(1) Gains earned for 2000 resulted primarily from sales of real estate we
acquired in connection with our acquisition of OAC in October 1999.
</FN>
Net Operating Gains on Investments in Real Estate. The following table
sets forth the results of our investments in real estate during the years
indicated:
2001 2000 1999
--------- --------- ---------
Operating income, net (1).................. $ 6,758 $ 15,856 $ 3,637
Equity in earnings of loans accounted for
as investments in real estate (2)........ 3,338 12,427 --
Impairment write-down (3).................. (4,515) (704) (2,817)
--------- --------- ---------
$ 5,581 $ 27,579 $ 820
========= ========= =========
<FN>
(1) The decrease in operating income from our investments in real estate
during 2001 is primarily due to sales of properties during 2000, most of
which we acquired in connection with our acquisition of OAC in October
1999.
(2) The decline in equity in earnings related to certain loans we account for
as investments in real estate during 2001 is primarily due to the
repayment of loans during 2000, which generated significant resolution
gains, and an increase in our non-performing loans in 2001.
(3) Write-downs we recorded during 2001 consisted of $1,471 on our investment
in a shopping center in Bradenton, and $2,225 on our investment in three
assisted living facilities. See "Changes in Financial Condition -
Investments in Real Estate" and "Changes in Financial Condition - Real
Estate Held for Sale."
</FN>
Amortization of Excess of Net Assets Acquired over Purchase Price. The
amortization of excess of net assets acquired over purchase price resulted from
our acquisition of OAC on October 7, 1999. Our acquisition resulted in an excess
of net assets acquired over the purchase price of $60,042, which we amortize on
a straight-line basis. Effective October 1, 2000, we reduced the amortization
period
28
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
from 60 months to 39 months as a result of an acceleration of projected sale
dates for the acquired assets. This reduction in amortization period accounts
for the increase in amortization during 2001 as compared to 2000. The
unamortized balance of the excess of net assets acquired over purchase price at
December 31, 2001 was $18,133, as compared to $36,665 at December 31, 2000. On
January 1, 2002, upon adoption of Statement of Financial Accounting Standard
("SFAS") No. 141 and No. 142, we reversed the unamortized balance to income as
the effect of a change in accounting principle as required by these statements.
See Note 1 and Note 2 to our Consolidated Financial Statements (which is
incorporated herein by reference).
Other Income. See Note 27 to our Consolidated Financial Statements (which
is incorporated herein by reference) for a disclosure of the components of other
income for 2001, 2000 and 1999. The increase in other income during 2001 as
compared to 2000 was primarily due to consulting revenues generated by our joint
venture in Jamaica and real estate commission income generated from the sale of
our real estate owned properties during 2001. Other income for 1999 included
$12,896 of brokerage commissions earned by Ocwen UK prior to its sale on
September 30, 1999.
Non-Interest Expense. The following table sets forth the principal
components of our non-interest expense during the years indicated:
2001 2000 1999
-------- -------- --------
Compensation and employee benefits............. $ 84,914 $ 83,086 $102,173
Occupancy and equipment........................ 11,577 12,005 18,501
Technology and communication costs............. 26,768 23,876 20,957
Loan expenses.................................. 15,811 13,051 12,618
Net operating losses on certain affordable
housing properties........................... 16,580 9,931 6,291
Amortization of excess of purchase price over
net assets acquired.......................... 3,112 3,124 4,448
Professional services and regulatory fees...... 14,749 12,829 13,992
Other operating expenses....................... 8,935 12,107 16,088
-------- -------- --------
$182,446 $170,009 $195,068
======== ======== ========
Compensation and Employee Benefits. The following table presents the
principal components of compensation and benefits we incurred for the years
indicated:
2001 2000 1999
-------- -------- --------
Salaries (1)................................... $ 58,012 $ 58,580 $ 73,713
Bonuses (2).................................... 9,544 8,876 4,104
Payroll taxes.................................. 4,763 4,834 4,789
Commissions.................................... 3,541 3,957 4,739
Insurance...................................... 2,682 2,736 2,338
Severance...................................... 1,701 778 689
Contract programmers........................... 1,539 4,772 5,239
Relocation..................................... 1,049 1,165 1,875
Long-term incentive plan (3)................... -- (6,012) 3,645
Other.......................................... 2,083 3,400 1,042
-------- -------- --------
84,914 83,086 102,173
Adjusted for:
Exclusion of Ocwen UK........................ -- -- (16,520)
Exclusion of OFS............................. -- -- (6,174)
Suspension of long-term incentive plan (3)... -- 6,012 (3,645)
Reversal of stock option accrual (4)......... -- -- 2,248
-------- -------- --------
$ 84,914 $ 89,098 $ 78,082
======== ======== ========
(1) Salaries includes fees paid for the services of temporary employees.
(2) Bonus expense for 2001 and 2000 included $568 and $572, respectively,
related to stock options we granted to employees at an exercise price
below fair market value.
(3) We suspended our long-term incentive plan in the first quarter of 2000
and reversed the related accrual at that time.
29
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
(4) In 1999 we decided to grant stock options for services provided in 1999
and 1998 at an exercise price equal to fair market value, thereby not
recognizing any bonus expense attributable to stock options for those
years. We reversed the accrual related to 1998 in 1999 at the time of our
decision.
The average number of our full-time employees increased to 1,536 during
2001 as compared to 1,288 during 2000. At December 31, 2001 we had 258 employees
in our Bangalore, India office as we continue our globalization initiative to
reduce labor costs while maintaining the highly skilled level of our employees.
Our plans for 2002 call for a significant increase in the number of our India
employees. As indicated in the table above, excluding the reversal of our
long-term incentive plan accrual in 2000, our compensation and employee benefits
expense declined in 2001. This decline in compensation and employee benefits
expense resulted primarily from a reduction in contract programmers assisting
with the implementation of our residential loan servicing system, which was
completed in January 2001.
The decline in compensation and employee benefits for 2000 as compared to
1999 was largely a result of our sale of Ocwen UK and our closing of our
domestic subprime lending operations at OFS. As indicated in the table above,
excluding Ocwen UK, OFS and the long-term incentive plan, our compensation and
employee benefits increased during 2000. This increase reflects an increase in
the average number of our full-time employees (excluding Ocwen UK and OFS) from
1,155 to 1,288 between 1999 and 2000, respectively, and reductions in the stock
option component of bonus expense during 1999 as indicated in the table above.
Occupancy and Equipment. Occupancy and equipment costs consist principally
of rents, depreciation, mail and delivery expense and other costs of our office
operations. Excluding Ocwen UK and OFS, occupancy and equipment expense
decreased $793 during 2000.
Technology and Communication Costs. Technology and communication costs
consist primarily of depreciation on our computer hardware and software,
technology-related consulting fees (primarily OTX), imaging and telephone
expense. Technology costs for 2001 included $4,620 of one-time expenses
comprised primarily of a $3,185 payment related to the acquisition of an OTX
subsidiary in 1997. Excluding Ocwen UK and OFS, technology and communication
costs increased by $4,907 in 2000. These increases were primarily due to
increased consulting fees incurred at OTX. Additionally, OTX capitalized $2,645
of consulting fees as software development costs during 1999.
Net Operating Losses on Certain Affordable Housing Properties. Net
operating losses we recorded on investments in certain affordable housing
properties have increased during 2001 and 2000 principally because of impairment
charges we recorded in the amount of $15,587 and $6,448, respectively, for
expected losses on the sale of properties. Partially offsetting the increase in
impairment charges were declines in operating losses as a result of sales. See
"Changes in Financial Condition - Affordable Housing Properties."
Amortization of Excess of Purchase Price Over Net Assets Acquired
("Goodwill"). Goodwill amortization we recognized during 2001, 2000 and 1999
related entirely to OTX. Amortization in 1999 included a charge of $3,367
reflecting the impact of our reduction in the estimated useful life of the
goodwill. In accordance with the provisions of SFAS No. 142, which we adopted on
January 1, 2002, the remaining balance of our goodwill will no longer be
amortized beginning in 2002. However, our goodwill will be tested annually for
impairment. See Note 1 to our consolidated financial statements (which is
incorporated herein by reference).
Loan Expenses. Excluding Ocwen UK and OFS, loan expenses increased $5,110
during 2000. The increase in loan expenses during 2000 was due primarily to an
increase in appraisal fees in connection with property valuation services we
provided through ORA.
Professional Services and Regulatory Fees. Professional services and
regulatory fees are primarily comprised of non-technology related consulting
fees, legal and audit fees and FDIC insurance. The increase in 2001 is primarily
due to a $1,651 increase in FDIC insurance. The decline in professional services
and regulatory fees during 2000 is principally related to Ocwen UK and OFS.
Excluding Ocwen UK and OFS, professional services and regulatory fees increased
by $254 in 2000 as compared to 1999.
Other Operating Expenses. Other operating expenses include travel costs,
acquisition expenses, marketing costs, and amortization of deferred costs.
Excluding Ocwen UK and OFS, other operating expenses increased $4,328 during
2000. The increase in 2000 was largely due to increased marketing costs we
incurred at OTX and our recognition of $1,355 of previously deferred expenses
related to the sale of affordable housing properties. See Note 28 to our
Consolidated Financial Statements (which is incorporated herein by reference)
for a disclosure of the components of other operating expenses for 2001, 2000
and 1999.
30
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Distributions on Company Obligated, Mandatorily Redeemable Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company.
Cash distributions on our Capital Securities are payable semi-annually in
arrears on February 1 and August 1 of each year at an annual rate of 10.875%. We
recorded $7,132, $11,380, and $13,111 of distributions to holders of the Capital
Securities during 2001, 2000 and 1999, respectively. The decline in
distributions is the result of repurchases we made during 2000 and 1999. See
Note 19 to our Consolidated Financial Statements (which is incorporated herein
by reference) and "Changes in Financial Condition - Company-Obligated,
Mandatorily Redeemable Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Company."
Equity in Earnings (Losses) of Investments in Unconsolidated Entities. The
following table sets forth earnings (losses) earned from our investments in
unconsolidated entities for the years indicated:
2001 2000 1999
-------- -------- --------
Kensington (1)............................ $ -- $ (5,280) $ (9,154)
OAC (2)................................... -- -- (1,809)
OPLP (2).................................. -- -- (1,797)
Other..................................... 304 31 144
-------- -------- --------
$ 304 $ (5,249) $(12,616)
======== ======== ========
(1) We sold our 38.7% investment in Kensington on November 22, 2000.
(2) Before our acquisition of OAC in October 1999, we accounted for our
investments in OAC and OPLP using the equity method.
Income Tax Expense (Benefit). The following table provides details of our
income tax expense (benefit) and effective tax rates for the years indicated:
2001 2000 1999
----------- ----------- -----------
Income tax expense (benefit) on loss before taxes and extraordinary gain (1)..... $ (24,761) $ (9,543) $ 108
Provision for valuation allowance on current year's deferred tax asset (1)....... 23,348 -- --
Provision for valuation allowance on prior year's deferred tax asset............. 83,000 17,500 2,500
----------- ----------- -----------
Income tax expense........................................................... 81,587 7,957 2,608
Income tax expense on extraordinary gain (1)..................................... 1,413 10,990 1,491
----------- ----------- -----------
Total income tax expense......................................................... $ 83,000 $ 18,947 $ 4,099
=========== =========== ===========
<FN>
(1) Net of the provision to increase the valuation allowance on current year's
deferred tax asset, we did not record income tax expense or benefit for
2001. The income tax benefit we recorded on the loss before income taxes
and extraordinary gain was entirely offset by the provision to increase
the current year's valuation allowance and the income tax expense on
extraordinary gains.
</FN>
For 2001, 2000 and 1999 our effective tax rate before the provision for
the deferred tax valuation allowance was 54.9%, 6.8% and 6.9%, respectively, and
reflected tax credits of $2,078, $2,577 and $18,242, respectively, resulting
from our investment in affordable housing properties.
The provision for deferred tax asset valuation allowance is a non-cash
charge we recorded to increase the aggregate valuation allowance to $165,221 at
December 31, 2001 based on our estimate under the applicable accounting rules of
the amount of the deferred tax asset that we are more likely than not to
realize.
See Note 22 to our Consolidated Financial Statements (which is
incorporated herein by reference) and "Changes in Financial Condition -
Affordable Housing Properties."
31
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Extraordinary Gain on Repurchase of Debt, Net of Taxes. The following
table sets forth the components of the extraordinary gains resulting from our
repurchase of our debt securities during the years indicated:
2001 2000 1999
-------- -------- --------
10.875% Capital Securities due August 1, 2027:
Face amount repurchased......................... $ 18,371 $ 30,470 $ 15,000
======== ======== ========
Extraordinary gain.............................. 3,723 11,739 5,547
Income taxes.................................... (1,378) (4,343) (977)
-------- -------- --------
Net extraordinary gain......................... $ 2,345 $ 7,396 $ 4,570
======== ======== ========
11.875% Notes due October 1, 2003:
Face amount repurchased......................... $ 13,025 $ 3,800 $ 21,150
======== ======== ========
Extraordinary gain.............................. 52 439 1,322
Income taxes.................................... (35) (163) (232)
-------- -------- --------
Net extraordinary gain......................... $ 17 $ 276 $ 1,090
======== ======== ========
11.5% Redeemable Notes due July 1, 2005:
Face amount repurchased......................... $ -- $142,955 $ --
======== ======== ========
Extraordinary gain.............................. -- 17,525 --
Income taxes.................................... -- (6,484) --
-------- -------- --------
Net extraordinary gain......................... $ -- $ 11,041 $ --
======== ======== ========
12.00% Subordinated Debentures due June 15, 2005:
Face amount repurchased......................... $ -- $ -- $ 33,000
======== ======== ========
Extraordinary gain.............................. -- -- 1,605
Income taxes.................................... -- -- (282)
-------- -------- --------
Net extraordinary gain......................... $ -- $ -- $ 1,323
======== ======== ========
Total debt repurchases:
Face amount repurchased......................... $ 31,396 $177,225 $ 69,150
======== ======== ========
Extraordinary gain.............................. 3,775 29,703 8,474
Income taxes.................................... (1,413) (10,990) (1,491)
-------- -------- --------
Net extraordinary gain......................... $ 2,362 $ 18,713 $ 6,983
======== ======== ========
See "Changes in Financial Condition - Notes, Debentures and Other
Interest-Bearing Obligations" and "Company Obligated, Mandatorily Redeemable
Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of
the Company" and Note 18 and Note 19 to our Consolidated Financial Statements
(which are incorporated herein by reference).
32
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Changes in Financial Condition
Trading Securities. The following table sets forth the fair value of our
trading securities at the dates indicated:
December 31, December 31,
2001 2000
----------- -----------
Mortgage-related securities:
Collateralized mortgage obligations (AAA-rated) (1)....... $ 161,191 $ 277,595
=========== ===========
Subordinates and residuals (2):
Single family residential:
BB-rated subordinates ................................. $ 625 $ 4,563
B-rated subordinates .................................. 799 2,911
Unrated subordinates .................................. 1,008 9,361
Unrated subprime residuals ............................ 60,049 93,176
----------- -----------
62,481 110,011
Multi-family residential and commercial unrated
subordinates .......................................... 2,577 2,636
----------- -----------
$ 65,058 $ 112,647
=========== ===========
<FN>
(1) During the year ended December 31, 2001, our CMO trading securities
declined $116,404. This decline was primarily due to $187,113 of
maturities and principal repayments and $116,715 of sales, offset in part
by purchases of $188,432.
(2) During the year ended December 31, 2001, our subordinate, residual and
other trading securities declined by $47,589. This decline was primarily
due to $10,721 of maturities and principal repayments, $31,683 of sales
and $7,416 of net premium amortization.
</FN>
On September 30, 2000, we reclassified our portfolio of securities
available for sale to trading.
CMOs are like traditional debt instruments because they have stated
principal amounts and traditionally defined interest-rate terms. During 1999 and
prior years, we generally retained subordinate and residual securities related
to our securitizations of loans. Subordinate and residual interests in
mortgage-related securities provide credit support to the more senior classes of
the mortgage-related securities. Principal from the underlying mortgage loans
generally is allocated first to the senior classes, with the most senior class
having a priority right to the cash flow from the mortgage loans until its
payment requirements are satisfied. To the extent that there are defaults and
unrecoverable losses on the underlying mortgage loans, resulting in reduced cash
flows, the most subordinate security will be the first to bear this loss.
Because subordinate and residual interests generally have no credit support, to
the extent there are realized losses on the mortgage loans comprising the
mortgage collateral for such securities, we may not recover the full amount or,
indeed, any of our initial investment in such subordinate and residual
interests. Historically, we generally retained the most subordinate classes of
the securities from the securitization and therefore will be the first to bear
any credit losses.
Subordinate and residual and securities at December 31, 2001 and 2000
included retained interests with a fair value of $25,274 and $43,016,
respectively, from securitizations of loans completed by us during 1999 and
prior years. We determine the present value of estimated cash flows utilizing
valuation assumptions appropriate for each particular transaction. The
significant valuation assumptions have included the estimated prepayment speeds
and the estimated credit losses related to the underlying mortgages. In order to
determine the present value of this estimated excess cash flow, we currently
apply a discount rate of 9.78% to 25.00% to the projected cash flows on the
unrated classes of securities. The annual prepayment rate of the securitized
loans is a function of full and partial prepayments and defaults. We make
assumptions as to the prepayment rates of the underlying loans, which we believe
are reasonable, in estimating fair values of the subordinate securities and
residual securities retained. During 2001, we utilized proprietary prepayment
curves (reaching an approximate range of annualized rates of 14.55% - 40.22%).
During 2001, we estimated annual losses of between 0.76% and 5.26% of the unpaid
principal balance of the underlying loans. See Note 4 to our Consolidated
Financial Statements (which is incorporated herein by reference) for additional
disclosures regarding retained interests.
Subordinate and residual interests are affected by the rate and timing of
payments of principal (including prepayments, repurchase, defaults and
liquidations) on the mortgage loans underlying a series of mortgage-related
securities. The rate of principal payments may vary significantly over time
depending on a variety of factors, such as the level of prevailing mortgage loan
interest rates and economic, demographic, tax, legal and other factors.
Prepayments on the mortgage loans underlying a series of mortgage-related
33
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
securities are generally allocated to the more senior classes of
mortgage-related securities. Although in the absence of defaults or interest
shortfalls all subordinates receive interest, amounts otherwise allocable to
residuals generally are used to make payments on more senior classes or to fund
a reserve account for the protection of senior classes until
overcollateralization or the balance in the reserve account reaches a specified
level. For residual interests in residential mortgage-backed securities,
over-collaterization is the amount by which the collateral balance exceeds the
sum of the bond principal amounts. Over-collaterization is achieved by applying
monthly a portion of the interest payments of the underlying mortgages toward
the reduction of the class certificate principal amounts, causing them to
amortize more rapidly than the aggregate loan balance. Over-collaterization
represents the first tier of loss protection afforded to the non-residual
holders. To the extent not consumed by losses on more highly rated bonds,
over-collaterization is remitted to the residual holders. In periods of
declining interest rates, rates of prepayments on mortgage loans generally
increase, and if the rate of prepayments is faster than anticipated, then the
yield on subordinates will be positively affected and the yield on residuals
will be negatively affected.
We periodically assess the carrying value of our subordinate securities
and residual securities retained. There can be no assurance that our estimates
used to determine the value of subordinate securities and residual securities
retained will remain appropriate for the life of each securitization. If actual
loan prepayments or defaults exceed our estimates, the carrying value of our
subordinate securities and residual securities retained may be decreased during
the period in which we recognized the disparity. During 2000, and before our
transfer of securities available for sale to trading, we recorded $11,597 of
impairment charges on our portfolio of subordinate and residual securities as a
result of declines in value that we deemed to be "other- than- temporary."
The following table presents information regarding our trading subordinate
and residual securities summarized by classification and rating at December 31,
2001:
Anticipated Anticipated
Yield to Yield to Anticipated
Maturity Maturity Weighted
Percent at at Average Prospective
Owned by Purchase 12/31/01 Remaining Yield at
Rating/Description (1) Fair Value Ocwen (2) (3) Coupon Life (4) 12/31/01 (5)
- ------------------------------------- ---------- -------- ----------- ----------- ------ ----------- ------------
Single-family residential:
BB-rated subordinates............ $ 625 100.00% 16.87% 5.54% 6.93% 2.53 70.47%
B-rated subordinates............. 799 100.00 17.49 28.22 7.31 1.95 66.53
Unrated subordinates............. 1,008 97.50 15.50 15.82 7.97 0.39 49.42
Unrated subprime residuals....... 60,049 100.00 18.66 6.41 N/A 5.35 21.85
---------
62,481
Commercial:
Unrated subordinates............. 2,577 25.00 22.15 12.10 N/A 1.35 14.06
---------
$ 65,058
=========
<FN>
(1) Refers to the credit rating designated by the rating agency for each
securitization transaction. Classes designated "A" have a superior claim
on payment to those rated "B", which are superior to those rated "C."
Additionally, multiple letters have a superior claim to designations with
fewer letters. Thus, for example, "BBB" is superior to "BB," which in turn
is superior to "B." The lower class designations in any securitization
will receive interest payments after senior classes and will experience
losses before any senior class. The lowest potential class designation is
unrated which, if included in a securitization, will always receive
interest last and experience losses first.
(2) Represents the effective yield from inception to maturity based on the
purchase price and anticipated future cash flows under pricing
assumptions.
(3) Represents the effective yield based on the purchase price, actual cash
flows received from inception until the respective date, and the then
current estimate of future cash flows under the assumptions at the
respective date. Changes in the December 31, 2001 anticipated yield to
maturity from that originally anticipated are primarily the result of
changes in prepayment assumptions and loss assumptions.
(4) Represents the weighted average life based on the December 31, 2001 book
value.
(5) Represents the effective yield based on the book value of the investment
and the then current estimate of the future cash flows under assumptions
at the respective date. Prospective yields are considerably higher than
the anticipated yield to maturity because book values include impairments
recorded on the securities when they were classified as available for
sale.
</FN>
34
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth the principal amount of mortgage loans by
the geographic location of the property securing the mortgages that underlie our
trading subordinate and residual securities at December 31, 2001:
Description California U.K. Florida New York New Jersey Other (1) Total
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Single family residential ..... $ 211,099 $ 112,052 $ 107,561 $ 67,478 $ 61,631 $ 599,058 $1,158,879
Commercial .................... 18,842 -- -- -- -- 43,714 62,556
Multi-family .................. 450 -- 21 4,029 930 2,685 8,115
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total ......................... $ 230,391 $ 112,052 $ 107,582 $ 71,507 $ 62,561 $ 645,457 $1,229,550
========== ========== ========== ========== ========== ========== ==========
Percentage (2) ................ 18.74% 9.11% 8.75% 5.82% 5.09% 52.49% 100.00%
========== ========== ========== ========== ========== ========== ==========
<FN>
(1) Consists of properties located in 46 other states, none of which
aggregated over $46,844 in any one state.
(2) Based on a percentage of the total unpaid principal balance of the
underlying loans.
</FN>
See Note 1 and Note 4 to our Consolidated Financial Statements (which is
incorporated herein by reference).
Loans Available for Sale. Our loans available for sale are comprised
primarily of subprime single family residential loans and are carried at the
lower of cost or aggregate market value. The decline in our loans available for
sale during 2001, 2000 and 1999 primarily reflects our closure of the domestic
subprime origination business in 1999 and our sale of Ocwen UK, also in 1999.
Activity in Loans Available for Sale. The following table sets forth the
activity in our net loans available for sale during the periods indicated:
Year Ended December 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Balance at beginning of period............... $ 10,610 $ 45,213 $ 177,847 $ 177,041 $ 126,366
------------ ------------ ------------ ------------ ------------
Purchases (1)................................ -- -- 47,129 795,053 278,081
Originations (2)............................. -- -- 728,509 959,105 316,101
Sales (3) (4)................................ (7,702) (24,774) (865,959) (1,658,773) (501,079)
Decrease (increase) in lower of cost or
market valuation allowance................ 478 1,625 1,282 (4,064) (1,034)
Loans transferred (to)/from loan portfolio... -- -- -- (13,674)
Principal repayments, net of capitalized
interest.................................. (2,076) (6,785) (30,314) (82,728) (22,151)
Transfer to real estate owned................ (270) (4,669) (13,281) (7,787) (5,569)
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in loans............. (9,570) (34,603) (132,634) 806 50,675
------------ ------------ ------------ ------------ ------------
Balance at end of period..................... $ 1,040 $ 10,610 $ 45,213 $ 177,847 $ 177,041
============ ============ ============ ============ ============
<FN>
(1) Included $292,848 we purchased during 1998 from the U.S. operations of
Cityscape Financial Corp. and $421,188 we purchased from the UK operations
of Cityscape Financial Corp.
(2) Included approximately $509,800 and $254,300 originated by Ocwen UK during
1999 and 1998, respectively.
(3) Included $297,469 related to our sale of Ocwen UK on September 30, 1999.
(4) Included securitizations of domestic and foreign subprime single family
residential loans by us during 1999 and prior years. See "Results of
Operations - Non-Interest Income."
</FN>
35
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Real Estate Held for Sale. Our real estate held for sale consisted of the
following at the dates indicated:
December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Shopping centers (1)..................... $ -- $ 22,670 $ --
Assisted living facilities (2)........... 13,418 -- --
---------- ---------- ----------
$ 13,418 $ 22,670 $ --
========== ========== ==========
(1) During the fourth quarter of 2001, we transferred our shopping center in
Bradenton, Florida to held for investment after the contract to sell the
property was terminated. We recorded impairment charges of $1,471 on this
property during the second quarter of 2001. During the first quarter of
2001, we sold another shopping center located in Havre, Montana, which had
a carrying value of $1,034, for no gain.
(2) We transferred three assisted living facilities from held for investment
during the third quarter of 2001. We recorded impairment charges of $2,225
on these properties at the time of transfer based on anticipated sales
proceeds.
See "Changes in Financial Condition - Investments in Real Estate" and Note
9 to our Consolidated Financial Statements (which is incorporated herein by
reference).
Investment in Real Estate. Our investment in real estate consisted of the
following at the dates indicated:
December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Properties held for investment:
Office buildings............................. $ 32,132 $ 32,112 $202,607
Retail....................................... 29,637 9,515 33,224
Building improvements........................ 17,513 11,346 17,590
Tenant improvements and lease commissions.... 4,537 1,744 8,150
Furniture and fixtures....................... 52 52 44
-------- -------- --------
83,871 54,769 261,615
Accumulated depreciation..................... (5,327) (2,359) (9,011)
-------- -------- --------
78,544 52,410 252,604
-------- -------- --------
Loans accounted for as investments in real
estate:
Multi-family residential..................... -- 97 --
Nonresidential............................... 30,436 45,689 --
-------- -------- --------
30,436 45,786 --
-------- -------- --------
Properties held for lease:
Land and land improvements -- 1,256 1,256
Building..................................... -- 15,641 14,629
Accumulated depreciation..................... -- (855) (248)
-------- -------- --------
-- 16,042 15,637
-------- -------- --------
Investment in real estate partnerships......... 7,916 8,523 --
-------- -------- --------
$116,896 $122,761 $268,241
======== ======== ========
36
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Properties Held for Investment. These properties were acquired by us as a
result of our acquisition of OAC. The increase in our investment during 2001 was
due primarily to capitalized improvements and the transfer of our shopping
center in Bradenton, Florida from held for sale. The decline in our investment
during 2000 was due to sales and the transfer of properties from held for
investment to held for sale. Our properties held for investment at December 31,
2001 were comprised of the following:
Date %
Acquired Property Location Square Feet Property Type Leased Carrying Value
- --------------- ------------------------- --------------------- ------------- --------------- ---------- --------------
07/22/98 841 Prudential Drive (1) Jacksonville, FL 550,000 Office Bldg. 95.6% $ 41,937
04/09/98 7075 Bayers Road (2) Halifax, Nova Scotia 402,529 Shopping Ctr. 66.9 20,675
11/10/97 905-1205 Cortez Road (3) Bradenton, FL 290,673 Shopping Ctr. 93.9 21,259
Accumulated depreciation (5,327)
------------
$ 78,544
<FN>
(1) In July 1998, OAC purchased the Prudential Building, a 22-story office
building located in the central business district of Jacksonville,
Florida. OAC funded the purchase with cash on hand and advances from a
line of credit. Simultaneously with this closing, OAC also leased 98% of
the building back to the Prudential Insurance Co. of America for a term
expiring July 31, 2002 and sold two adjacent parking areas to a
neighboring hospital. Aetna U.S. Healthcare has executed a 7-year lease,
commencing on August 1, 2002, for approximately 297,000 square feet. This
lease is contingent upon, among other factors, the construction and
completion of an 1,100 space parking garage before the commencement date.
(2) In April 1998, OAC acquired the Bayers Road Shopping Centre. OAC acquired
the property by foreclosure on the loans secured by the property, which
OAC acquired at a discount in September 1997. The property consists
primarily of retail space but also includes some office space and storage
space. The original buildings were built in 1956 and were enclosed and
expanded in several phases between 1971 and 1987. We currently are
implementing a renovation plan to establish the second level as a
community shopping center anchored by value-oriented retailers while
filling the lower level with service providers, discount retailers and
entertainment uses. The third level will remain office space.
(3) In November 1997, OAC purchased Cortez Plaza, a shopping center located in
a suburb of Tampa, Florida. This property was built in 1956 and renovated
in 1988. In a separate transaction, OAC simultaneously purchased the fee
simple title to a large portion of the shopping center that had been
subject to a ground lease.
</FN>
37
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth a summary schedule of the total lease
expirations for our investments in real estate for leases in place as of
December 31, 2001, assuming that none of our tenants exercise renewal options or
termination rights, if any, at or before the scheduled expirations.
Percentage of Average Base Percentage of
Aggregate Annualized Rent per Aggregate
Number of Square Footage Portfolio Base Rent of Square Foot of Portfolio
Year of Lease Leases of Expiring Leased Square Expiring Expiring Annualized Base
Expiration (1) Expiring Leases Feet Leases (2) Leases (3) Rent
- ----------------- ----------------- ----------------- ----------------- ---------------- --------------- ---------------
2002 14 504,409 51.06 4,422 8.77 63.14
2003 9 17,361 1.76 98 5.66 1.40
2004 9 28,920 2.93 332 11.48 4.74
2005 18 61,843 6.26 226 3.66 3.23
2006 9 106,627 10.79 473 4.43 6.75
2007 4 32,540 3.29 211 6.48 3.01
2008 6 67,868 6.87 326 4.80 4.65
2009 1 3,409 0.35 40 11.65 0.57
2010 9 51,845 5.25 175 3.37 2.49
2011 1 11,791 1.19 19 1.67 0.28
Thereafter 4 101,257 10.25 682 6.74 9.74
----- ----------- ---------- --------- --------
84 987,870 100.00% $ 7,004 100.00%
===== =========== ========== ========= ========
<FN>
(1) Lease year runs from January 1 to December 31 for all years.
(2) Annualized base rent is calculated based on the amount of rent scheduled
from January 1 of the listed year to the lease expiration.
(3) Average base rent per square foot is calculated using the annualized base
rent divided by the square footage.
</FN>
We regularly engage in negotiations with existing tenants to extend leases
due to expire as well as to enter into new leases with other interested parties.
Square footage involved in such negotiations may vary from a small sub-tenancy
to substantially all the available space at any given property.
Non-cancellable operating leases with our tenants expire on various dates
through 2012. The future minimum rental income (base rent) we expect to receive
under leases existing as of December 31, 2001, is as follows:
2002............................................................... $ 8,528
2003............................................................... 4,313
2004............................................................... 3,799
2005............................................................... 3,211
2006............................................................... 3,577
Thereafter......................................................... 8,756
-------
$32,184
Loans Accounted for as Investments in Real Estate. We acquired certain
acquisition, development and construction loans in January 2000 in which we
participate in the expected residual profits of the underlying real estate, and
where the borrower has not contributed substantial equity to the project. As
such, we account for these loans under the equity method of accounting as though
we have an investment in a real estate limited partnership. The decline in our
investment during 2001 is due primarily to repayments of loans.
Properties Held for Lease. During the third quarter of 2001, we recorded
an impairment charge of $2,225 on our three assisted living facilities based on
anticipated sales proceeds and transferred our investment to real estate held
for sale.
38
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Investment in Real Estate Partnerships. Consists of interests in four
limited partnerships operating as real estate ventures, consisting of
multi-family type properties. During 1999, we recognized an impairment charge of
$2,817 on our investment in a nonresidential real estate venture, which reduced
the carrying value to $0.
See "Changes in Financial Condition - Real Estate Held for Sale" and Note
10 to our Consolidated Financial Statements (which is incorporated herein by
reference).
Affordable Housing Properties. We have invested in multi-family
residential projects which have been allocated low-income housing tax credits
under Section 42 of the Internal Revenue Code of 1986, as amended, by a state
tax credit allocating agency. The carrying values of our affordable housing
investments are as follows at the dates indicated:
December 31,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
Investments solely as a limited partner made prior to May 18, 1995.................. $ 21,768 $ 53,399 $ 17,327
Investments solely as a limited partner made on or after May 18, 1995............... 6,838 15,185 59,541
Investments both as a limited and, through subsidiaries, as a general partner....... 73,463 74,228 74,121
---------- ---------- ----------
Total ......................................................................... $ 102,069 $ 142,812 $ 150,989
========== ========== ==========
The decline in the balances during 2001 and 2000 was due to sales of
projects with a book value of approximately $38,000 and impairment charges of
$15,587, offset by additional investments in projects under construction of
approximately $18,000. During 2000, we entered into agreements to sell
twenty-five of our affordable housing properties, together with the related tax
credits. Although these agreements resulted in the transfer of tax credits and
operating results for these properties to the purchaser, they did not qualify as
sales for accounting purposes due to insufficient cash received and
contingencies with respect to potential repurchase requirements. As a result, we
have valued them at the lower of cost or fair value less disposal costs. At
December 31, 2001 and 2000, our investments in affordable housing properties
included $54,688 and $93,210, respectively, of properties subject to sales
agreements that had not yet qualified as sales for accounting purposes. We
recorded a charge to earnings during 2000 of $6,448 reflecting the expected net
loss to be incurred upon completion of these transactions. During 2001, we
recorded impairment charges of $15,587 on properties not subject to sales
contracts to reflect their estimated net realizable values.
We account for investments made on or after May 18, 1995, in which we
invest solely as a limited partner, using the equity method in accordance with
the consensus of the Emerging Issues Task Force as recorded in Issue Number
94-1. We account for limited partnership investments made prior to May 18, 1995,
under the effective yield method as a reduction of income tax expense. We
present investments both as a limited and, through a subsidiary, as general
partner on a consolidated basis.
See Note 12 to our Consolidated Financial Statements (which is
incorporated herein by reference).
Loan Portfolio, Net. Our net loan portfolio decreased during 2001, 2000
and 1999 reflecting the continuing payoff of multi-family and commercial loans
following our decision in 1999 to cease origination of such loans, offset in
part by our acquisition of loans acquired in 1999 in connection with our
acquisition of OAC.
39
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Composition of Loan Portfolio. The following table sets forth the
composition of our loan portfolio by type of loan at the dates indicated:
December 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Single family residential loans ...... $ 400 $ 848 $ 4,334 $ 30,361 $ 46,226
--------- --------- --------- --------- ---------
Multi-family residential loans:
Permanent ......................... 277 6,083 23,430 53,311 38,105
Construction ...................... 19,714 39,123 57,526 22,288 33,277
--------- --------- --------- --------- ---------
Total multi-family residential... 19,991 45,206 80,956 75,599 71,382
--------- --------- --------- --------- ---------
Commercial real estate:
Hotels:
Permanent ....................... -- -- -- 29,735 64,040
Construction .................... 30,115 38,153 38,349 6,896 25,322
Office buildings .................. 20,350 20,817 64,745 93,068 68,759
Land .............................. -- 1 2,238 2,266 2,858
Other ............................. -- -- -- 6,762 16,094
--------- --------- --------- --------- ---------
Total commercial real estate..... 50,465 58,971 105,332 138,727 177,073
--------- --------- --------- --------- ---------
Consumer ............................. 9 48 82 132 244
--------- --------- --------- --------- ---------
Unsecured ............................ 200 -- -- -- --
--------- --------- --------- --------- ---------
71,065 105,073 190,704 244,819 294,925
Undisbursed loan funds ............... (2,914) (8,879) (24,654) (7,099) (22,210)
Unamortized deferred fees ............ (29) (372) (1,383) (2,480) (2,721)
Allowance for loan losses ............ (3,197) (2,408) (7,259) (4,928) (3,695)
--------- --------- --------- --------- ---------
$ 64,925 $ 93,414 $ 157,408 $ 230,312 $ 266,299
========= ========= ========= ========= =========
Contractual Principal Repayments. The following table sets forth certain
information at December 31, 2001 regarding the dollar amount of loans maturing
in our loan portfolio based on scheduled contractual amortization, as well as
the dollar amount of loans which have fixed or adjustable interest rates. We
report demand loans (loans having no stated schedule of repayments and no stated
maturity) and overdrafts as due in one year or less. We have not reduced loan
balances for (i) undisbursed loan proceeds, unearned fees and the allowance for
loan losses or (ii) non-performing loans.
Maturing in
-------------------------------------------------------------------------------
After After Five
One Year Years
One Through Five Through Ten After Ten
Year or Less Years Years Years Total
------------ ------------ ----------- ----------- -----------
Single family residential loans.......... $ 91 $ -- $ 24 $ 285 $ 400
Multi-family residential loans........... 19,131 -- 860 -- 19,991
Commercial real estate and land loans.... 50,465 -- -- -- 50,465
Consumer and other loans................. 9 -- -- 200 209
----------- ----------- ----------- ----------- -----------
$ 69,696 $ -- $ 884 $ 485 $ 71,065
=========== =========== =========== =========== ===========
Interest rate terms on amounts due:
Fixed................................. $ 20,719 $ -- $ 884 $ 395 $ 21,998
Adjustable............................ 48,977 -- -- 90 49,067
----------- ----------- ----------- ----------- -----------
$ 69,696 $ -- $ 884 $ 485 $ 71,065
=========== =========== =========== =========== ===========
Scheduled contractual principal repayments may not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses. The average life of mortgage loans,
particularly fixed-rate loans, tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, to decrease when rates on existing mortgages are substantially
higher than current mortgage loan rates.
40
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Activity in the Loan Portfolio. The following table sets forth the
activity in our net loan portfolio during the periods indicated:
Year Ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Balance at beginning of period..................... $ 93,414 $ 157,408 $ 230,312 $ 266,299 $ 402,582
----------- ----------- ----------- ----------- -----------
Originations and funded commitments:
Single family residential loans................. -- -- -- -- 1,987
Multi-family residential loans.................. 5,109 36,165 3,692 56,657 16,799
Commercial real estate loans.................... 12,835 3,627 17,258 116,452 69,948
Commercial non-mortgage and
consumer loans................................ 200 -- -- -- 1,140
----------- ----------- ----------- ----------- -----------
Total loans originated (1).................... 18,144 39,792 20,950 173,109 89,874
----------- ----------- ----------- ----------- -----------
Purchases:
Single family residential loans................. -- -- 6,209 -- 78
Multi-family residential loans.................. -- -- 45,285 -- --
Commercial real estate loans.................... -- -- 69,619 -- --
----------- ----------- ----------- ----------- -----------
Total loans purchased (2)..................... -- -- 121,113 -- 78
----------- ----------- ----------- ----------- -----------
Sales.............................................. (23,288) (32,959) (53,197) -- (2,346)
Loans transferred from available for sale.......... -- -- -- -- 13,782
Principal repayments and other..................... (28,618) (89,591) (138,530) (222,668) (306,916)
Transfer to real estate owned...................... (246) (2,872) (4,451) (547) (661)
Decrease (increase) in undisbursed loan funds...... 5,965 15,774 (17,555) 15,111 67,630
Decrease in unamortized deferred fees.............. 343 1,011 1,097 241 2,448
Decrease (increase) in allowance for loan losses... (789) 4,851 (2,331) (1,233) (172)
----------- ----------- ----------- ----------- -----------
Net (decrease) increase in loans................... (28,489) (63,994) (72,904) (35,987) (136,283)
----------- ----------- ----------- ----------- -----------
Balance at end of period........................... $ 64,925 $ 93,414 $ 157,408 $ 230,312 $ 266,299
=========== =========== =========== =========== ===========
<FN>
(1) Originations in 2001 and 2000 represent loans made to facilitate sales of
our own assets and fundings of construction loans we originated in prior
years.
(2) Purchases during 1999 represent loans, including undisbursed loans, we
acquired as a result of our acquisition of OAC.
</FN>
The following table sets forth certain information relating to our
non-performing loans in our loan portfolio at the dates indicated:
December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Non-performing loans:
Single family residential loans................. $ -- $ 316 $ 982 $ 1,169 $ 1,575
Multi-family residential loans (1).............. 17,201 13,373 11,037 7,392 7,583
Commercial real estate and other................ 5 4,581 19,360 488 --
--------- --------- --------- --------- ---------
Total........................................ $ 17,206 $ 18,270 $ 31,379 $ 9,049 $ 9,158
========= ========= ========= ========= =========
Non-performing loans as a percentage of:
Total loans (2)................................. 25.26% 19.07% 19.06% 3.85% 3.39%
Total assets.................................... 1.01% 0.81% 0.96% 0.27% 0.30%
Allowance for loan losses as a percentage of:
Total loans (2).............................. 4.69% 2.51% 4.41% 2.09% 1.37%
Non-performing loans......................... 18.58% 13.18% 23.13% 54.46% 40.35%
<FN>
(1) Non-performing multi-family residential loans at December 31, 2001 were
comprised of 3 loans, all of which management believes are adequately
collateralized and reserved.
(2) Total loans is net of undisbursed loan proceeds and unamortized deferred
fees.
</FN>
41
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
See Note 5 to our Consolidated Financial Statements (which is incorporated
herein for reference).
Discount Loan Portfolio, Net. Our discount loan portfolio has decreased
during 2001, 2000 and 1999. Resolutions and repayments, loans transferred to
real estate owned and sales more than offset acquisitions during those years. We
have not acquired any discount loans since 2000. Substantially all of our
discount loan portfolio is secured by first mortgage liens on real estate.
Composition of the Discount Loan Portfolio. The following table sets forth
the composition of our discount loan portfolio by type of loan at the dates
indicated:
December 31,
----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Principal balance:
Single family residential loans.... $ 56,699 $ 289,883 $ 597,719 $ 597,100 $ 900,817
------------ ------------ ------------ ------------ ------------
Multi-family residential loans..... 13,328 105,591 191,971 244,172 191,302
------------ ------------ ------------ ------------ ------------
Commercial real estate loans:
Office buildings................. 43,913 77,608 97,784 154,063 363,681
Hotels........................... 911 63,967 75,095 100,407 98,907
Retail properties................ 47,492 85,924 105,247 21,230 106,755
Other properties................. 607 36,511 87,148 173,310 131,692
------------ ------------ ------------ ------------ ------------
92,923 264,010 365,274 449,010 701,035
------------ ------------ ------------ ------------ ------------
Other loans (1).................... 10,337 17,188 21,615 10,144 1,865
------------ ------------ ------------ ------------ ------------
173,287 676,672 1,176,579 1,300,426 1,795,019
------------ ------------ ------------ ------------ ------------
Unaccreted discount:
Single family residential loans.... (16,460) (74,184) (147,630) (161,650) (170,743)
Multi-family residential loans..... (650) (5,176) (37,981) (20,795) (45,944)
Commercial real estate loans....... (19,296) (40,413) (57,604) (69,747) (120,457)
Other loans........................ -- -- (954) (321) (206)
------------- ------------- ------------- ------------- -------------
(36,406) (119,773) (244,169) (252,513) (337,350)
------------- ------------- ------------- ------------- -------------
136,881 556,899 932,410 1,047,913 1,457,669
Allowance for loan losses............. (17,554) (20,871) (19,181) (21,402) (23,493)
------------ ------------ ------------ ------------ ------------
$ 119,327 $ 536,028 $ 913,229 $ 1,026,511 $ 1,434,176
============ ============ ============ ============ ============
<FN>
(1) Included $10,337, $17,188, $16,397 and $8,248 at December 31, 2001, 2000,
1999 and 1998, respectively, of charged-off unsecured credit card
receivables which were acquired at a discount. Collections are accounted
for under the cost recovery method. These receivables were fully reserved
at December 31, 2001.
</FN>
Activity in the Discount Loan Portfolio. The following table sets forth the
activity in our net discount loan portfolio during the periods indicated:
Year Ended December 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Amount
Balance at beginning of period............... $ 536,028 $ 913,229 $ 1,026,511 $ 1,434,176 $ 1,060,953
Acquisitions (1)(2)(3):
Single family residential loans............ -- 164,920 516,744 613,201 1,061,967
Multi-family residential loans............. -- 21,378 78,244 231,130 57,707
Commercial real estate loans............... -- 25,612 157,258 264,697 656,904
Other...................................... -- 10,030 17,414 14,699 195
----------- ----------- ----------- ----------- -----------
-- 221,940 769,660 1,123,727 1,776,773
----------- ----------- ----------- ----------- -----------
Resolutions and repayments (4)............... (98,679) (216,480) (372,442) (539,353) (484,869)
Loans transferred to real estate owned....... (92,433) (193,469) (203,043) (382,904) (292,412)
Sales (5).................................... (312,273) (311,897) (318,022) (696,063) (518,872)
Decrease (increase) in discount.............. 83,367 124,395 8,344 84,837 (95,442)
Decrease (increase) in allowance............. 3,317 (1,690) 2,221 2,091 (11,955)
----------- ----------- ----------- ----------- -----------
Balance at end of period..................... $ 119,327 $ 536,028 $ 913,229 $ 1,026,511 $ 1,434,176
=========== =========== =========== =========== ===========
42
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Number of Loans
Balance at beginning of period............... 4,021 8,064 8,100 12,980 5,460
Acquisitions (1)(2)(3):
Single family residential loans............. -- 2,208 6,606 7,779 17,154
Multi-family residential loans............... -- 9 34 92 173
Commercial real estate loans................. -- 12 202 205 354
Other........................................ -- 2 6 8 22
----------- ----------- ----------- ----------- -----------
-- 2,231 6,848 8,084 17,703
----------- ----------- ----------- ----------- -----------
Resolutions and repayments (4)............... (585) (1,467) (1,241) (1,918) (1,978)
Loans transferred to real estate owned....... (739) (2,400) (2,367) (3,193) (1,596)
Sales (5).................................... (1,827) (2,407) (3,276) (7,853) (6,609)
----------- ----------- ----------- ----------- -----------
Balance at end of period..................... 870 4,021 8,064 8,100 12,980
=========== =========== =========== =========== ===========
<FN>
(1) Acquisitions exclude certain commercial and multi-family loans which we
account for as investments in real estate. See "Changes in Financial
Condition - Investment in Real Estate."
(2) The decline in acquisitions reflect our strategic decision to move from
reliance on capital-intensive businesses toward more fee-based businesses.
(3) Acquisitions of other discount loans during 2000, 1999 and 1998 consisted
primarily of charged-off unsecured credit card receivables we acquired at
a discount.
(4) Resolutions and repayments consists of loans which we resolved in a manner
which resulted in partial or full repayment of the loan to us, as well as
principal payments on loans which have been brought current in accordance
with their original or modified terms (whether pursuant to forbearance
agreements or otherwise) or on other loans which have not been resolved.
(5) Included securitizations of performing single family discount loans in
1999, 1998, and 1997. See "Results of Operations - Non-Interest Income."
</FN>
Payment Status of Discount Loans. The following table sets forth certain
information relating to the contractual payment status of loans in our discount
loan portfolio at the dates indicated:
December 31,
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- -------------
Loans without Forbearance Agreements:
Current................................... $ 46,887 $ 270,106 $ 432,603 $ 533,904 $ 589,119
Past due 31 days to 89 days............... 2,071 5,027 18,860 30,652 18,271
Past due 90 days or more.................. 72,070 222,216 329,477 354,436 474,466
Acquired and servicing not yet transferred -- -- 67,740 39,726 6,557
------------- ------------- ------------- ------------- -------------
121,028 497,349 848,680 958,718 1,088,413
------------- ------------- ------------- ------------- -------------
Loans with Forbearance Agreements:
Current................................... 1,815 3,273 2,308 1,049 2,905
Past due 31 days to 89 days............... 453 1,622 7,951 3,267 1,452
Past due 90 days or more (1).............. 13,585 54,655 73,471 84,879 364,899
------------- ------------- ------------- ------------- -------------
15,853 59,550 83,730 89,195 369,256
------------- ------------- ------------- ------------- -------------
$ 136,881 $ 556,899 $ 932,410 $ 1,047,913 $ 1,457,669
============= ============= ============= ============= =============
43
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
(1) For our loans with forbearance agreements that are contractually past due
90 days or more, the following table indicates the payment status of the
loans under the terms of their forbearance agreements:
December 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Current..................... $ 6,071 $ 33,776 $ 52,005 $ 57,919 $ 216,155
Past due 31 to 89 days...... 2,064 1,698 21,204 23,438 46,576
Past due 90 days or more.... 5,450 19,181 262 3,522 102,168
------------ ------------ ------------ ------------ ------------
$ 13,585 $ 54,655 $ 73,471 $ 84,879 $ 364,899
============ ============ ============ ============ ============
December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Percentage of Loans
Loans without Forbearance Agreements:
Current................................... 34.25% 48.50% 46.40% 50.95% 40.42%
Past due 31 days to 89 days............... 1.51 0.90 2.02 2.93 1.25
Past due 90 days or more.................. 52.66 39.91 35.33 33.82 32.55
Acquired and servicing not yet transferred -- -- 7.27 3.79 0.45
--------- --------- --------- --------- ---------
88.42 89.31 91.02 91.49 74.67
--------- --------- --------- --------- ---------
Loans with Forbearance Agreements:
Current................................... 1.33 0.59 0.25 0.10 0.20
Past due 31 days to 89 days............... 0.33 0.29 0.85 0.31 0.10
Past due 90 days or more.................. 9.92 9.81 7.88 8.10 25.03
--------- --------- --------- --------- ---------
11.58 10.69 8.98 8.51 25.33
--------- --------- --------- --------- ---------
100.00% 100.00% 100.00% 100.00% 100.00%
========= ========= ========= ========= =========
The following table sets forth certain information relating to our
non-performing discount loans and allowance for loan losses at the dates
indicated:
December 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Non-performing loans (1):
Single family............................. $ 31,828 $ 179,276 $ 328,582 $ 352,390 $ 572,290
Multi-family.............................. 5,251 4,381 20,098 23,975 71,749
Commercial real estate and other.......... 48,576 93,214 54,268 62,950 95,326
------------ ------------ ------------ ------------ ------------
Total................................... $ 85,655 $ 276,871 $ 402,948 $ 439,315 $ 739,365
============ ============ ============ ============ ============
Non-performing loans as a percentage of (1):
Total loans (2)............................ 62.58% 49.44% 43.22% 41.92% 50.72%
Total assets............................... 5.01% 12.27% 12.28% 13.31% 24.26%
Allowance for loan losses as a percentage of:
Total loans (2)............................ 12.82% 3.75% 2.06% 2.04% 1.61%
Non-performing loans (1)................... 20.49% 7.56% 4.76% 4.87% 3.18%
<FN>
(1) Loans which are contractually past due 90 days or more in accordance with
the original terms of the loan agreement.
(2) Total loans are net of unaccreted discount.
</FN>
See Note 6 to our Consolidated Financial Statements (which is incorporated
herein by reference).
44
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Match Funded Assets. Our match funded assets were comprised of the
following at the dates indicated:
December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Single family residential loans.............. $ 53,123 $ 80,834 $105,596
Allowance for loan losses.................... (170) (285) (495)
-------- -------- --------
Match funded loans, net.................... 52,953 80,549 105,101
-------- -------- --------
Match funded securities...................... 19,435 36,438 52,693
-------- -------- --------
Match funded advances on loans serviced for
others:
Principal and interest..................... 65,705 -- --
Taxes and insurance........................ 21,900 -- --
Other...................................... 14,358 -- --
-------- -------- --------
101,963 -- --
-------- -------- --------
$174,351 $116,987 $157,794
======== ======== ========
We acquired single family residential match funded loans in connection
with our acquisition of OAC. OAC had previously securitized these loans and
transferred them to a real estate mortgage investment conduit on November 13,
1998. The transfer did not qualify as a sale for accounting purposes.
Accordingly, we report the proceeds we received from the transfer as a secured
borrowing with pledge of collateral (bonds-match funded agreements).
Non-performing loans amounted to $4,405, $2,831 and $1,127 at December 31, 2001,
2000 and 1999, respectively. The declines in the balance during 2001 and 2000
were due to repayment of loan principal.
Match funded securities resulted from our transfer of four unrated
residual securities to a trust on December 16, 1999 in exchange for non-recourse
notes. The transfer did not qualify as a sale for accounting purposes.
Accordingly, we reported the amount of proceeds we received from the transfer as
a secured borrowing with pledge of collateral (bonds-match funded agreements).
The declines in the balance during 2001 and 2000 were primarily due to principal
repayments. The following table presents information regarding our match funded
securities summarized by classification and rating:
Anticipated
Original Anticipated Weighted
Anticipated Yield to Average Prospective
Yield to Maturity at Remaining Yield at
Fair Value Percent Owned Maturity 12/31/01 (1) Coupon Life(2) 12/31/01
---------- ------------- -------- ------------ ------ ------- --------
Unrated residuals............... $ 19,435 100.00% 17.47% 3.89% N/A 8.36 years 142.27%
========
<FN>
(1) Changes in the December 31, 2001 anticipated yield to maturity from that
originally anticipated are primarily the result of changes in prepayment
assumptions and, to a lesser extent, loss assumptions.
(2) Equals the weighted average duration based on the December 31, 2001 book
value.
</FN>
The following table sets forth the principal amount of mortgage loans by
the geographic location of the property securing the mortgages that underlie our
match-funded securities at December 31, 2001:
Description California Florida Illinois New York Washington Other (1) Total
- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Single family residential $ 44,929 $ 33,310 $ 14,397 $ 11,954 $ 12,027 $ 172,107 $ 288,724
Multi-family ............ 1,635 599 695 793 -- 4,783 8,505
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 46,564 $ 33,909 $ 15,092 $ 12,747 $ 12,027 $ 176,890 $ 297,229
=========== =========== =========== =========== =========== =========== ===========
Percentage (2) .......... 15.67% 11.41% 5.08% 4.29% 4.05% 59.50% 100.00%
=========== =========== =========== =========== =========== =========== ===========
<FN>
(1) Consists of properties located in 44 other states, none of which
aggregated over $11,259 in any one state.
(2) Based on a percentage of the total unpaid principal balance of the
underlying loans.
</FN>
45
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Match funded advances on loans serviced for others resulted from our
transfer of certain residential loan servicing related advances to a third party
in exchange for cash on December 20 and 21, 2001. The transfer did not qualify
as a sale for accounting purposes. Accordingly, we report the amount of proceeds
we received from the sale as a secured borrowing with pledge of collateral
(bonds-match funded agreements.) See "Bonds-Match Funded Agreements" and Note 7
to our Consolidated Financial Statements, (which is incorporated herein by
reference).
Allowances for Loan Losses. We maintain an allowance for loan losses for
each of our loan, discount loan and match funded loan portfolios at a level
which we consider adequate to provide for probable losses in each portfolio
based upon an evaluation of known and inherent risks in such portfolios. The
following tables set forth (a) the breakdown of the allowance for loan losses on
our loan portfolio, discount loan portfolio and match funded loan portfolios by
loan category and (b) the percentage of loans in each category to total loans in
the respective portfolios at the dates indicated:
December 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
Amount
Loan portfolio:
Single family residential loans........... $ 5 $ 10 $ 87 $ 215 $ 512
Multi-family residential loans............ 1,275 993 1,722 2,714 2,163
Commercial real estate loans.............. 1,917 1,405 5,450 1,999 1,009
Other..................................... -- -- -- -- 11
----------- ----------- ----------- ----------- -----------
$ 3,197 $ 2,408 $ 7,259 $ 4,928 $ 3,695
=========== =========== =========== =========== ===========
Discount loan portfolio:
Single family residential loans........... $ 3,396 $ 3,483 $ 11,081 $ 10,307 $ 15,017
Multi-family residential loans............ 911 1,805 1,681 2,457 2,616
Commercial real estate loans.............. 2,910 6,813 5,152 8,607 5,860
Other loans (1)........................... 10,337 8,770 1,267 31 --
----------- ----------- ----------- ----------- -----------
$ 17,554 $ 20,871 $ 19,181 $ 21,402 $ 23,493
=========== =========== =========== =========== ===========
Match funded loans:
Single family residential loans........... $ 170 $ 285 $ 495 $ -- $ --
=========== =========== =========== =========== ===========
<FN>
(1) Allowance for loan losses on other discount loans pertains to our
charged-off unsecured credit card receivables acquired at a discount.
</FN>
December 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Percentage of Loans to Total Loans
Loan portfolio:
Single family residential loans........... 0.6% 0.8% 2.3% 12.4% 15.7%
Multi-family residential loans............ 27.2 42.5 42.5 30.9 24.2
Commercial real estate loans.............. 72.2 56.7 55.2 56.7 60.0
Other..................................... -- -- -- -- 0.1
---------- ---------- ---------- ---------- ----------
100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
Discount loan portfolio:
Single family residential loans........... 29.4% 42.8% 48.3% 41.6% 50.1%
Multi-family residential loans............ 9.3 15.6 16.5 21.3 10.0
Commercial real estate loans.............. 53.8 39.0 33.0 36.2 39.8
Other loans............................... 7.5 2.6 2.2 0.9 0.1
---------- ---------- ---------- ---------- ----------
100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict our use of the allowance to
absorb losses in any other category.
46
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth an analysis of activity in the allowance
for loan losses relating to our loan portfolio during the periods indicated:
Year Ended December 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Balance at beginning of period................... $ 2,408 $ 7,259 $ 4,928 $ 3,695 $ 3,523
Provision for loan losses........................ 2,518 4 1,636 891 325
Charge-offs:
Single family residential loans............... (173) -- (8) (212) (100)
Multi-family residential loans................ (872) (1,662) -- -- --
Commercial real estate loans.................. (684) (3,193) -- -- --
Consumer loans................................ -- -- -- (7) (53)
-------- -------- -------- -------- --------
Total charge-offs........................... (1,729) (4,855) (8) (219) (153)
Recoveries:
Commercial real estate loans.................. -- -- -- 561 --
-------- -------- -------- -------- --------
Net (charge-offs) recoveries................ (1,729) (4,855) (8) 342 (153)
-------- -------- -------- -------- --------
Acquired allowance (OAC acquisition)............. -- -- 703 -- --
-------- -------- -------- -------- --------
Balance at end of period......................... $ 3,197 $ 2,408 $ 7,259 $ 4,928 $ 3,695
======== ======== ======== ======== ========
Net (charge-offs) recoveries as a percentage of
average loan portfolio ....................... (2.11)% (3.37%) --% 0.13% (0.04%)
The following table sets forth an analysis of activity in the allowance
for loan losses relating to our discount loan portfolio during the periods
indicated:
Year Ended December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Balance at beginning of period..................... $ 20,871 $ 19,181 $ 21,402 $ 23,493 $ 11,538
Provision for loan losses.......................... 12,960 15,266 5,434 17,618 31,894
Charge-offs:
Single family residential loans................. (5,791) (7,132) (4,409) (14,574) (13,281)
Multi-family residential loans.................. -- (888) (912) (2,648) (2,056)
Commercial real estate loans.................... (10,970) (6,193) (2,687) (2,888) (5,012)
Other loans..................................... -- -- (44) (20) --
---------- ---------- ---------- ----------- ----------
Total charge-offs............................ (16,761) (14,213) (8,052) (20,130) (20,349)
---------- ---------- ---------- ---------- ----------
Recoveries:
Single family residential loans................. 391 616 397 421 410
Commercial real estate loans.................... 93 21 -- -- --
---------- ---------- ---------- ---------- ----------
Total recoveries............................. 484 637 397 421 410
---------- ---------- ---------- ---------- ----------
Net charge-offs.............................. (16,277) (13,576) (7,655) (19,709) (19,939)
---------- ---------- ---------- ---------- ----------
Balance at end of period........................... $ 17,554 $ 20,871 $ 19,181 $ 21,402 $ 23,493
========== ========== ========== ========== ==========
Net charge-offs as a percentage of average discount
loan portfolio.................................. (4.54%) (1.66%) (0.80%) (1.52%) (1.55%)
Real Estate Owned, Net. Real estate owned, net, has decreased during 2001,
2000 and 1999. Sales of real estate owned more than offset loan foreclosures
during those years. Declines in our acquisitions of discount loans have
contributed to the decline in foreclosures. Our real estate owned consists
almost entirely of properties we acquired by foreclosure or deed-in-lieu thereof
on loans in our discount loan portfolio.
47
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth the composition of our real estate owned by
loan portfolio at the dates indicated:
December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Discount loan portfolio:
Single family residential.................. $ 16,150 $ 55,751 $ 72,193 $ 94,641 $ 76,409
Multi-family residential................... -- 149 2,601 20,130 16,741
Commercial real estate..................... 93,664 88,214 85,233 82,591 71,339
---------- ---------- ---------- ---------- ----------
Total.................................... 109,814 144,114 160,027 197,362 164,489
Loan portfolio................................ 377 1,384 2,183 227 357
Loans available for sale...................... 274 921 5,296 3,962 2,419
---------- ---------- ---------- ---------- ----------
$ 110,465 $ 146,419 $ 167,506 $ 201,551 $ 167,265
========== ========== ========== ========== ==========
The following tables set forth the activity in our real estate owned
during the years indicated:
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Amount
Balance at beginning of period......................... $ 146,419 $ 167,506 $ 201,551 $ 167,265 $ 103,704
Properties acquired through foreclosure or
deed-in-lieu thereof:
Discount loans....................................... 92,433 193,469 203,043 382,904 292,412
Loans available for sale............................. 270 4,669 13,281 7,787 5,569
Loan portfolio....................................... 246 2,872 4,451 547 661
Less discount transferred............................ (35,698) (60,246) (63,664) (110,716) (93,021)
Add advances transferred............................. 6,790 11,741 13,308 16,551 10,962
---------- ---------- ---------- ---------- ----------
64,041 152,505 170,419 297,073 216,583
---------- ---------- ---------- ---------- ----------
Capital improvements................................... 12,737 6,775 37 808 598
Acquired in connection with acquisitions of discount
loans................................................. -- 9,059 47,808 19,949 38,486
Sales.................................................. (111,776) (188,465) (250,453) (280,565) (191,253)
Increase in valuation allowance........................ (956) (961) (1,856) (2,979) (853)
---------- ---------- ---------- ---------- ----------
Balance at end of period............................... $ 110,465 $ 146,419 $ 167,506 $ 201,551 $ 167,265
========== ========== ========== ========== ==========
Year Ended December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Number of Properties
Balance at beginning of period......................... 1,298 1,672 1,999 1,505 825
Properties acquired through foreclosure or
deed-in-lieu thereof:
Discount loans....................................... 739 2,400 2,367 3,193 1,596
Loans available for sale............................. 7 47 157 82 54
Loan portfolio....................................... 1 8 10 3 6
---------- ---------- ---------- ---------- ----------
747 2,455 2,534 3,278 1,656
---------- ---------- ---------- ---------- ----------
Acquired in connection with acquisitions of discount
loans................................................. -- 171 931 303 545
Sales.................................................. (1,656) (3,000) (3,792) (3,087) (1,521)
---------- ---------- ---------- ---------- ----------
Balance at end of period............................... 389 1,298 1,672 1,999 1,505
========== ========== ========== ========== ==========
48
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth the amount of time that we have held our
real estate owned at the dates indicated:
December 31,
---------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
One to two months..................... $ 2,251 $ 17,832 $ 30,695 $ 38,444 $ 83,144
Three to four months.................. 1,655 11,450 26,532 79,264 28,912
Five to six months.................... 2,244 9,494 11,263 27,115 20,929
Seven to 12 months.................... 27,422 18,426 28,606 26,122 23,621
Over 12 months........................ 76,893 89,217 70,410 30,606 10,659
------------ ------------ ------------ ------------ ------------
$ 110,465 $ 146,419 $ 167,506 $ 201,551 $ 167,265
============ ============ ============ ============ ============
We actively manage our real estate owned. Our sales of real estate owned
resulted in gains (losses), net of the provision for loss, of $(3,655), $(4,159)
and $8,257 during 2001, 2000 and 1999, respectively, which are included in
determining our gain (loss) on real estate owned. Real estate owned that we have
held in excess of one year include a large retail property with a carrying value
of $49,275 at December 31, 2001 which, as anticipated, migrated into the over 12
month category in 1999, because it was being repositioned for sale. The balance
of real estate owned we have held in excess of one year at December 31, 2000
also included an office building with a carrying value of $12,386 which was
subsequently sold in January 2001. The average period during which we held the
real estate owned, which was sold during the years ended December 31, 2001, 2000
and 1999, was 8 months, 7 months and 6 months, respectively.
We value properties acquired through foreclosure or by deed-in-lieu
thereof at the lower of amortized cost or fair value after foreclosure. We
periodically reevaluate properties included in the our real estate owned
portfolio to determine that we are carrying them at the lower of cost or fair
value less estimated costs to sell. We record holding and maintenance costs we
incur related to properties as expenses in the period incurred. We recognize
decreases in value resulting from valuation adjustments to real estate owned
after acquisition as a valuation allowance. We reflect subsequent increases
related to the valuation of real estate owned as a reduction in the valuation
allowance, but not below zero. We charge or credit to income, respectively,
increases and decreases in the valuation allowance.
The following table sets forth the activity, in aggregate, in the
valuation allowance on our real estate owned during the years indicated:
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Balance at beginning of year...................... $ 18,142 $ 17,181 $ 15,325 $ 12,346 $ 11,493
Provisions for losses............................. 17,766 26,674 28,008 18,626 13,450
Charge-offs and sales............................. (16,810) (25,713) (26,152) (15,647) (12,597)
---------- ---------- ---------- ---------- ----------
Balance at end of year............................ $ 19,098 $ 18,142 $ 17,181 $ 15,325 $ 12,346
========== ========== ========== ========== ==========
Valuation allowance as a percentage of total gross
real estate owned (1).......................... 14.74% 11.02% 9.30% 7.07% 6.87%
<FN>
(1) The increase in this ratio since 1998 reflects an increasing valuation
allowance and a declining balance of gross real estate owned. The
valuation allowance has not declined proportionately primarily because of
the large retail property we are repositioning for sale, as discussed
above.
</FN>
See Note 8 to our Consolidated Financial Statements (which is incorporated
herein by reference).
Deferred Tax Asset. The following table provides details of our net
deferred tax assets as of the dates indicated:
December 31,
---------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Deferred tax asset, net of deferred tax liabilities............ $ 173,632 $ 154,864 $ 178,293
--------------- --------------- ---------------
Valuation allowance:
OAC purchase accounting adjustment........................... 38,873 38,873 38,873
Allowance on deferred tax asset.............................. 126,348 20,000 2,500
--------------- --------------- ---------------
165,221 58,873 41,373
--------------- --------------- ---------------
Deferred tax asset, net........................................ $ 8,411 $ 95,991 $ 136,920
=============== =============== ===============
49
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The decreases in our net deferred tax asset during 2001 and 2000 were due
in large part to an increase in our valuation allowance resulting from our
evaluation of the future realizability of the deferred tax asset in the near
future. Depending on the results of operations in future periods, additional
provisions may be required, although considered unlikely, or the valuation
allowance may be reversed to income. See Note 22 to our Consolidated Financial
Statements (which is incorporated herein by reference) for a disclosure of the
components of our gross deferred tax assets and liabilities.
Advances on Loans and Loans Serviced for Others. Advances related to our
loan portfolios and loans we serviced for others consisted of the following at
the dates indicated:
December 31,
----------------------------------------------------
2001 2000 1999
----------- ----------- -----------
Loan Portfolios:
Taxes and insurance......................................... $ 2,214 $ 11,168 $ 19,967
Other....................................................... 4,135 11,840 11,594
----------- ----------- -----------
6,349 23,008 31,561
----------- ----------- -----------
Loans Serviced for Others:
Principal and interest...................................... 107,319 95,191 58,497
Taxes and insurance......................................... 99,972 64,159 41,569
Other....................................................... 69,543 44,697 30,921
----------- ----------- -----------
276,834 204,047 130,987
----------- ----------- -----------
$ 283,183 $ 227,055 $ 162,548
=========== =========== ===========
The increase in advances on loans serviced for others reflects the growth
in our residential loan servicing business. The balances at December 31, 2001 do
not include advances transferred to a third party in exchange for cash, a
transaction which did not qualify as a sale for accounting purposes and which we
accounted for as a secured borrowing with pledge of collateral. We reclassified
those transferred advances to match funded assets at the time of the transfer in
December 2001. See "Changes in Financial Condition - Match Funded Assets" and
Note 11 to our Consolidated Financial Statements (which is incorporated herein
by reference).
Mortgage Servicing Rights. Our unamortized balance of mortgage servicing
rights amounted to $101,107, $51,426 and $11,683 at December 31, 2001, 2000 and
1999, respectively. The increase in our investment during 2001 and 2000 reflects
the growth of our residential loan servicing business through purchases of
rights to service loans for others. Our purchases of new servicing rights
amounted to $79,522 and $49,779 during 2001 and 2000, respectively. Our
purchases were offset in part by amortization of $29,841 and $10,036 during 2001
and 2000, respectively. See Note 11 to our Consolidated Financial Statements
(which is incorporated herein by reference).
Deposits. Our deposits decreased during 2001 and 2000 primarily as a
result of maturing brokered certificates of deposits. We did not issue any new
brokered certificates of deposit during 2001 and, at this time, do no intend to
issue any such deposits in the foreseeable future.
50
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth information related to our deposits at the
dates indicated:
Year Ended December 31,
----------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ------------------------------ ------------------------------
Weighted % of Weighted % of Weighted % of
Average Total Average Total Average Total
Amount Rate Deposits Amount Rate Deposits Amount Rate Deposits
---------- -------- -------- ---------- -------- -------- ---------- -------- --------
Non-interest bearing checking
accounts..................... $ 5,624 --% 0.8% $ 13,523 --% 1.1% $ 9,215 --% 0.6%
NOW and money market checking
accounts..................... 15,479 1.44% 2.4 14,670 5.18% 1.2 30,342 4.28% 1.9
Savings accounts................ 1,287 1.25% 0.2 1,274 2.38% 0.1 1,361 2.38% 0.1
---------- ----- ---------- ----- ---------- -----
22,390 3.4 29,467 2.4 40,918 2.6
---------- ---------- ----------
Certificates of deposit (1)(2) 636,037 1,176,566 1,536,997
Unamortized deferred fees....... (1,549) (3,989) (6,688)
---------- ---------- ----------
Total certificates of deposit... 634,488 6.06% 96.6 1,172,577 6.34% 97.6 1,530,309 5.92% 97.4
---------- ----- ---------- ----- ---------- -----
$ 656,878 100.0% 1,202,044 100.0% $1,571,227 100.0%
========== ===== ========== ===== ========== =====
<FN>
(1) Included $499,710, $964,443 and $1,379,262 at December 31, 2001, 2000 and
1999, respectively, of brokered deposits originated through national,
regional and local investment banking firms which solicit deposits from
their customers, all of which are non-cancellable.
(2) At December 31, 2001, 2000 and 1999, certificates of deposit issued on an
uninsured basis (greater than $100) amounted to $60,804, $75,417 and
$155,205, respectively. Of the $60,804 of uninsured deposits at December
31, 2001, $2,149 were from political subdivisions in New Jersey and were
secured or collateralized as required under state law.
</FN>
The following table sets forth remaining maturities for our term deposits
in amounts of $100 or more at December 31, 2001:
Three months or less................................................ $ 56,095
Over three months through six months................................ 41,920
Over six months through twelve months............................... 15,874
Thereafter.......................................................... 42,674
--------
$156,563
========
Escrow Deposits on Loans and Loans Serviced for Others. Escrow deposits on
our loans and loans we serviced for others amounted to $73,565, $56,316 and
$243,420 at December 31, 2001, 2000 and 1999, respectively. The balance at
December 31, 2001 and 2000, consisted principally of custodial deposit balances
representing collections we made from borrowers for the payment of taxes and
insurance premiums on mortgage properties underlying loans we serviced for
others. The balance increased during 2001 principally because of an increase in
loans we serviced for others. The balance at December 31, 1999 also included
custodial deposit balances related to taxes and insurance, but was primarily
comprised of custodial deposit balances representing collections of principal
and interest we received from borrowers which we had yet to remit to investors
under loan servicing agreements. We transferred these custodial balances to a
correspondent bank during 2000. See "Results of Operations - Non-Interest Income
- - Servicing and Other Fees."
51
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Bonds-Match Funded Agreements. Bonds-match funded agreements represent
proceeds received from transfers of loans, residual securities and advances on
our loans serviced for others. These transfers did not qualify as sales for
accounting purposes and therefore, we report them as secured borrowings with
pledges of collateral. Our bonds-match funded agreements were comprised of the
following at the dates indicated:
December 31,
---------------------------------------
Collateral 2001 2000 1999
- -------------------------------------------------- ----------- ----------- -----------
Single family residential loans (1)............... $ 46,145 $ 72,101 $ 100,968
Unrated residual securities (1)................... 18,997 34,949 40,547
Advances on loans serviced for others (2)......... 91,766 -- --
----------- ----------- -----------
$ 156,908 $ 107,050 $ 141,515
=========== =========== ===========
<FN>
(1) The decline in the balance outstanding during 2001 and 2000 was due to
principal repayments, offset by amortization of discount.
(2) Under the terms of the agreement, we are eligible to sell additional
advances on loans serviced for others up to a maximum balance of $200,000.
</FN>
See "Changes in Financial Condition - Bonds-Match Funded Assets" and Notes
7 and 16 to our Consolidated Financial Statements (which are incorporated herein
by reference).
Notes, Debentures and Other Interest-Bearing Obligations. Notes,
debentures and other interest-bearing obligations mature as follows:
December 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
2003:
11.875% Notes due October 1....................... $ 87,025 $ 100,050 $ 103,850
2004:
Loan due May 24 (LIBOR plus 250 basis points)..... 6,235 6,235 6,236
2005:
12% Subordinated Debentures due June 15........... 67,000 67,000 67,000
11.5% Redeemable Notes due July 1................. 45 45 140,487
----------- ----------- -----------
$ 160,305 $ 173,330 $ 317,573
=========== =========== ===========
The decrease in outstanding balances during 2001 and 2000 is due to
repurchases. These repurchases resulted in extraordinary gains. See "Results of
Operations - Extraordinary Gain on Repurchase of Debt, Net of Taxes" and Note 18
to our Consolidated Financial Statements (which is incorporated herein by
reference).
52
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Obligations Outstanding Under Lines of Credit. We have obtained secured
line of credit arrangements from unaffiliated financial institutions as follows
at the dates indicated:
Balance Amount of Committed Maturity
Collateral Outstanding Facility Amount Date Interest Rate(1)
- ------------------------------------ ----------- -------------- ----------- --------------- ------------------------------
December 31, 2001:
Real estate investments and
commercial loans............ $ 32,463 $ 200,000 $ 115,580 June 2002 LIBOR + 240 basis points
Advances on loans serviced for
others...................... 51,841 100,000 51,841 October 2002 LIBOR + 200 basis points
---------
$ 84,304
=========
December 31, 2000:
Real estate investments and
commercial loans............ $ 32,933 $ 200,000 $ 115,580 June 2001 LIBOR + 240 basis points
=========
December 31, 1999:
Subprime single family
residential loans........... $ 2,041 $ 200,000 $ 100,000 July 2001 LIBOR + 75 basis points
3,770 115,000 100,000 May 2000 LIBOR + 95 - 150 basis points
15,227 50,000 50,000 May 2000 LIBOR + 137.5 basis points
7,658 25,000 -- May 2000 LIBOR + 175 basis points
Real estate investments and
commercial loans............ 84,170 200,000 200,000 June 2001 LIBOR + 175 basis points
75,000 75,000 75,000 April 2001 LIBOR + 175 basis points
---------
$ 187,866
=========
<FN>
(1) 1-month LIBOR was 1.87%, 6.57% and 5.82% at December 31, 2001, 2000 and
1999, respectively.
</FN>
Lines of credit secured by advances on loans serviced for others were
entered into during April 2001 to fund advances purchased in connection with our
acquisition of rights to services loans for others. The decrease in outstanding
balances during 2000 was primarily the result of repayments of lines secured by
loans and real estate properties held for sale which were sold during 2000. See
Note 17 to our Consolidated Financial Statements (which is incorporated herein
by reference).
Company Obligated, Mandatorily Redeemable Securities of Subsidiary Trust
Holding Solely Junior Subordinated Debentures of the Company ("Capital
Securities"). The outstanding balance of the 10.875% Capital Securities amounted
to $61,159, $79,530 and $110,000 at December 31, 2001, 2000 and 1999,
respectively. During 2001 and 2000, we repurchased $18,371 and $30,470,
respectively, of our Capital Securities in the open market, resulting in
extraordinary gains. See "Results of Operations - Extraordinary Gain on
Repurchase of Debt, Net of Taxes" and Note 19 to our Consolidated Financial
Statements (which is incorporated herein by reference).
Stockholders' Equity. Stockholders' equity amounted to $379,106 at
December 31, 2001 as compared to $503,426 at December 31, 2000 and $509,442 at
December 31, 1999. The $124,320 decrease in equity during 2001 was primarily due
to the $124,782 net loss we incurred for the year. The decrease in equity during
2000 was primarily due to our repurchase of 1,388,300 shares of common stock in
the aggregate amount of $8,996, offset in part by net income we earned of
$2,192. On September 30, 2000, we changed our policy for securities available
for sale and match funded securities to account for these securities as trading.
As a result, we now include net unrealized holding gains and losses on trading
securities in earnings. Previously, we reported unrealized holding gains and
losses for these securities as a separate component of accumulated other
comprehensive income in stockholders' equity. See Consolidated Statements of
Changes in Stockholders' Equity and Notes 1 and 24 to our Consolidated Financial
Statements (which are incorporated herein by reference).
Asset and Liability Management
Asset and liability management is concerned with the timing and magnitude
of the repricing of assets and liabilities. Our objective is to attempt to
control risks associated with interest rate and foreign currency exchange rate
movements. In general, our strategy is to match our asset and liability balances
within maturity categories and to manage our foreign currency rate exposure
related to our
53
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
investments in non-U.S. dollar functional currency operations to limit our
exposure to earnings variations and variations in the value of our assets and
liabilities as interest rates and foreign currency exchange rates change over
time. Our Asset/Liability Management Committee (the "Committee"), which is
composed of our directors and officers, formulates and monitors our asset and
liability management strategy in accordance with policies approved by our Board
of Directors. The Committee meets to review, among other things, the sensitivity
of the our assets and liabilities to interest rate changes and foreign currency
exchange rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, including those attributable to hedging
transactions, purchase and sale activity, and maturities of investments and
borrowings. The Committee also approves and establishes pricing and funding
decisions with respect to overall asset and liability composition.
The Committee's methods for evaluating interest rate risk include an
analysis of the our interest rate sensitivity "gap," which is defined as the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
The following table sets forth the estimated maturity or repricing of our
interest-earning assets and interest-bearing liabilities at December 31, 2001.
We determined the amounts of our assets and liabilities shown within a
particular period in accordance with the contractual terms of the assets and
liabilities, with the following exceptions:
o We include adjustable-rate loans, performing discount loans, securities
and FHLB advances in the period in which they are first scheduled to
adjust and not in the period in which they mature.
o Fixed-rate mortgage-related securities reflect estimated prepayments,
which we estimated based on analyses of broker estimates, the results
of a prepayment model utilized and empirical data.
o Non-performing discount loans reflect the estimated timing of
resolutions that result in repayment to us.
o NOW and money market checking deposits and savings deposits, which do
not have contractual maturities, reflect estimated levels of attrition,
which we based on detailed studies of each such category of deposit.
o We exclude escrow deposits on loans and loans serviced for others and
other non-interest bearing checking accounts, which amounted to $79,189
at December 31, 2001.
54
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
We believe that these assumptions approximate actual experience and
consider them reasonable; however, the interest rate sensitivity of our assets
and liabilities in the table could vary substantially if we were to use
different assumptions or actual experience differs from the historical
experience on which we based the assumptions.
December 31, 2001
------------------------------------------------------------------------
More Than
Within Three Four to One Year to Three Years
Months Twelve Months Three Years and Over Total
------------ ------------ ------------ ------------ ------------
Rate-Sensitive Assets:
Interest-earning deposits....................... $ 111,579 $ -- $ -- $ -- $ 111,579
Federal funds sold.............................. 126,000 -- -- -- 126,000
Trading securities.............................. 85,448 73,140 24,096 43,565 226,249
Loans available for sale (1).................... 61 643 201 135 1,040
Investment securities, net...................... 4,659 -- -- -- 4,659
Loan portfolio, net (1)......................... 25,282 39,458 42 143 64,925
Discount loan portfolio, net (1)................ 26,385 35,171 49,740 8,031 119,327
Match funded assets, net (1)(2)................. 12,989 22,947 14,037 22,415 72,388
------------ ------------ ------------ ------------ ------------
Total rate-sensitive assets.................... 392,403 171,359 88,116 74,289 726,167
------------ ------------ ------------ ------------ ------------
Rate-Sensitive Liabilities:
NOW and money market checking deposits.......... 13,804 192 412 1,071 15,479
Savings deposits................................ 98 183 362 644 1,287
Certificates of deposit......................... 167,656 249,018 171,063 46,751 634,488
------------ ------------ ------------ ------------ ------------
Total interest-bearing deposits................. 181,558 249,393 171,837 48,466 651,254
Securities sold under agreements to repurchase.. 79,405 -- -- -- 79,405
Bonds-match funded agreements................... 143,021 6,353 7,534 -- 156,908
Obligations outstanding under lines of credit... 84,304 -- -- -- 84,304
Notes, debentures and other..................... 6,235 -- 87,025 67,045 160,305
------------ ------------ ------------ ------------ ------------
Total rate-sensitive liabilities............... 494,523 255,746 266,396 115,511 1,132,176
------------ ------------ ------------ ------------ ------------
Interest rate sensitivity gap excluding financial
instruments.................................... (102,120) (84,387) (178,280) (41,222) (406,009)
Financial Instruments:
Interest rate caps................................ -- -- 104 -- 104
Interest rate floors.............................. -- -- 300 -- 300
------------ ------------ ------------ ------------ ------------
Total rate-sensitive financial instruments........ -- -- 404 -- 404
------------ ------------ ------------ ------------ ------------
Interest rate sensitivity gap including financial
instruments.................................... $ (102,120) $ (84,387) $ (177,876) $ (41,222) $ (405,605)
============ ============ ============ ============ ============
Cumulative interest rate sensitivity gap (3)...... $ (102,120) $ (186,507) $ (364,383) $ (405,605)
============ ============ ============ ============
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets....... (14.06)% (25.68)% (50.18)% (55.86)%
<FN>
(1) Balances have not been reduced for non-performing loans.
(2) Excludes match funded advances on loans serviced for others, which do not
earn interest, of $101,963 at December 31, 2001.
(3) We have experienced an increasingly large negative interest rate
sensitivity gap in recent years. This change has been the result of both
our acquisition of OAC and our change in strategic focus away from
capital-intensive businesses and into fee-based sources of income. The
result has been an increase in the relative amount of our
noninterest-bearing assets, such as real estate assets and loan servicing
assets that are funded by interest-bearing liabilities. Consequently, the
amount of the negative interest rate sensitivity gap may continue to
increase as we continue our transition to fee-based businesses.
</FN>
55
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The OTS has established specific minimum guidelines for thrift
institutions to observe in the area of interest rate risk as described in Thrift
Bulletin No. 13a, "Management of Interest Rate Risk, Investment Securities, and
Derivative Activities" ("TB 13a"). Under TB 13a, institutions are required to
establish and demonstrate quarterly compliance with board-approved limits on
interest rate risk that are defined in terms of net portfolio value ("NPV"),
which is defined as the net present value of an institution's existing assets,
liabilities and off-balance sheet instruments. These limits specify the minimum
net portfolio value ratio ("NPV Ratio") allowable under current interest rates
and hypothetical interest rate scenarios. An institution's NPV Ratio for a given
interest rate scenario is calculated by dividing the NPV that would result in
that scenario by the present value of the institution's assets in that same
scenario. The hypothetical scenarios are represented by immediate, permanent,
parallel movements (shocks) in the term structure of interest rates of plus and
minus 100, 200 and 300 basis points from the actual term structure observed at
quarter end. The current NPV Ratio for each of the seven rate scenarios and the
corresponding limits approved by the Board of Directors, as applied to Ocwen
Financial Corporation and its subsidiaries, are as follows at December 31, 2001:
Board Limits Current
Rate Shock in basis points (minimum NPV Ratios) NPV Ratios
- ---------------------------- ------------------------ --------------------------
+300 5.00% 24.42%
+200 6.00% 24.38%
+100 7.00% 24.38%
0 8.00% 24.36%
-100 7.00% 24.40%
-200 6.00% 24.50%
-300 5.00% 24.66%
The Committee also regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on net interest income or
expense and NPV and evaluating such impacts against the maximum potential
changes in net interest income and NPV that is authorized by the Board of
Directors, as applied to Ocwen Financial Corporation and its subsidiaries. The
following table quantifies the potential changes in net interest expense and net
portfolio value should interest rates go up or down (shocked) 300 basis points,
assuming the yield curves of the rate shocks will be parallel to each other. We
calculate the cash flows associated with the loan portfolios and securities
available for sale based on prepayment and default rates that vary by asset. We
generate projected losses, as well as prepayments, based upon the actual
experience with the subject pool, as well as similar, more seasoned pools. To
the extent available, we use loan characteristics such as loan-to-value ratio,
interest rate, credit history, prepayment penalty terms and product types to
produce the projected loss and prepayment assumptions that are included in the
cash flow projections of the securities. When we shock interest rates we further
adjust these projected loss and prepayment assumptions. The base interest rate
scenario assumes interest rates at December 31, 2001. Actual results of Ocwen
Financial Corporation and its subsidiaries could differ significantly from the
results estimated in the following table:
Estimated Changes in
---------------------------------------------------
Rate Shock in basis points Net Interest Expense NPV
- ---------------------------- ------------------------ --------------------------
+300 88.45% (1.97)%
+200 58.97% (1.45)%
+100 29.48% (0.64)%
0 0.00% 0.00%
-100 (29.48)% 0.97%
-200 (58.97)% 2.25%
-300 (88.45)% 3.73%
56
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table shows our financial instruments that are sensitive to
changes in interest rates, categorized by expected maturity or repricing
characteristics, and the fair values of those instruments at December 31, 2001:
Expected Maturity Date At December 31, 2001 (1)
-----------------------------------------------------------------------------------------
Total Fair
2002 2003 2004 2005 2006 Thereafter Balance Value
--------- --------- --------- --------- --------- ---------- ---------- ----------
Rate-Sensitive Assets:
Interest-earning deposits............. $ 111,579 $ -- $ -- $ -- $ -- $ -- $ 111,579 $ 111,579
Average interest rate.............. 1.64% -- -- -- -- -- 1.64%
Federal funds......................... 126,000 -- -- -- -- -- 126,000 126,000
Average interest rate.............. 1.46% -- -- -- -- -- 1.46%
Trading securities.................... 158,587 16,482 7,615 7,678 7,095 28,792 226,249 226,249
Average interest rate.............. 8.67% 21.39% 28.30% 24.37% 31.40% 28.80% 14.07%
Loans available for sale (2).......... 704 180 21 16 14 105 1,040 1,040
Average interest rate.............. 12.23% 10.87% 12.42% 12.12% 12.12% 12.14% 11.98%
Investment securities................. 4,659 -- -- -- -- -- 4,659 4,659
Average interest rate.............. -- -- -- -- -- -- --
Loan portfolio, (2)................... 64,739 23 20 26 16 101 64,925 64,925
Average interest rate.............. 7.10% 10.53% 10.52% 9.98% 10.48% 10.39% 7.11%
Discount loan portfolio (2)........... 61,557 40,048 9,691 1,098 975 5,958 119,327 127,133
Average interest rate.............. 10.18% 10.46% 10.07% 10.63% 10.64% 10.65% 10.30%
Match funded assets (2)(3)............ 35,936 10,541 3,496 2,882 2,487 17,046 72,388 70,344
Average interest rate.............. 9.19% 8.85% 9.63% 9.67% 9.64% 9.70% 9.32%
--------- --------- --------- --------- --------- ---------- ---------- ----------
Total rate-sensitive assets...... $ 563,761 $ 67,274 $ 20,843 $ 11,700 $ 10,587 $ 52,002 $ 726,167 $ 731,929
========= ========= ========= ========= ========= ========== ========== ==========
Rate-Sensitive Liabilities:
NOW and money market checking
deposits......................... $ 13,996 $ 223 $ 189 $ 160 $ 137 $ 774 $ 15,479 $ 15,070
Average interest rate.............. 1.78% 0.48% 0.48% 0.48% 0.48% 0.48% 1.66%
Savings deposits...................... 281 201 161 129 103 412 1,287 1,226
Average interest rate.............. 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Certificates of deposit............... 416,674 110,660 60,403 25,701 1,107 19,943 634,488 657,204
Average interest rate.............. 5.94% 6.09% 6.59% 6.91% 5.36% 5.94% 6.06%
--------- --------- --------- --------- --------- ---------- ---------- ----------
Total interest-bearing deposits.. 430,951 111,084 60,753 25,990 1,347 21,129 651,254 673,500
Securities sold under agreements to
repurchase......................... 79,405 -- -- -- -- -- 79,405 79,405
Average interest rate.............. 1.87% -- -- -- -- -- 1.87%
Bonds-match funded agreements......... 149,374 6,612 922 -- -- -- 156,908 156,996
Average interest rate.............. 3.31% 9.50% 9.50% -- -- -- 3.61%
Obligations outstanding under lines of
credit........................... 84,304 -- -- -- -- -- 84,304 84,304
Average interest rate.............. 4.28% -- -- -- -- -- 4.28%
Notes, debentures and other........... 6,235 87,025 -- 67,045 -- -- 160,305 159,590
Average interest rate.............. 7.00% 11.88% -- 12.00% -- -- 11.74%
--------- --------- --------- --------- --------- ---------- ---------- ----------
Total rate-sensitive liabilities. $ 750,269 $ 204,721 $ 61,675 $ 93,035 $ 1,347 $ 21,129 $1,132,176 $1,153,795
========= ========= ========= ========= ========= ========== ========== ==========
<FN>
(1) Expected maturities are contractual maturities adjusted for prepayments of
principal. We use certain assumptions to estimate fair values and expected
maturities. For assets, expected maturities are based upon contractual
maturity, projected repayments and prepayments of principal. We base the
prepayment experience reflected herein on our historical experience. Our
average Constant Prepayment Rate ("CPR") is 29.84% and 22.14% on our
fixed-rate and adjustable-rate portfolios, respectively, for
interest-earning assets (excluding investment securities, which do not
have prepayment features). The actual maturities of these instruments
could vary substantially if future prepayments differ from our historical
experience.
(2) We have not reduced balances for non-performing loans.
(3) Excludes match funded advances on loans serviced for others, which do not
earn interest, of $101,963 at December 31, 2001.
</FN>
57
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
(4) The expected maturity or repricing dates of interest rate-sensitive assets
and liabilities as of December 31, 2001 and 2000 compare as follows:
1st Year 2nd Year 3rd Year 4th Year 5th Year Thereafter Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets:
2001:
Amount..................... $ 563,761 $ 67,274 $ 20,843 $ 11,700 $ 10,587 $ 52,002 $ 726,167
% of total.............. 77.64% 9.26% 2.87% 1.61% 1.46% 7.16% 100.00%
2000:
Amount..................... $ 801,060 $ 206,150 $ 70,041 $ 46,854 $ 26,163 $ 145,257 $1,295,525
% of total.............. 61.83% 15.91% 5.41% 3.62% 2.02% 11.21% 100.00%
Total rate-sensitive
liabilities:
2001:
Amount..................... $ 750,269 $ 204,721 $ 61,675 $ 93,035 $ 1,347 $ 21,129 $1,132,176
% of total.............. 66.27% 18.08% 5.45% 8.22% 0.12% 1.86% 100.00%
2000:
Amount..................... $ 785,055 $ 332,126 $ 207,900 $ 57,135 $ 95,692 $ 23,925 $1,501,833
% of total.............. 52.27% 22.12% 13.84% 3.81% 6.37% 1.59% 100.00%
We believe that the broad geographic distribution of our loans available
for sale, loan portfolio, discount loan portfolio and match-funded loans reduces
the risks that would otherwise result from concentrating such loans in limited
geographic areas. See Notes 5, 6 and 7 to our Consolidated Financial Statements
(which are incorporated herein by reference).
The Committee is authorized to utilize a wide variety of off-balance sheet
financial techniques to assist it in the management of interest rate risk and
foreign currency exchange rate risk. These techniques include interest rate
exchange contracts or "swap" agreements, interest rate caps and floors U.S.
Treasury interest rate futures contracts, foreign currency futures contracts,
foreign currency forwards and European swaptions and put options.
Interest Rate Risk Management. In managing our interest rate risk, we
enter, from time to time, into interest rate swaps. Under interest rate swaps,
we agree with other parties to exchange, at specified intervals, the difference
between fixed-rate and floating-rate interest amounts calculated by reference to
an agreed notional amount. We utilize interest rate swaps 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 a line of credit, in an increasing
interest-rate environment. We had entered into interest rate swaps with an
aggregate notional amount of $33,000 at December 31, 2000. Those swaps matured
in April 2001 and we have no interest rate swaps outstanding at December 31,
2001.
From time to time, we also enter into swaption contracts, put option
contracts and interest rate futures contracts, including Eurodollar and U.S.
Treasury contracts. Swaption contracts are options to enter into an interest
rate swap agreement at a future date at a specific interest rate. A put option
allows us to sell a specified quantity of an asset at a specified price at a
specific date. 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. We had no
swaptions, put option contracts or interest futures contracts outstanding at
either December 31, 2001 or 2000.
Additionally, we purchased amortizing caps and floors to hedge the
interest rate exposure relating to our mortgage servicing rights and our match
funded loans and securities. An interest rate cap or interest rate floor is
designed to provide protection against the interest rate on a floating-rate
instrument rising above some level (cap) or falling below some level (floor). We
had entered into caps and floors with an aggregate notional amount of $125,933
and $34,101, respectively, at December 31, 2001, as compared to caps and floors
with an aggregate notional amount of $141,674 and $37,787, respectively, at
December 31, 2000. The floor related to our mortgage servicing rights, which had
a notional amount of $11,600, expired during the third quarter of 2001.
See the "Derivative Financial Instruments" section of Note 1 and the
"Interest Rate Management" section of Note 21 to our Consolidated Financial
Statements (which are incorporated herein by reference).
Foreign Currency Exchange Rate Risk Management. We have entered into
foreign currency derivatives to hedge our net investment in foreign subsidiaries
which own residual securities backed by residential loans originated in the UK
("UK residuals") and a shopping center located in Halifax, Nova Scotia ("the
Nova Scotia shopping center"). Our exposure to foreign currency exchange rates
58
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
exists with the British Pound versus the U.S. dollar and the Canadian Dollar
versus the U.S. dollar. Our policy is to periodically adjust the amount of
foreign currency derivative contracts we have entered into in response to
changes in our recorded investment in these foreign entities as well as to
changes in our assets denominated in a foreign currency.
Our hedges, related investments in foreign subsidiaries and our net
exposures at December 31, 2001 and December 31, 2000 were as follows:
Investment Hedge Net Exposure
---------- ---------- ------------
December 31, 2001:
UK residuals............................. $ 25,535 $ 24,754 $ (781)
Nova Scotia shopping center.............. 21,648 21,691 43
December 31, 2000:
UK residuals............................. $ 23,239 $ 22,236 $ (1,003)
Nova Scotia shopping center.............. 21,913 22,423 510
Our net exposures are subject to gain or loss if foreign currency exchange
rates fluctuate. See the "Derivatives Financial Instruments" section of Note 1
and the "Foreign Currency Management" section of Note 21 to our Consolidated
Financial Statements (which are incorporated herein by reference).
Liquidity, Commitments and Off-Balance Sheet Risks
Our primary sources of funds for liquidity are:
o Deposits o Maturities and payments received
o FHLB advances on loans, securities and advances
o Securities sold under o Proceeds from sales of assets
agreements to repurchase o Servicing fees
o Lines of credit
o Match funded debt
At December 31, 2001, we were eligible to borrow up to an aggregate of
$149,398 from the FHLB of New York (based on the availability of acceptable
collateral) and had $81,764 of short duration CMOs pledged as security for any
such borrowings. At December 31, 2001, we had contractual relationships with
eleven brokerage firms and the FHLB of New York pursuant to which we could
obtain funds from securities sales under agreements to repurchase. In addition,
under a match funding agreement that we entered into on December 20, 2001, we
were eligible to sell advances on loans serviced for others up to a maximum debt
balance of $200,000 at any one time. At December 31, 2001, we had $91,766 of
bonds-match funded agreements outstanding under this facility, which is expected
to mature in December 2003. The sales of advances did not qualify as sales for
accounting purposes; therefore, we report them as secured borrowings with
pledges of collateral. We will account for additional sales under this facility
in the same manner. At December 31, 2001, we also had $245,249 of unrestricted
cash and cash equivalents and $74,190 of short duration CMOs which we could use
to secure additional borrowings. We had no outstanding FHLB advances at December
31, 2001. Securities we sold under agreements to repurchase from the FHLB
amounted to $79,405 at December 31, 2001.
We continuously monitor our liquidity position and ongoing funding
requirements. Among the risks and challenges associated with our funding
activities are the following:
o We do not intend to utilize brokered certificates of deposit, a
significant portion of which mature during 2002, as a source of funding
in the foreseeable future.
o Expiration of existing collateralized lines of credit at various times
through 2002.
o Potential extension of resolution and sale timelines for non-core
assets in the current weak economic environment.
o Ongoing cash requirements to fund operations of our holding company and
OTX.
o Cash requirements to fund our acquisition of additional servicing
rights and related advances, as well as the need to fund the unfinanced
portion of our existing servicing advances.
We believe that our existing sources of liquidity, including internally
generated funds, will be adequate to fund our planned activities for the
foreseeable future, although there can be no assurances in this regard. We
continue to evaluate other sources of liquidity, such as lines of credit from
unaffiliated parties, match funded debt and other secured borrowings. See the
"Short-Term Highly Liquid
59
Management's Discussion and Analysis of Financial Condition and Results of
Operations. (Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Investments," "Securities Sold Under Agreements to Repurchase," and "Derivative
Financial Instruments" sections of Note 1 and Notes 14 and 17 to our
Consolidated Financial Statements (which are incorporated herein by reference).
As of November 29, 2001, Standard & Poor's and Fitch's rating outlooks for
Ocwen Financial Corporation and Ocwen Federal Bank are negative. On November 13,
2001, Standard & Poor's lowered its credit rating on Ocwen Financial Corporation
and its subsidiaries, Ocwen Federal Bank and Ocwen Capital Trust I. On November
29, 2001, Fitch lowered its credit ratings on Ocwen Financial Corporation and
Ocwen Federal Bank's subordinated debt while affirming its credit ratings on
Ocwen Financial Corporation's long-term senior debt and short-term ratings and
Ocwen Federal Bank's short-term rating.
Our operating activities provided (used) $53,850, $2,713 and $(248,082) of
cash flows during 2001, 2000 and 1999, respectively. During the foregoing years
our cash resources were provided primarily by trading securities and proceeds
from sales of loans available for sale, and we used cash resources primarily to
purchase and fund loan servicing advances and, in 1999, to purchase and
originate loans available for sale.
Our investing activities provided cash flows totaling $428,088, $744,663
and $518,466 during 2001, 2000 and 1999, respectively. During the foregoing
years, cash flows from our investing activities were provided primarily from
principal payments on our discount loans and loans held for investment,
maturities of and principal payments received on our securities available for
sale and proceeds from sales of discount loans, securities available for sale,
real estate held for sale and real estate owned. We used cash flows from our
investing activities primarily to purchase discount loans, mortgage servicing
rights and securities available for sale. Cash flows from our investing
activities for 1999 included $122,101 of proceeds from our sale of Ocwen UK.
Our financing activities used cash flows of $(375,019), $(947,859) and
$(335,319) during 2001, 2000 and 1999, respectively. Cash flows related to our
financing activities primarily resulted from changes in our deposits and
obligations outstanding under lines of credit, as well as repurchases and
issuance of debt. Cash flows used in our financing activities decreased during
2001 primarily because we established a new line of credit agreement to fund
advances on loans serviced for others that we acquired in connection with a
servicing acquisition, and we entered into a new match funding agreement to fund
current and future advances on loans serviced for others. We also repurchased
less of our outstanding debt and repurchased none of our common stock during
2001.
Applicable federal regulations previously required that Ocwen Federal Bank
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 (not less than 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less). Effective July 18,
2001 the OTS issued a final rule eliminating the 4% liquidity requirement.
However, the rule continues to require that savings associations maintain
sufficient liquidity to ensure its safe and sound operation.
At December 31, 2001, we had $3,432 of commitments related to the funding
of construction loans (including loans accounted for as investments in real
estate). We believe that we have adequate resources to fund all such unfunded
commitments to the extent required and that substantially all of such unfunded
commitments will be funded during 2002. See Note 30 to our Consolidated
Financial Statements (which is incorporated herein by reference).
In addition to commitments to extend credit, we are party to various
off-balance sheet financial instruments in the normal course of our business to
manage our interest rate risk and foreign currency exchange rate risk. See Note
21 to our Consolidated Financial Statements (which is incorporated herein by
reference) and "Asset and Liability Management" above.
We conduct business with a variety of financial institutions and other
companies in the normal course of business, including counterparties to our
off-balance sheet financial instruments. We are subject to potential financial
loss if the counterparty is unable to complete an agreed upon transaction. We
seek to limit counterparty risk through financial analysis, dollar limits and
other monitoring procedures.
Regulatory Capital and Other Requirements
See Note 25 to our Consolidated Financial Statements (which is
incorporated herein by reference).
Recent Accounting Developments
For information relating to the effects of our adoption of recent
accounting standards, see Note 1 to our Consolidated Financial Statements (which
is incorporated herein by reference).
60
Forward-Looking Statements
Certain statements contained herein are not, and certain statements contained in
future filings by us with the Securities and Exchange Commission (the
"Commission"), in our press releases or in the our other public or shareholder
communications may not be, based on historical facts and are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements, which are based on various assumptions (some
of which are beyond our control), may be identified by reference to a future
period(s) or by the use of forward-looking terminology such as "anticipate,"
"believe," "commitment," "consider," "continue," "could," "estimate," "expect,"
"foresee," "intend," "in the event of," "may," "plan," "propose," "prospect,"
"whether," "will," "would," future or conditional verb tenses, similar terms,
variations on such terms or negatives of such terms. Although we believe the
anticipated results or other expectations reflected in such forward-looking
statements are based on reasonable assumptions, it can give no assurance that
those results or expectations will be attained. Actual results could differ
materially from those indicated in such statements due to risks, uncertainties
and changes with respect to a variety of factors, including, but not limited to,
international, national, regional or local economic environments (particularly
in the market areas where we operate), government fiscal and monetary policies
(particularly in the market areas where we operate), prevailing interest or
currency exchange rates, effectiveness of interest rate, currency and other
hedging strategies, laws and regulations affecting financial institutions,
investment companies and real estate (including regulatory fees, capital
requirements, access for disabled persons and environmental compliance),
uncertainty of foreign laws and potential political issues related to operations
outside of the USA, competitive products, pricing and conditions (including from
competitors that have significantly greater resources than our Company), credit,
prepayment, basis, default, subordination and asset/liability risks, loan
servicing effectiveness, ability to identify acquisitions and investment
opportunities meeting our investment strategy, the course of negotiations and
the ability to reach agreement with respect to the material terms of any
particular transaction, satisfactory due diligence results, satisfaction or
fulfillment of agreed upon terms and conditions of closing or performance, the
timing of transaction closings, software integration, development and licensing,
damage to our computer equipment and the information stored our data centers,
availability of and costs associated with obtaining adequate and timely sources
of liquidity, ability to repay or refinance indebtedness (at maturity or upon
acceleration), to meet collateral calls by lenders (upon re-valuation of the
underlying assets or otherwise), to generate revenues sufficient to meet debt
service payments and other operating expenses, availability of discount loans
and servicing rights for purchase, size of, nature of and yields available with
respect to the secondary market for mortgage loans, financial, securities and
securitization markets in general, adequacy of allowances for loan losses,
changes in real estate conditions (including liquidity, valuation, revenues,
rental rates, occupancy levels and competing properties), adequacy of insurance
coverage in the event of a loss, other factors generally understood to affect
the real estate acquisition, mortgage, servicing and leasing markets, securities
investments and the software and technology industry, and other risks detailed
from time to time in our reports and filings with the Commission, including our
periodic reports on Forms 10-Q, 8-K and 10-K and Exhibit 99.1, titled Risk
Factors, to our Form 10-K for the year ended December 31, 2001. Given these
uncertainties, readers are cautioned not to place undue reliance on such
statements. We do not undertake, and specifically disclaims any obligation, to
release publicly the results of any revisions that may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
61
REPORT OF MANAGEMENT
The management of Ocwen Financial Corporation is responsible for the
accompanying consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States of
America applied on a consistent basis. In preparing the financial statements, it
is necessary for management to make informed judgments and best estimates giving
due consideration to materiality. In the opinion of management, the consolidated
financial statements fairly reflect our financial position and results of
operations. Information, both financial and non-financial, presented elsewhere
in this annual report is consistent with that in the consolidated financial
statements.
To ensure that the financial statements are reliable, the Company
established and maintains an effective system of internal accounting controls
and procedures that provide reasonable assurance that assets are safeguarded and
transactions are properly recorded and executed in accordance with corporate
policy and management authorization. The Company believes its accounting
controls provide reasonable assurance that errors or irregularities which could
be material to the financial statements are prevented or would be detected
within a timely period and corrected in the normal course of business.
PricewaterhouseCoopers LLP was engaged to perform an audit of the
consolidated financial statements in accordance with auditing standards
generally accepted in the United States of America. Such standards include the
evaluation of our accounting policies and procedures and the effectiveness of
the related internal control system. In addition to the use of independent
certified public accountants, the Company maintains a professional staff of
internal auditors who conduct financial, procedural and special audits and make
recommendations on both administrative and accounting controls.
The Audit Committee of the Board of Directors is comprised solely of
independent directors and is responsible for overseeing and monitoring the
quality of our accounting and auditing practices. The independent accountants
and internal auditors have direct access to the Audit Committee and meet
periodically with the committee to discuss the scope and results of their work,
the adequacy of internal accounting controls and financial reporting matters.
/s/ William C. Erbey /s/ Mark S. Zeidman
William C. Erbey Mark S. Zeidman
Chairman and Chief Executive Officer Senior Vice President and
Chief Financial Officer
62
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Ocwen Financial Corporation
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of operations, of
comprehensive income, of changes in stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Ocwen
Financial Corporation (the "Company") and its subsidiaries at December 31, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
West Palm Beach, Florida
February 12, 2002
63
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
December 31, 2001 December 31, 2000
----------------- -----------------
Assets:
Cash and amounts due from depository institutions.................................... $ 23,076 $ 18,749
Interest earning deposits............................................................ 111,579 134,987
Federal funds sold................................................................... 126,000 --
Trading securities, at fair value:
Collateralized mortgage obligations (AAA-rated)................................. 161,191 277,595
Subordinates, residuals and other securities.................................... 65,058 112,647
Loans available for sale, at lower of cost or market................................. 1,040 10,610
Real estate held for sale............................................................ 13,418 22,670
Investment in real estate............................................................ 116,896 122,761
Affordable housing properties........................................................ 102,069 142,812
Investment securities, at cost....................................................... 4,659 13,257
Loan portfolio, net.................................................................. 64,925 93,414
Discount loan portfolio, net......................................................... 119,327 536,028
Match funded assets.................................................................. 174,351 116,987
Investments in unconsolidated entities............................................... 1,067 430
Real estate owned, net............................................................... 110,465 146,419
Premises and equipment, net.......................................................... 44,589 43,152
Income taxes receivable.............................................................. 20,842 30,261
Deferred tax asset, net.............................................................. 8,411 95,991
Advances on loans and loans serviced for others...................................... 283,183 227,055
Mortgage servicing rights............................................................ 101,107 51,426
Other assets......................................................................... 57,897 52,169
-------------- --------------
$ 1,711,150 $ 2,249,420
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Deposits........................................................................... $ 656,878 $ 1,202,044
Escrow deposits on loans and loans serviced for others............................. 73,565 56,316
Securities sold under agreements to repurchase..................................... 79,405 --
Bonds - match funded agreements.................................................... 156,908 107,050
Obligations outstanding under lines of credit...................................... 84,304 32,933
Notes, debentures and other interest bearing obligations........................... 160,305 173,330
Accrued interest payable........................................................... 12,836 22,096
Excess of net assets acquired over purchase price.................................. 18,333 36,665
Accrued expenses, payables and other liabilities................................... 28,351 36,030
-------------- --------------
Total liabilities............................................................... 1,270,885 1,666,464
-------------- --------------
Company obligated, mandatorily redeemable securities of subsidiary trust holding
solely junior subordinated debentures of the Company............................. 61,159 79,530
Commitments and contingencies (Note 30)
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized; 0 shares issued and
outstanding.................................................................... -- --
Common stock, $.01 par value; 200,000,000 shares authorized; 67,289,313 and
67,152,363 shares issued and outstanding at December 31, 2001 and
December 31, 2000, respectively................................................ 673 672
Additional paid-in capital........................................................ 224,142 223,163
Retained earnings................................................................. 154,412 279,194
Accumulated other comprehensive income (loss), net of taxes:
Net unrealized foreign currency translation gain (loss)......................... (121) 397
-------------- --------------
Total stockholders' equity........................................................ 379,106 503,426
-------------- --------------
$ 1,711,150 $ 2,249,420
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
64
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
For the Years Ended December 31,
-----------------------------------------------
2001 2000 1999
------------ ------------ ------------
Net interest income:
Income ........................................................... $ 83,371 $ 184,816 $ 253,224
Expense........................................................... 93,329 169,090 155,542
------------ ------------ ------------
Net interest income (expense) before provision for loan losses.... (9,958) 15,726 97,682
Provision for loan losses......................................... 15,666 15,177 6,710
------------ ------------ ------------
Net interest income (expense) after provision for loan losses..... (25,624) 549 90,972
------------ ------------ ------------
Non-interest income:
Servicing and other fees.......................................... 134,597 97,080 76,018
Gain (loss) on interest earning assets, net....................... (3,949) 17,625 44,298
Gain (loss) on trading and match funded securities, net........... 16,330 (3,971) --
Impairment charges on securities available for sale............... -- (11,597) (58,777)
Loss on real estate owned, net.................................... (9,256) (14,904) (3,957)
Gain (loss) on other non-interest earning assets, net............. (1,054) 45,517 58,693
Net operating gains on investments in real estate................. 5,581 27,579 820
Amortization of excess of net assets acquired over purchase price 18,333 14,112 3,201
Other income...................................................... 8,759 6,084 24,346
------------ ------------ ------------
169,341 177,525 144,642
------------ ------------ ------------
Non-interest expense:
Compensation and employee benefits................................ 84,914 83,086 102,173
Occupancy and equipment........................................... 11,577 12,005 18,501
Technology and communication costs................................ 26,768 23,876 20,957
Loan expenses..................................................... 15,811 13,051 12,618
Net operating losses on investments in certain affordable housing
properties...................................................... 16,580 9,931 6,291
Amortization of excess of purchase price over net assets acquired. 3,112 3,124 4,448
Professional services and regulatory fees......................... 14,749 12,829 13,992
Other operating expenses.......................................... 8,935 12,107 16,088
------------ ------------ ------------
182,446 170,009 195,068
------------ ------------ ------------
Distributions on Company-obligated, mandatorily redeemable
securities of subsidiary trust holding solely junior
subordinated debentures of the Company.......................... 7,132 11,380 13,111
Equity in income (losses) of investments in unconsolidated entities 304 (5,249) (12,616)
------------ ------------ ------------
Income (loss) before income taxes and extraordinary gain............ (45,557) (8,564) 14,819
Income tax expense.................................................. 81,587 7,957 2,608
Minority interest in net loss of consolidated subsidiary............ -- -- (638)
------------ ------------ ------------
Income (loss) before extraordinary gain............................. (127,144) (16,521) 12,849
Extraordinary gain on repurchase of debt, net of taxes.............. 2,362 18,713 6,983
------------ ------------ ------------
Net income (loss)................................................... $ (124,782) $ 2,192 $ 19,832
============ ============ ============
Earnings (loss) per share:
Basic:
Net income (loss) before extraordinary gain..................... $ (1.89) $ (0.25) $ 0.20
Extraordinary gain.............................................. 0.03 0.28 0.11
------------ ------------ ------------
Net income (loss)............................................... $ (1.86) $ 0.03 $ 0.31
============ ============ ============
Diluted:
Net income (loss) before extraordinary gain..................... $ (1.89) $ (0.25) $ 0.20
Extraordinary gain.............................................. 0.03 0.28 0.11
------------ ------------ ------------
Net income (loss)............................................... $ (1.86) $ 0.03 $ 0.31
============ ============ ============
Weighted average common shares outstanding:
Basic............................................................. 67,227,058 67,427,662 63,051,015
Diluted........................................................... 67,227,058 67,464,043 63,090,282
The accompanying notes are an integral part of these
consolidated financial statements.
65
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
For the Years Ended December 31,
-----------------------------------------------
2001 2000 1999
----------- ----------- -----------
Net income (loss)..................................................... $ (124,782) $ 2,192 $ 19,832
----------- ----------- -----------
Other comprehensive income (loss), net of taxes:
Change in unrealized loss (gain) on securities available for sale
arising during the year........................................... -- -- (9,338)
Less: Reclassification adjustment................................... -- (163) (4,556)
----------- ----------- -----------
Netchange in unrealized (gain) loss on securities available for
sale (net of a tax benefit of $122 and $7,771 for 2000 and
1999, respectively)............................................ -- (163) (13,894)
----------- ----------- -----------
Change in unrealized foreign currency translation adjustment arising
during the year................................................... (518) 389 463
Less: Reclassification adjustment for losses on foreign currency
translation adjustment included in net income..................... -- 757 481
----------- ----------- -----------
Net change in unrealized foreign currency translation loss (net of
tax benefit (expense) of $284, $(627) and $(514) for 2001, 2000
and 1999, respectively)........................................... (518) 1,146 944
----------- ----------- -----------
Other comprehensive income (loss)................................... (518) 983 (12,950)
----------- ----------- -----------
Comprehensive income (loss)........................................... $ (125,300) $ 3,175 $ 6,882
=========== =========== ===========
Disclosure of reclassification adjustment:
Unrealized holding losses (gains) arising during the year on
securities sold or impaired....................................... $ -- $ (7,394) $ (36,671)
Add: Adjustment for realized losses and impairment charges on
securities available for sale included in net income (loss)....... -- 7,231 32,115
----------- ----------- -----------
Net reclassification adjustment for (gains) losses recognized in
other comprehensive income (loss) in prior years (net of tax
benefit of $122 and $2,558 for 2000 and 1999, respectively) (1)... $ -- $ (163) $ (4,556)
=========== =========== ===========
Unrealized foreign currency translation adjustment arising during
the year.......................................................... $ -- $ (131) $ (703)
Add: Adjustment for realized foreign currency losses on the sale of
the equity investment in a foreign entity and foreign subsidiary
in 2000 and 1999, respectively.................................... -- 888 1,184
----------- ----------- -----------
Net reclassification adjustment for foreign currency losses
recognized in other comprehensive income (loss) in prior years
(net of tax benefit of $408 and $259 for 2000 and 1999,
respectively)..................................................... $ -- $ 757 $ 481
=========== =========== ===========
<FN>
(1) In 2000, includes the adjustment related to the reclassification of
securities available for sale to trading securities.
</FN>
The accompanying notes are an integral part of these
consolidated financial statements.
66
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
(Dollars in thousands, except share data)
Accumulated
Other
Common Stock Additional Comprehensive
-------------------- Paid-in Retained Income (Loss),
Shares Amount Capital Earnings Net of Taxes Total
------------ ------ ---------- --------- -------------- ----------
Balances at December 31, 1998................ 60,800,357 $ 608 $ 166,234 $ 257,170 $ 12,364 $ 436,376
Net income................................... -- -- -- 19,832 -- 19,832
Repurchase and retirement of common stock.... (4,611,700) (46) (30,645) -- -- (30,691)
Exercise of common stock options............. 5,069 -- 23 -- -- 23
Directors' compensation...................... 6,099 -- 43 -- -- 43
Issuance of common stock for acquisition of
Ocwen Asset Investment Corp............... 12,371,750 124 96,685 -- -- 96,809
Other comprehensive income, net of taxes:
Change in unrealized gain (loss) on
securities available for sale.......... -- -- -- -- (13,894) (13,894)
Change in unrealized foreign currency
translation loss....................... -- -- -- -- 944 944
------------ ------ --------- --------- ---------- ----------
Balances at December 31, 1999................ 68,571,575 686 232,340 277,002 (586) 509,442
Net income................................... -- -- -- 2,192 -- 2,192
Repurchase and retirement of common stock.... (1,427,747) (14) (9,233) -- -- (9,247)
Directors' compensation...................... 8,535 -- 56 -- -- 56
Other comprehensive income, net of taxes:
Change in unrealized gain on securities
available for sale..................... -- -- -- -- (163) (163)
Change in unrealized foreign currency
translation loss....................... -- -- -- -- 1,146 1,146
------------ ------ --------- --------- ---------- ----------
Balances at December 31, 2000................ 67,152,363 672 223,163 279,194 397 503,426
Net loss..................................... -- -- -- (124,782) -- (124,782)
Exercise of common stock options............. 128,155 1 901 -- -- 902
Directors' compensation...................... 8,795 -- 78 -- -- 78
Other comprehensive income, net of taxes:
Change in accounting principle for
derivative financial instruments....... -- -- -- -- 59 59
Reclassification of gain on derivative
financial instruments to earnings...... -- -- -- -- (59) (59)
Change in unrealized foreign currency
translation gain....................... -- -- -- -- (518) (518)
------------ ------ --------- --------- ---------- ----------
Balances at December 31, 2001................ 67,289,313 $ 673 $ 224,142 $ 154,412 $ (121) $ 379,106
============ ====== ========= ========= ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
67
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Years Ended December 31,
---------------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)........................................................... $(124,782) $ 2,192 $ 19,832
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Net cash provided by trading activities................................... 192,069 102,091 18,723
Proceeds from sales of loans available for sale........................... 6,996 22,982 568,490
Purchases of loans available for sale..................................... -- -- (47,129)
Origination of loans available for sale................................... -- -- (728,509)
Principal payments received on loans available for sale................... 1,596 6,827 25,949
Premium amortization (discount accretion) on securities, net.............. 7,337 8,493 11,074
Depreciation and amortization............................................. 26,902 20,360 13,339
Provision for loan losses................................................. 15,666 15,177 6,710
Provision for real estate owned........................................... 17,766 26,674 28,008
Gain on sale of Ocwen UK.................................................. -- -- (50,371)
Gain on sale of investment in Kensington Group plc........................ -- (20,025) --
Gain on interest-earning assets, net...................................... 3,949 (17,625) (44,298)
(Gain) loss on trading and match funded securities........................ (16,330) 3,971 --
Impairment charges on securities available for sale....................... -- 11,597 58,777
Extraordinary gain on repurchase of debt.................................. (3,774) (29,704) (8,475)
(Gain) loss on sale of other non-interest earning assets.................. 1,054 (25,492) (8,322)
Impairment charges on investment in real estate........................... 4,515 704 2,817
Impairment charges on affordable housing properties....................... 15,587 6,448 700
Gain on sale of real estate owned......................................... (14,111) (22,515) (36,265)
Equity in (income) losses of investment in unconsolidated entities........ (304) 5,249 12,616
(Increase) decrease in income taxes receivable............................ 9,419 (30,261) 34,333
(Decrease) increase in income taxes payable............................... -- (6,369) 6,369
(Increase) decrease in deferred tax asset................................. 87,580 40,929 (53,273)
Increase in advances and match funded advances on loans and loans serviced
for others.............................................................. (165,123) (67,638) (54,507)
(Increase) decrease in other assets, net.................................. 4,064 (12,340) (11,330)
Decrease in accrued expense, interest payable and other liabilities....... (16,226) (39,012) (13,340)
--------- --------- ---------
Net cash provided (used) by operating activities............................ 53,850 2,713 (248,082)
--------- --------- ---------
(Continued on next page)
The accompanying notes are an integral part of these
consolidated financial statements.
68
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
For the Years Ended December 31,
----------------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale...................... -- 553,589 43,923
Purchase of securities available for sale................................. -- (896,470) (589,985)
Maturities of and principal payments received on securities available for
sale.................................................................... -- 416,004 553,136
Proceeds from the sale of Ocwen UK........................................ -- -- 122,101
Proceeds from the sale of investment in Kensington Group plc.............. -- 48,556 --
Redemption of Federal Home Loan Bank stock................................ 8,598 -- --
Acquisitions of subsidiaries.............................................. -- -- 64,450
Principal payments received on match funded loans......................... 30,552 26,595 11,868
Investment in affordable housing properties............................... (30,496) (27,213) (56,874)
Proceeds from sale of affordable housing properties....................... 52,076 27,587 44,233
Purchase of servicing rights.............................................. (79,522) (49,779) (9,218)
Proceeds from sale of discount loans, net................................. 263,373 262,018 275,935
Principal payments received on discount loans, net........................ 84,282 180,048 301,826
Purchase and funded commitments of discount loans......................... (1,220) (175,708) (584,328)
Proceeds from sale of real estate held for investment..................... 14,360 4,237 23,436
Investment in real estate held for investment............................. (7,996) (34,057) (19,115)
Proceeds from sale of real estate held for sale........................... 1,000 232,811 --
Investment in real estate held for sale................................... -- (57,737) --
Proceeds from sales of loans held for investment.......................... 18,018 30,709 51,691
Principal payments received on loans held for investment.................. 16,193 90,387 137,199
Purchases, originations and funded commitments of loans held for
investment, net......................................................... (24,106) (55,567) (36,991)
Decrease (increase) in investment in unconsolidated entities.............. (333) 7,286 10,687
Capital improvements to real estate owned................................. (12,737) (6,775) (37)
Proceeds from sale of real estate owned................................... 108,338 180,473 251,621
Purchase of real estate owned in connection with discount loan purchases.. -- (9,059) (47,807)
Additions to premises and equipment....................................... (12,292) (3,272) (29,285)
--------- --------- ---------
Net cash provided by investing activities................................... 428,088 744,663 518,466
--------- --------- ---------
(Continued on next page)
The accompanying notes are an integral part of these
consolidated financial statements.
69
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
For the Years Ended December 31,
------------------------------------------
2001 2000 1999
----------- ----------- -----------
Cash flows from financing activities:
Decrease in deposits....................................................... (527,917) (556,287) (354,144)
Increase (decrease) in securities sold under agreements to repurchase...... 79,405 (47,365) (34,059)
(Repayment of) proceeds from obligations under lines of credit, net........ 51,371 (155,805) 110,413
Proceeds from issuance of other interest bearing obligations............... -- -- 6,236
Proceeds from issuance of bonds - match funded agreements.................. 91,766 -- 40,094
Repayments of bonds - match funded agreements.............................. (43,144) (33,002) (12,559)
Repurchase of notes and subordinated debentures............................ (13,233) (127,649) (51,223)
Exercise of common stock options........................................... 902 -- 23
Issuance of shares of common stock......................................... 78 56 43
Repurchase of Capital Securities, net...................................... (14,247) (18,811) (9,452)
Repurchase of common stock................................................. -- (8,996) (30,691)
----------- ----------- -----------
Net cash used by financing activities........................................ (375,019) (947,859) (335,319)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents......................... 106,919 (200,483) (64,935)
Cash and cash equivalents at beginning of period............................. 153,736 354,219 419,154
----------- ----------- -----------
Cash and cash equivalents at end of period................................... $ 260,655 $ 153,736 $ 354,219
=========== =========== ===========
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions.......................... $ 23,076 $ 18,749 $ 125,799
Interest-earning deposits.................................................. 111,579 134,987 116,420
Federal funds sold and repurchase agreements............................... 126,000 -- 112,000
----------- ----------- -----------
$ 260,655 $ 153,736 $ 354,219
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................................... $ 75,834 $ 179,564 $ 153,891
Income tax refunds (payments).............................................. (14,816) 18,829 633
Supplemental schedule of non-cash investing and financing activities:
Real estate owned acquired through foreclosure............................. 64,043 140,764 157,111
Reclassification of properties from investment in real estate to real
estate held for sale.................................................... (7,343) 174,480 --
Reclassification of securities available for sale to trading securities.... -- 496,295 --
Exchange of discount loans and loans available for sale for securities..... -- -- 758,032
Exchange of note receivable for real estate held for sale.................. -- 19,000 --
Acquisition of businesses:
Fair value of assets acquired.............................................. $ -- $ -- $ (706,329)
Liabilities assumed........................................................ -- -- 599,855
Stock issued............................................................... -- -- 96,809
----------- ----------- -----------
Cash paid.................................................................. -- -- (9,665)
Less cash acquired......................................................... -- -- 74,115
----------- ----------- -----------
Net cash acquired (paid) for assets acquired............................... $ -- $ -- $ 64,450
=========== =========== ===========
Sale of subsidiary:
Fair value of assets sold.................................................. $ -- $ -- $ 413,121
Liabilities sold........................................................... -- -- (345,327)
Cash sold.................................................................. -- -- 3,936
Gain on sale............................................................... -- -- 50,371
----------- ----------- -----------
Net cash received for assets sold............................................ $ -- $ -- $ 122,101
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
70
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Ocwen Financial Corporation ("OCN") is a financial services company whose
primary business activities consist of the servicing and resolution of
subperforming and nonperforming residential and commercial mortgage loans. We
also specialize in the related development of loan servicing technology and
software for the mortgage and real estate industries. Our consolidated financial
statements include the accounts of OCN and its subsidiaries. We own directly and
indirectly all of the outstanding common and preferred stock of our primary
subsidiaries, Ocwen Federal Bank FSB (the "Bank"), Investors Mortgage Insurance
Holding Company ("IMI"), Ocwen Technology Xchange, Inc. ("OTX") and Ocwen Asset
Investment Corp. ("OAC"). We acquired OAC on October 7, 1999. Our consolidated
financial statements include OAC and its subsidiaries as of that date. We also
own 99.6% of Ocwen Financial Services, Inc. ("OFS"), with the remaining 0.4%
owned by the shareholders of Admiral Home Loan. In August 1999, we closed our
domestic subprime origination business, which we had previously conducted
through OFS. We sold our investment in our foreign subsidiary, Ocwen UK, on
September 30, 1999. Ocwen UK's results of operations for 1999 are included in
our consolidated statements of operations through that date. We have eliminated
all significant intercompany transactions and balances in consolidation.
The Bank is a federally chartered savings bank regulated by the Office of
Thrift Supervision ("OTS").
Reclassification
Certain amounts included in our 2000 and 1999 consolidated financial
statements have been reclassified to conform to the 2001 presentation.
Consolidated Statements of Cash Flows
For purposes of reporting cash flows, our cash and cash equivalents
include cash on hand, interest-bearing and non-interest-bearing deposits and all
investments in highly liquid debt instruments that we purchased with an original
maturity of three months or less. Cash flows associated with items we intended
as hedges of identifiable transactions or events are classified in the same
category as the cash flows from the items being hedged.
Short-Term Highly Liquid Investments
Our short-term highly liquid investments generally consist of federal
funds sold and assets we purchased under agreements to resell. We invest in
these assets to maximize the return on liquid funds. At December 31, 2001, such
investments amounted to $126,000 of federal funds sold which had an overnight
maturity. At December 31, 2000, we had no such investments outstanding. The
average balance of our investment in federal funds sold and assets purchased
under agreements to resell amounted to $200,329 and $128,079 during 2001 and
2000, respectively.
The Federal Reserve System requires that the Bank maintain
non-interest-earning cash reserves against certain of its transaction accounts
and time deposit accounts. Such reserves totaled $5,040 and $5,153 at December
31, 2001 and 2000, respectively.
Securities
We report securities in our statement of financial condition at fair
value. We determine fair value within a range based on third party dealer
quotations, where available, and internal values, subject to an internal review
process.
In 1999 and prior years, when we acquired securities resulting from the
securitization of loans available for sale and sold the securities shortly
thereafter, we accounted for the transaction as the sale of loans and the
purchase and sale of trading securities.
On September 30, 2000, we changed our policy for securities available for
sale and match funded securities to account for these securities as trading. For
these securities, we reported changes in fair value in income in the period of
change. Previously, we accounted for the securities as available for sale, for
which we reported the unrealized gains and losses as a separate component of
accumulated other comprehensive income in stockholders' equity, subject to an
evaluation for other-than-temporary impairment. For each security where we
concluded that all or part of the decrease in value was other-than-temporary, we
charged such amount to earnings, thereby establishing a new cost basis for the
security.
71
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
Loans Available for Sale and Held for Investment
We designate loans originated or purchased by us that we presently do not
intend to hold to maturity as loans available for sale at time of origination or
purchase. We report these loans at the lower of cost, after considering deferred
loan fees and costs, or aggregate market value. We record unrealized losses as a
reduction in earnings and include them under the caption "Gain on
interest-earning assets, net" in our consolidated statements of operations. We
have deferred loan origination fees and certain direct loan origination costs
and included them in the carrying value. Upon the sale of a loan, we include any
unamortized deferred loan fees, net of costs, in the gain or loss on sale of
interest earning assets. We compute gains and losses on disposal of such loans
on a specific identification basis.
We report loans held for investment at amortized cost, less an allowance
for loan losses, discounts, deferred loan fees and undisbursed loan funds. To
qualify for this treatment, upon origination or purchase we must have both the
ability and the intent to hold such loans to maturity. We defer loan origination
fees and certain direct loan origination costs and recognize them over the lives
of the related loans as a yield adjustment that we include in interest income
using the interest method applied on a loan-by-loan basis.
We accrue interest income as it is earned. We place loans on non-accrual
status after being delinquent greater than 89 days or earlier if the borrower is
deemed by management to be unable to continue performance. When we place a loan
on non-accrual status, we reverse interest accrued but not received. In
addition, we suspend the amortization of deferred loan fees when we place a loan
on nonaccrual status. We return loans to accrual status only when we reinstate
the loan and have no doubt regarding ultimate collectibility.
Allowance for Loan Losses
We maintain the allowance for loan losses at a level that, based upon our
evaluation of known and inherent risks in the portfolio, we consider adequate to
provide for losses. We establish specific valuation allowances for impaired
loans in the amount by which the carrying value, before allowance for probable
losses, exceeds the fair value of collateral less costs to dispose on an
individual loan basis, except for single family residential mortgage loans and
consumer loans which we generally evaluate for impairment as homogeneous pools
of loans. We consider a loan to be impaired when, based upon current information
and events, we believe that we will probably be unable to collect on a timely
basis all amounts due according to the contractual terms of the loan agreement.
We measure these impaired loans at the fair value of the loans' underlying
collateral less estimated disposal costs. We may leave impaired loans on accrual
status during the period we are pursuing repayment of the loan. We place these
loans on non-accrual status at such time that either: (i) the loans become 90
days delinquent; or (ii) we determine that the borrower is incapable of, or has
ceased efforts toward, curing the cause of the non-payment. We recognize
impairment losses through an increase in the allowance for loan losses and a
corresponding charge to the provision for loan losses. When we either sell,
transfer to real estate owned ("REO") or charge-off an impaired loan, we remove
valuation allowance from the allowance for loan losses. Charge-offs occur when
we consider loans, or a portion thereof, uncollectible and of such little value
that we consider unwarranted their continuance as bankable assets. We base our
ongoing evaluation of the allowance for loan losses upon an analysis of the
portfolio, historical loss experience, economic conditions and trends,
collateral values and other relevant factors. We may make subsequent adjustments
to the allowance if economic conditions and trends, collateral values and other
relevant factors differ substantially from the assumptions used in making the
evaluation.
Discount Loan Portfolio
We have acquired at a discount certain mortgage loans for which the
borrowers were not current as to principal and interest payments or for which
there was a reason to believe borrowers would be unable to continue to make
their scheduled principal and interest payments. We accounted for the initial
investment in these pools of loans based upon the pricing methodologies used to
bid on the pool. We allocated the acquisition cost to each loan within the pool
when we determined the bid price; we made these allocations based upon an
analysis of the expected future cash flows of each individual loan. We accounted
for the acquisition cost in the aggregate when we determined the bid price using
assumptions concerning the expected future cash flows from groups of loans
within the pool. For those single family residential mortgage loans that are
brought current by the borrower and certain multi-family and commercial real
estate loans that are current and that we believe will remain current, we
accrete the remaining unamortized discount into interest income as a yield
adjustment using the interest method over the contractual maturity of the loan.
For all other loans, we report interest as cash is received. We report gains on
the repayment and discharging of loans as interest income. The resolution
alternatives applied to the discount loan portfolio are:
o The borrower brings the loan current in accordance with original or
modified terms
o The borrower repays the loan or a negotiated amount
o The borrower agrees to a deed-in-lieu of foreclosure, in which case we
classify it as real estate owned and held for sale
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
o We foreclose on the loan and the property is either acquired at the
foreclosure sale by a third-party or by us, in which case it is
classified as real estate owned and held for sale.
In situations where we foreclose upon the collateral, we transfer the
loans to real estate owned upon receipt of title to the property.
Real Estate Owned
We value properties acquired through foreclosure at the lower of the
adjusted cost basis of the loan or fair value less estimated costs of disposal
of the property after the date of foreclosure. We periodically re-evaluate
properties held to determine that we are carrying them at the lower of cost or
fair value less estimated costs to dispose. We recognize sales proceeds and
related costs with passage of title to the buyer and, in cases where we finance
the sale, receipt of sufficient down payment. We report rental income related to
properties as a part of loss on real estate owned, net, as earned. We report
holding and maintenance costs related to properties as period costs as incurred.
We record no depreciation expense related to the properties. We recognize
decreases in the market value of foreclosed real estate after foreclosure as a
valuation allowance on a property specific basis. We report subsequent increases
in market value of the foreclosed real estate as reductions in the valuation
allowance, but only to the extent the valuation allowance reaches zero. We
charge or credit to income such changes in the valuation allowance.
Mortgage Servicing Rights
We acquire mortgage servicing rights which we record at cost. In
connection with our securitization and sale of loans in 1999 and prior years, we
generally retained the rights to service such loans for investors. We recognized
the servicing asset or liability and other retained interests as allocations of
the carrying amounts of the assets sold between the asset sold and the servicing
obligation and other retained interests based on the relative fair value of the
assets sold to the interests retained. We amortize mortgage servicing assets in
proportion to and over the period of estimated net servicing income. We
determine estimated net servicing income using the estimated future balance of
the underlying mortgage loan portfolio which, absent new purchases, declines
over time from prepayments and scheduled loan amortization. We adjust
amortization prospectively in response to changes in estimated projections of
future cash flows. We evaluate the mortgage servicing assets for impairment
based on the fair value of the servicing assets by strata. We stratify the
servicing assets based on legal loan-to-value, seasoning, coupon rate and
delinquency rate. We estimate fair value by discounting underlying loan cash
flows using discount and prepayment rates that we believe market participants
would use. To the extent the carrying value of the servicing assets exceeds
their fair value by strata, we establish a valuation allowance, which we may
adjust in the future, as the value of the servicing assets increase or decrease.
Mortgage Servicing Fees and Advances on Loans Serviced for Others
We receive fees from investors for servicing mortgage loans. We collect
servicing fees, generally expressed as a percent of the unpaid principal
balance, from the borrowers' payments. We also include late charge income and
other ancillary fees, net of amortization of our servicing assets, in servicing
income. During any period in which the borrower is not making payments, we are
required under certain servicing agreements to advance our own funds to meet
contractual principal and interest remittance requirements for certain
investors, pay property taxes and insurance premiums and process foreclosures.
We generally recover such advances from borrowers for reinstated and performing
loans and from investors for foreclosed loans. We record a charge to servicing
income to the extent that we estimate that advances are uncollectible under
provisions of the servicing contracts, taking into consideration historical loss
and delinquency experience, length of delinquency and the amount of the advance.
Investment in Real Estate
We record investment in real estate at cost less accumulated depreciation.
We review our investment in real estate for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
We compute depreciation on a straight-line basis over the estimated useful
lives of the assets as follows:
Buildings and improvements 39 - 40 years
Tenant improvements Lesser of lease term or useful life
Land improvements 20 years
Furniture, fixtures and equipment 5 - 10 years
Our investments in real estate partnerships are accounted for under the
equity method of accounting. Under the equity method of accounting, we record an
investment in the shares or other interests of an investee at cost of the shares
or interests acquired and thereafter periodically increase (decrease) the
investment by our proportionate share of earnings (losses) of the investee and
decrease it by the dividends or distributions that we receive from the investee.
In addition, we acquired certain acquisition, development and construction
loans in which we participate in the residual profits of the underlying real
estate and the borrower had not contributed substantial equity to the project.
As such, we account for these loans under the equity method of accounting as
though we had made an investment in a real estate limited partnership.
We charge expenditures for repairs and maintenance to operations as
incurred but capitalize significant improvements. We classify our leases as
operating. We defer fees and costs incurred in the successful negotiation of
leases and amortize them on a straight-line basis over the terms of the
respective leases. We report rental income on a straight-line basis over the
terms of the respective leases.
Real Estate Held for Sale
We report real estate held for sale at the lower of the carrying amount or
fair value less cost to sell. We classify real estate as held for sale when we
have committed to a plan to sell the assets, and discontinue recording
depreciation. We include gains and losses on the sale of real estate held for
sale in gain on other non-interest earning assets, net, in our consolidated
statement of operations.
Investments in Affordable Housing Properties
Affordable housing partnerships own multi-family residential properties
that have been allocated tax credits under the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). The obligations of the partnership to
sustain qualifying status of the properties covers a 15-year period; however,
tax credits accrue over a 10-year period on a straight-line basis. We account
for investments in affordable housing partnerships that we made on or after May
18, 1995 and in which we invest solely as a limited partner using the equity
method. For our limited partnership investments made before this date, we record
our receipt of income tax credits and other tax benefits on a level yield basis
over the 15-year obligation period and report the tax credits and tax benefits
net of amortization of our investment in the limited partnership as a reduction
of income tax expense. We consolidate affordable housing partnerships in which
we have invested as a limited partner, and through which a subsidiary acts as
the general partner, and include them in our consolidated financial statements.
For all investments in affordable housing partnerships made after May 18, 1995,
we capitalize interest expense and certain direct costs incurred during the
pre-operating period.
We report affordable housing properties for which we have entered into an
agreement to sell at the lower of cost or fair value less costs to sell. We
report all other affordable housing investments at estimated net realizable
value.
Excess of Cost Over Net Assets Acquired
We report the excess of purchase price over net assets of acquired
businesses ("goodwill") at cost and amortize it on a straight-line basis over
the estimated future periods to be benefited, ranging from 3 to 7 years. We
review the carrying value of goodwill for impairment whenever events or changes
in circumstances indicate that it may not be recoverable. Additionally, we
evaluate the amortization periods to determine whether events or circumstances
warrant revised amortization periods. We include the results of operations of
acquired companies in our consolidated statements of operations beginning with
the acquisition date. Effective January 1, 2002 we will no longer amortize our
goodwill, but will review the carrying value annually for impairment in
accordance with the provisions of Statement of Financial Accounting Standard
("SFAS") No. 142. See Current Accounting Pronouncements below.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
Premises and Equipment
We report premises and equipment at cost and, except for land, depreciate
them over their estimated useful lives on the straight-line method as follows:
Buildings 39 years
Land improvements 15 years
Furniture and fixtures 5 years
Computer hardware and software 3 years
Leasehold improvements Life of the lease, with maximum
lease term of 10 years.
Capitalized Software Costs
We currently expense all costs attributable to developing, modifying and
enhancing our OTX technology solutions. Prior to 2000, we expensed costs
incurred up to the establishment of technological feasibility as research and
development costs. Once the products were made available for general release to
customers, we began amortization of the capitalized costs using the
straight-line method over the estimated economic lives of the individual
products. We reduce the unamortized costs by product to an amount not to exceed
the future net realizable value by product at each financial statement date.
Securities Sold Under Agreements to Repurchase
We periodically enter into sales of securities under agreements to
repurchase the same securities ("reverse repurchase agreements"). We report
reverse repurchase agreements as financings and report the obligations to
repurchase securities sold as a liability in our consolidated statements of
financial condition. We report all securities underlying reverse repurchase
agreements as assets in our consolidated statements of financial condition.
Custodians hold these securities in safekeeping.
Excess of Net Assets Acquired Over Purchase Price
The effects of our acquisition of OAC resulted in a new basis of
accounting reflecting fair values of assets and liabilities at the date of
acquisition. We report the excess of assets over the purchase price of acquired
net assets resulting from the acquisition at cost and have amortized it on a
straight-line basis over the estimated future periods to be benefited. Effective
January 1, 2002, we reversed the unamortized balance of the excess of net assets
acquired over purchase price to income in accordance with the provisions of SFAS
No. 141. See Current Accounting Pronouncements below.
Derivative Financial Instruments
We use derivative financial instruments for the purpose of managing our
exposure to adverse fluctuations in interest and foreign currency exchange
rates. While these instruments are subject to fluctuations in value, such
fluctuations are generally offset by the change in value of the underlying
exposures being hedged. We do not enter into any derivative financial
instruments for trading purposes.
We record all of our derivative instruments in the statement of financial
condition at fair value. We record changes in the fair value of derivatives each
period in current earnings or other comprehensive (loss) income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
depending on the type of hedge transaction and the effectiveness of the hedge.
For cash-flow hedge transactions in which we hedge the variability of cash
flows related to a variable-rate asset, liability or a forecasted transaction,
we report the effective portions of the changes in the fair value of the
derivative instruments in other comprehensive (loss) income. The gains and
losses on the derivative instrument that are reported in other comprehensive
(loss) income are reclassified to earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item.
For hedge transactions of net investments in foreign operations, we record
the effective portions of the changes in fair value of the derivative
instruments as a cumulative translation adjustment and include as a component of
accumulated other comprehensive (loss) income in stockholders' equity.
We recognize the ineffective portions of all hedges in our current period
earnings.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
We account for all other derivative instruments used for risk management
purposes that do not meet the hedge accounting criteria and, therefore, do not
qualify for hedge accounting at fair value with changes in fair value recorded
in our consolidated statement of operations.
Effective January 1, 2001, we adopted SFAS No. 133. See Current Accounting
Pronouncements below.
Foreign Currency Translation
We translate assets and liabilities of foreign entities where the
functional currency is not the U.S. dollar into U.S. dollars at the current rate
of exchange existing at the statement of financial condition date and revenues
and expenses at average monthly rates. We include the resulting translation
adjustments as a component of accumulated other comprehensive income in
stockholders' equity.
Income Taxes
We file consolidated Federal income tax returns with our subsidiaries.
Consolidated income tax is allocated among the subsidiaries participating in the
consolidated returns as if each subsidiary that has one or more subsidiaries
filed its own consolidated return and those with no subsidiaries filed separate
returns.
We account for income taxes using the asset and liability method which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. Additionally, we adjust deferred
taxes for subsequent tax rate changes. We conduct periodic evaluations to
determine whether it is more likely than not that some or all of our deferred
tax asset will not be realized. Among the factors considered in this evaluation
are estimates of future earnings, the future reversal of temporary differences
and the impact of tax planning strategies that we can implement if warranted.
Investment in Unconsolidated Entities
We account for our investments in unconsolidated entities under the equity
method of accounting. Under the equity method of accounting, we initially record
an investment in the shares or other interests of an investee at the cost of the
shares or interests acquired and thereafter periodically increase (decrease) the
investment by our proportionate share of the earnings (losses) of the investee
and decrease it by the dividends or distributions that we receive from the
investee.
Basic and Diluted Earnings Per Share
We calculate basic earnings per share based upon the weighted average
number of shares of common stock outstanding during the year. We calculate
diluted earnings per share based upon the weighted average number of shares of
common stock outstanding and all dilutive potential common shares outstanding
during the year. The computation of diluted earnings per share includes the
impact of the exercise of the outstanding options to purchase common stock and
assumes that the proceeds from such issuance are used to repurchase common
shares at fair value. We exclude common stock equivalents from the diluted
calculation if the Company incurs a net loss for the period since the common
stock equivalents would be antidilutive.
Comprehensive Income
Comprehensive income represents the change in equity of a business
enterprise during a period from transactions and other events and circumstances
excluding those resulting from investments by and distributions to owners. We
present comprehensive income beginning with net income and add the elements of
comprehensive income not included in the determination of net income to arrive
at comprehensive income. We present accumulated other comprehensive income net
of income taxes and include unrealized foreign currency translation gains and
losses.
Risks and Uncertainties
In the normal course of business, we encounter two significant types of
risk: economic and regulatory. There are three main components of economic risk:
credit risk, market risk and concentration of credit risk. Credit risk is the
risk of default on our loan portfolios and derivative financial instruments that
results from a borrower's inability or unwillingness to make contractually
required payments. Market risk includes interest rate risk, foreign currency
exchange rate risk, equity price risk and liquidity risk. We are exposed to
interest
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
rate risk to the degree that our interest-bearing liabilities mature or reprice
at different speeds, or different bases, than our interest-earning assets. We
are exposed to foreign currency exchange rate risk in connection with our
investment in non-U.S. dollar functional currency operations and to the extent
our foreign exchange positions remain unhedged. We are exposed to equity price
risk as a result of our investments in the equity securities of other entities.
Market risk also reflects the risk of declines in the valuation of loans held
for sale and trading securities, and in the value of the collateral underlying
loans and the value of real estate held. Concentration of credit risk refers to
the risk that, if we extend a significant portion of the total outstanding
credit to borrowers in a specific geographical area or industry or on the
security of a specific form of collateral, we may experience disproportionately
high levels of default and losses if those borrowers, or the value of such type
of collateral, is adversely affected by economic or other factors that are
particularly applicable to such borrowers or collateral.
We are also exposed to liquidity risk. Our business requires substantial
cash to support the residential loan servicing business, including acquisitions
of mortgage servicing rights and the unfinanced portion of servicing advances,
and to fund holding company operations including OTX operations. In general, we
finance our operations through various sources, including asset specific lines
of credit and financing facilities, some of which have 90% advance rates. As we
continue to increase our purchase of mortgage servicing contracts and fund OTX
operations from other operating cash flows, we must secure additional capital to
support our growth. Failure to secure additional financing sources or to achieve
profitable operations could result in a significant adverse effect on our
financial position and results of operations.
The Bank is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period. The
Bank also undergoes periodic examinations by the regulatory agencies, which may
subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.
The preparation of financial statements in conformity with generally
accepted accounting principles requires that we make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly significant in the near or medium term relate to our determination
of the allowance for loan losses and our valuation of securities, real estate,
affordable housing properties, servicing rights, intangibles and our deferred
tax asset.
Current Accounting Pronouncements
On January 1, 2001, we adopted the provisions of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137
and SFAS No. 138 (collectively, "SFAS No. 133") and recorded a net of tax, a
cumulative effect adjustment in accumulated other comprehensive income to
recognize at fair value the interest rate swap that was designated as a
cash-flow hedging of an outstanding line of credit. The swap matured in April
2001, and we have reclassified to earnings all of this transition adjustment.
Adoption of SFAS 133 did not have a material impact on our use of futures
contracts to hedge the net investments in our foreign subsidiaries, as the SFAS
133 accounting is similar to the pre-existing accounting. In addition, adoption
of SFAS 133 did not have an impact on our other risk management instruments that
do not meet the hedge criteria as these derivatives were already accounted for
at fair value with changes in fair value recognized currently in earnings.
As of December 31, 2000, we adopted the disclosure provisions of SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," as they relate to recognition and
reclassification of collateral and for disclosures relating to securitization
transactions, mortgage servicing rights and collateral.
As of April 1, 2001, we adopted the other provisions of SFAS 140 as they
relate to transfers and servicing of financial assets and extinguishments of
liabilities. Adoption of SFAS 140 did not have a material impact on our results
of operations, financial position or cash flows.
The Emerging Issues Task Force issued EITF 99-20 "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Assets" effective for fiscal quarters beginning after March 15,
2001. On April 1, 2001, we adopted the provisions of EITF 99-20. Adoption of
EITF 99-20 did not have a material impact on our results of operations,
financial position or cash flows.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 141,
"Business Combinations". SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for
using the purchase method for which the date of acquisition is July 1, 2001, or
later.
SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations leaving only the purchase method of accounting. In
addition, SFAS No. 141 requires that intangible assets be recognized separately
from goodwill if they meet one of two criteria - the contractual-legal criterion
or the separability criterion. SFAS No. 141 also expands upon disclosure
requirements by requiring the disclosure of the primary reasons for the business
combination, the allocation of the purchase price to the assets acquired and
liabilities assumed and, if significant, the amount of goodwill by segment and
the amount of the purchase price assigned to each major class of intangible
asset. As of July 1, 2001, we adopted the provisions of SFAS No. 141. The impact
of the adoption of SFAS No. 141 on our results of operations, financial position
and cash flows results from the reversal, as discussed below, of the unamortized
balance of the excess of net assets acquired over purchase price upon the
adoption of SFAS No. 142.
The FASB has also issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Except for goodwill and intangible assets acquired after June 30, 2001,
which are immediately subject to its provisions, SFAS No. 142 is effective
starting with fiscal years beginning after December 15, 2001.
Under SFAS No. 142, goodwill and intangible assets that have indefinite
useful lives will no longer be amortized. Both goodwill and intangible assets
that are not being amortized must be tested annually for impairment. In
addition, SFAS No. 142 requires additional disclosures regarding goodwill and
other intangible assets, including changes in the carrying amount of goodwill
from period to period, the carrying amount of intangible assets by major
intangible asset class and the estimated intangible asset amortization for the
next five years.
We adopted the provisions of SFAS No. 142 effective January 1, 2002. As a
result, we reversed the unamortized balance of the excess of net assets acquired
over purchase price. This reversal resulted in a pre-tax credit to income of
$18,333 on January 1, 2002 that will be reported as the effect of a change in
accounting principle. We expect that the elimination of goodwill amortization
after the adoption of SFAS No. 142 will positively impact pretax net income by
approximately $3,000 in 2002. We have not yet fully determined the impact that
the adoption of other elements of SFAS No. 142, including possible impairment
charges on goodwill or other intangible assets, may have on our financial
position or results of operations.
On October 3, 2001, the FASB has also issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 is designed to establish a
single model for long-lived assets to be disposed of and, as such, supercedes
SFAS 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
We are required to adopt the provisions of SFAS No. 144 effective January
1, 2002. We have not yet determined the impact that the adoption of SFAS No. 144
will have on our results of operations, financial positions or cash flows.
NOTE 2: ACQUISITION AND DISPOSITION TRANSACTIONS
On November 22, 2000, we sold our minority investment in Kensington Group
plc ("Kensington") for proceeds, net of stamp duty and other fees, of
approximately (pound)34,500 or $48,600. As a result of the transaction, we
recorded a pretax gain on sale of $20,025.
On October 7, 1999, Ocwen Acquisition Company ("Acquisition Sub"), a
Virginia corporation and an indirect wholly-owned subsidiary of OCN, merged (the
"Merger") with and into OAC, a Virginia corporation, in accordance with the
Agreement of Merger (the "Merger Agreement") dated as of July 25, 1999 among
OAC, OCN and Acquisition Sub. In accordance with the Merger Agreement, OAC
shareholders (except for OCN or its subsidiaries) received 0.71 shares of OCN
stock for each outstanding share of OAC common stock. We issued a total of
12,371,750 shares of OCN stock at a value of $96,809 to OAC shareholders. Before
the Merger, we owned, through IMI, 1,540,000 or 8.12% of the outstanding common
stock of OAC and 1,808,733 units or 8.71% of the outstanding partnership units
of Ocwen Partnership L.P. ("OPLP"). OPLP is the operating partnership subsidiary
of OAC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
The Merger, which resulted in our acquisition of the remaining interest in
OAC, reflected an aggregate purchase price of $101,271, including direct costs
of the acquisition. The Merger was accounted for as a purchase, and the purchase
price was allocated to OAC's assets and liabilities based on their fair market
values as follows:
Purchase price.................................................. $ 101,271
Fair value of net assets........................................ 161,313
-----------
Excess of net assets acquired over purchase price............... $ 60,042
===========
We have amortized the excess of net assets acquired over the purchase
price on a straight-line basis. Amortization in 2000 includes an additional
amount of $2,330 resulting from the reduction in the estimated life of the
excess of net assets acquired over the purchase price from 60 months to 39
months, effective October 1, 2000, as a result of our acceleration of projected
sale dates for the acquired assets. Effective January 1, 2002, we reversed the
unamortized balance of net assets acquired over our purchase price to income in
accordance with the provisions FAS 141 (see Note 1, above). Results of
operations for OAC are included in our consolidated statement of operations from
the date of merger.
On September 30, 1999, we sold all the shares of our wholly-owned
subsidiary, Ocwen UK, to Malvern House Acquisition Limited for the pound
sterling equivalent of $122,101 in cash. Ocwen UK was originally formed to
acquire substantially all of the assets, and certain of the liabilities, of the
United Kingdom operations of Cityscape Financial Corp., and commenced operations
on April 24, 1998. As a result of the transaction, we recorded a pretax gain on
sale of $50,371.
On June 2, 1999, OTX acquired substantially all of the assets of Synergy
Software, LLC ("Synergy"), a developer of commercial and multi-family mortgage
servicing systems, for $5,000. The acquisition was accounted for as a purchase.
The excess of purchase price over net assets acquired related to this
transaction amounted to $4,948.
NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS
A majority of our assets, liabilities and off-balance sheet instruments
and commitments are considered financial instruments. For the majority of our
financial instruments, principally loans and deposits, fair values are not
readily available since there are no available trading markets as characterized
by current exchanges between willing parties. Accordingly, fair values can only
be derived or estimated using various valuation techniques, such as computing
the present value of estimated future cash flows using discount rates
commensurate with the risks involved. However, the determination of estimated
future cash flows is inherently subjective and imprecise. In addition, for those
financial instruments with option-related features, prepayment assumptions are
incorporated into the valuation techniques. Minor changes in assumptions or
estimation methodologies can have a material effect on these derived or
estimated fair values.
The fair values reflected below are indicative of the interest rate
environments as of December 31, 2001 and 2000, and do not take into
consideration the effects of interest rate fluctuations. In different interest
rate environments, fair value results can differ significantly, especially for
certain fixed-rate financial instruments and non-accrual assets. In addition,
the fair values presented do not attempt to estimate the value of our fee
generating businesses and anticipated future business activities. In other
words, they do not represent our value as a going concern. Furthermore, the
differences between the carrying amounts and the fair values presented may not
be realized.
Reasonable comparability of fair values among financial institutions is
difficult due to the wide range of permitted valuation techniques and numerous
estimates that must be made in the absence of secondary market prices. This lack
of objective pricing standards introduces a degree of subjectivity to these
derived or estimated fair values. Therefore, while disclosure of estimated fair
values of financial instruments is required, readers are cautioned in using this
data for purposes of evaluating our financial condition.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
The methodologies used and key assumptions made to estimate fair value,
the estimated fair values determined and recorded carrying values follow:
Cash and Cash Equivalents
We have valued cash and cash equivalents at their carrying amounts as
these are reasonable estimates of fair value given the relatively short period
of time between origination of the instruments and their expected realization.
Securities
We adjust our securities portfolio to fair value within a range based on
third party dealer quotations, where available, and internal values, subject to
an internal review process. For those securities which do not have an available
market quotation, we will request market values and underlying assumptions from
the various securities dealers that underwrote, are currently financing the
securities or have had prior experience with the type of security to be valued.
When we obtain quotations from two or more dealers, we generally use the average
dealer quote.
Loans Available for Sale, Loans, Match Funded Loans and Securities, and Discount
Loans
We estimate the fair value of our performing loans based upon quoted
market prices for similar whole loan pools. We base the fair value of our
non-performing loans on estimated cash flows discounted using a rate
commensurate with the risk associated with the estimated cash flows. We estimate
the fair value of our match funded loans and our discount loan portfolio based
upon current market yields at which recent pools of similar mortgages have
traded taking into consideration the timing and amount of expected cash flows.
We mark our match funded securities to fair value in the same manner as
securities.
Investment Securities
Our investment securities represent required holdings of specified levels
of common stock issued by the Federal Home Loan Bank. These securities are
subject to regulatory restrictions that limit our ability to dispose of them
freely and we carry them at cost.
Advances on Loans and Loans Serviced for Others
We value advances we make on our loans and loans we service for others at
their carrying amounts because they have no stated maturity, do not bear
interest and we believe that there is no substantial risk of uncollectibility.
Deposits
The fair value of our demand deposits, savings accounts and money market
deposits is the amount payable on demand at the reporting date. We estimate the
fair value of fixed-maturity certificates of deposit by discounting the required
cash payments at the market rates offered for deposits with similar maturities
on the respective financial statement dates.
Borrowings
We base the fair value of our bond-match funded loan agreements, notes and
debentures and Capital Securities on quoted market prices. The fair value of our
other borrowings, including securities sold under agreements to repurchase and
obligations outstanding under lines of credit, approximates carrying value
because these borrowings are either short-term or bear interest at a rate that
is adjusted regularly based on a market index.
Derivative Financial Instruments
We base the fair values of our derivative financial instruments on quoted
market prices.
80
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
Loan Commitments, Letters of Credit and Guarantees
The fair values of loan commitments, letters of credit and guarantees are
estimated considering the difference between interest rates on the respective
financial statement dates and the committed rates.
The carrying amounts and the estimated fair values of our financial
instruments are as follows:
December 31, 2001 December 31, 2000
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial assets:
Interest earning and non-interest earning cash....... $ 134,655 $ 134,655 $ 153,736 $ 153,736
Federal funds sold................................... 126,000 126,000 -- --
Trading securities................................... 226,249 226,249 390,242 390,242
Loans available for sale............................. 1,040 1,040 10,610 10,610
Investment securities................................ 4,659 4,659 13,257 13,257
Loan portfolio, net.................................. 64,925 64,925 93,414 93,408
Discount loan portfolio, net......................... 119,327 127,133 536,028 579,909
Match funded assets.................................. 174,351 172,306 116,987 109,635
Advances on loans and loans serviced for others...... 283,183 283,183 227,055 227,055
Financial liabilities:
Deposits............................................. 656,878 679,124 1,202,044 1,219,952
Escrow deposits on loans and loans serviced for
others............................................. 73,565 73,565 56,316 56,316
Securities sold under agreements to repurchase....... 79,405 79,405 -- --
Bond-match funded agreements......................... 156,908 156,996 107,050 108,783
Obligations outstanding under lines of credit........ 84,304 84,304 32,933 32,933
Notes, debentures and other interest-bearing
obligations........................................ 160,305 159,590 173,330 152,277
Capital Securities................................... 61,159 50,762 79,530 48,911
Derivative financial instruments:
Interest rate swaps.................................. -- -- -- 59
Caps and floors...................................... 404 404 271 499
British Pound futures................................ (235) (235) (339) (339)
Canadian Dollar futures.............................. 353 353 (242) (242)
Other:
Loan commitments..................................... -- 3,432 -- 11,259
Letters of credit.................................... -- 210 -- 6,968
Guarantees........................................... -- 7,035 -- 7,035
81
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 4: Trading Securities
As discussed in Note 1, we reclassified our securities available for sale
to trading on September 30, 2000. The fair value of our trading securities are
as follows at December 31:
2001 2000
----------- -----------
Collateralized mortgage obligations (AAA-rated).............................................. $ 161,191 $ 277,595
=========== ===========
Subordinates and residual securities:
Single family residential:
BB-rated subordinates.................................................................. $ 625 $ 4,563
B-rated subordinates................................................................... 799 2,911
Unrated subordinates................................................................... 1,008 9,361
Unrated subprime residuals ............................................................ 60,049 93,176
----------- -----------
62,481 110,011
Multi-family and commercial unrated subordinates.......................................... 2,577 2,636
----------- -----------
$ 65,058 $ 112,647
=========== ===========
At December 31, 2001, we had pledged securities from our portfolio of
collateralized mortgage obligation (AAA-rated) for the following purposes:
Fair Value
----------
Securities sold under agreements to repurchase from the FHLB of New York................................. $ 81,764
Security for certificates of deposit in excess of $100 issued to municipalities in the State of New
Jersey............................................................................................... 1,005
Overdraft protection with the Federal Reserve Bank of New York........................................... 4,231
----------
$ 87,000
==========
At December 31, 2001, we held securities with an aggregate fair value of
$36,181 and $59,634 that were issued by Freddie Mac and Fannie Mae,
respectively.
A profile of the maturities of our trading securities at December 31,
2001, follows. Mortgage-backed securities are included based on their
weighted-average maturities, reflecting anticipated future prepayments.
Collateralized Mortgage Obligations Subordinates and Residuals
--------------------------------------- ---------------------------------------
Weighted Average Weighted Average
Yield Fair Value Yield Fair Value
---------------- ------------------- ---------------- --------------------
Due within one year..................... 1.07% $ 150,002 50.70% $ 8,585
Due after 1 through 5 years............. 2.87 11,189 31.98 27,681
Due after 5 through 10 years............ -- -- 30.52 21,555
Due after 10 years...................... -- -- 24.17 7,237
------------ ------------
$ 161,191 $ 65,058
============ ============
Realized and unrealized gain (loss) on trading and match funded securities
for the year ended December 31, 2001, was comprised of the following:
Unrealized gain (loss):
Trading securities........................................... $ 3,125
Match funded securities...................................... 2,088
-----------
5,213
-----------
Realized gain (loss):
Trading securities........................................... 11,117
Match funded securities...................................... --
-----------
11,117
-----------
$ 16,330
===========
82
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
Our residual and subordinate securities classified as trading securities
at December 31, 2001 include retained interests with a fair value of $25,274
from securitizations of loans completed in prior years. We completed no
securitizations of loans during the years ended December 31, 2001 and 2000.
The key economic assumptions we used to estimate the fair value of these
retained interests at December 31, 2001 were as follows:
Weighted Average
----------------
Discount rate............................................... 18.84%
Projected prepayments....................................... 23.21%
Projected average life...................................... 3.97 years
Projected annual loss rates................................. 3.07%
Static pool losses.......................................... 12.74%
At December 31, 2001, the effect on the fair value of our retained
interests caused by immediate adverse changes in the assumptions shown above
would be as follows:
Decrease
------------
Discount rate:
Impact of a +10% change...................................... $ (1,911)
Impact of a +20% change...................................... (3,604)
Prepayments:
Impact of a -10% change...................................... (258)
Impact of a -20% change...................................... (543)
Loss rates:
Impact of a +10% change...................................... (1,223)
Impact of a +20% change...................................... (2,315)
These sensitivities are hypothetical and are presented for illustrative
purposes only. We applied the changes in the assumptions regarding prepayments
and loss rates to the cash flows of the loans underlying the retained
securities. We applied changes in assumptions regarding discount rates to the
cash flows of the securities. Changes in fair value based upon a change in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. We
calculated the changes in assumptions presented in the table above without
changing any other assumption. In reality, changes in one assumption may result
in changes in another, which may magnify or offset the sensitivities presented.
For example, changes in market interest rates may simultaneously impact
prepayments, losses and the discount rate.
At and for the year ended December 31, 2001, the following information is
provided regarding securitized loans and related financial assets we managed:
Current unpaid principal balance of securitized loans............ $ 801,863
Delinquencies of securitized loans (30 days past due)............ 255,127
Losses, net of recoveries, on securitized loans.................. 50,348
83
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 5: LOAN PORTFOLIO
Our loan portfolio consisted of the following at December 31:
Carrying Value
------------------------
2001 2000
---------- ----------
Loan type:
Single family residential.......................... $ 400 $ 848
---------- ----------
Multi-family residential:
Permanent........................................ 277 6,083
Construction..................................... 19,714 39,123
---------- ----------
Total multi-family residential................... 19,991 45,206
---------- ----------
Commercial real estate:
Hotel construction............................... 30,115 38,153
Office .......................................... 20,350 20,817
Land ............................................ -- 1
---------- ----------
Total commercial real estate................... 50,465 58,971
---------- ----------
Other ............................................. 209 48
---------- ----------
Total loans.................................... 71,065 105,073
Undisbursed loan funds............................. (2,914) (8,879)
Unamortized deferred fees.......................... (29) (372)
Allowance for loan losses.......................... (3,197) (2,408)
---------- ----------
Loans, net..................................... $ 64,925 $ 93,414
========== ==========
Our loan portfolio is secured by mortgages on properties located
throughout the United States. The following table sets forth the five states in
which the largest amount of properties securing our loans were located at
December 31, 2001:
Single Family Multi-family Commercial
Residential Residential Real Estate Consumer Unsecured Total
----------- ----------- ----------- ---------- ---------- ----------
New York....................... $ -- $ -- $ 15,766 $ 8 $ -- $ 15,774
Delaware....................... 240 -- 14,349 -- -- 14,589
Connecticut.................... -- -- 12,800 -- -- 12,800
New Jersey..................... 35 8,563 -- 1 -- 8,599
Virginia....................... -- -- 7,550 -- -- 7,550
Other (1)...................... 125 11,428 -- -- 200 11,753
---------- ---------- ---------- ---------- ---------- ----------
Total....................... $ 400 $ 19,991 $ 50,465 $ 9 $ 200 $ 71,065
========== ========== ========== ========== ========== ==========
<FN>
(1) Consists of properties located in 5 other states, none of which aggregated
over $5,645 in any one state.
</FN>
84
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
The following table presents a summary of our non-performing loans,
allowance for loan losses and significant ratios for our loan portfolio at and
for the years ended December 31:
2001 2000 1999
-------------- -------------- --------------
Non-performing loans:
Single family residential................................... $ -- $ 316 $ 982
Multi-family residential.................................... 17,201 13,373 11,037
Commercial real estate and other............................ 5 4,581 19,360
-------------- -------------- --------------
$ 17,206 $ 18,270 $ 31,379
============== ============== ==============
Allowance for loan losses:
Balance, beginning of year.................................. $ 2,408 $ 7,259 $ 4,928
Provision for loan losses................................... 2,518 4 1,636
Charge-offs................................................. (1,729) (4,855) (8)
Acquired allowance (OAC acquisition)........................ -- -- 703
-------------- -------------- --------------
Balance, end of year........................................ $ 3,197 $ 2,408 $ 7,259
============== ============== ==============
Significant ratios:
Non-performing loans as a percentage of:
Total loans.............................................. 25.26% 19.07% 19.06%
Total assets............................................. 1.01 0.81 0.96
Allowance for loan losses as a percentage of:
Total loans.............................................. 4.69% 2.51% 4.41%
Non-performing loans..................................... 18.58 13.18 23.13
If non-accrual loans had been current in accordance with their original
terms, interest income for the years ended December 31, 2001, 2000 and 1999,
would have been greater by approximately $1,175, $1,919 and $1,139,
respectively. We have accrued no interest on loans greater than 89 days past
due.
At December 31, 2001, we had no commercial loans that were impaired. The
average carrying value of impaired loans during 2001 was $2,226. At December 31,
2000, we had five commercial loans with an aggregate carrying value of $1,877,
net of allowance for loan losses of $361, which were impaired. The average
carrying value of impaired loans for the year ended December 31, 2000 was
$8,988. At December 31, 1999, we had two commercial loans with an aggregate
carrying value of $1,793, net of allowance for loan losses of $1,982, which were
impaired.
The following table sets forth the geographic distribution of properties
securing our non-accrual loans in the loan portfolio at December 31, 2001:
Multi-family
Residential Consumer Total
----------- ---------- ----------
New Jersey........................ $ 7,516 $ -- $ 7,516
California........................ 5,519 -- 5,519
Tennessee......................... 4,166 -- 4,166
New York.......................... -- 5 5
---------- ---------- ----------
Total.......................... $ 17,201 $ 5 $ 17,206
========== ========== ==========
85
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 6: DISCOUNT LOAN PORTFOLIO
Our discount loan portfolio consisted of the following at December 31:
2001 2000
--------------- ---------------
Single family residential loans.......................................... $ 56,699 $ 289,883
--------------- ---------------
Multi-family residential loans........................................... 13,328 105,591
--------------- ---------------
Commercial real estate loans:
Office buildings.................................................... 43,913 77,608
Hotels.............................................................. 911 63,967
Retail properties................................................... 47,492 85,924
Other properties.................................................... 607 36,511
--------------- ---------------
92,923 264,010
--------------- ---------------
Other loans.............................................................. 10,337 17,188
--------------- ---------------
Total discount loans................................................ 173,287 676,672
--------------- ---------------
Unaccreted discount:
Single family residential loans..................................... (16,460) (74,184)
Multi-family residential loans..................................... (650) (5,176)
Commercial real estate loans........................................ (19,296) (40,413)
--------------- ---------------
(36,406) (119,773)
--------------- ---------------
136,881 556,899
Allowance for loan losses................................................ (17,554) (20,871)
--------------- ---------------
Discount loans, net...................................................... $ 119,327 $ 536,028
=============== ===============
Our discount loan portfolio is secured by mortgages on properties located
throughout the United States. The following table sets forth the five states in
which the largest amount of properties securing our discount loans were located
at December 31, 2001:
Commercial
Single Family Multi-Family Real Estate
Residential Residential and Other Total
----------- ----------- ----------- -----------
Wisconsin.................................. $ 84 $ -- $ 34,414 $ 34,498
New York................................... 2,088 -- 26,631 28,719
Texas...................................... 2,497 4,127 948 7,572
Oklahoma................................... 188 6,270 1,033 7,491
California................................. 2,483 -- 4,400 6,883
Other (1).................................. 32,899 2,281 16,538 51,718
----------- ----------- ----------- -----------
$ 40,239 $ 12,678 $ 83,964 $ 136,881
=========== =========== =========== ===========
<FN>
(1) Consists of properties located in 39 other states, none of which
aggregated over $3,856 in any one state.
</FN>
86
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
The following table sets forth the contractual payment status at December
31 of the loans in our discount loan portfolio:
2001 2000
------------ ------------
Loans without Forbearance Agreements:
Current................................................................... $ 46,887 $ 270,106
Past due 31 days to 89 days............................................... 2,071 5,027
Past due 90 days or more.................................................. 72,070 222,216
------------ ------------
Subtotal............................................................... 121,028 497,349
------------ ------------
Loans with Forbearance Agreements:
Current................................................................... 1,815 3,273
Past due 31 days to 89 days............................................... 453 1,622
Past due 90 days or more (1)(2)........................................... 13,585 54,655
------------ ------------
Subtotal............................................................... 15,853 59,550
------------ ------------
$ 136,881 $ 556,899
============ ============
<FN>
(1) Included $8,135 of loans which were less than 90 days past due under the
terms of the forbearance agreements at December 31, 2001, of which $6,071
were current and $2,064 were past due 31 to 89 days.
(2) Included $35,474 of loans which were less than 90 days past due under the
terms of the forbearance agreements at December 31, 2000, of which $33,776
were current and $1,698 were past due 31 to 89 days.
</FN>
The following schedule presents a summary of our allowance for loan losses
and significant ratios for our discount loans at and for the years ended
December 31:
2001 2000 1999
----------- ----------- -----------
Allowance for loan losses:
Balance at beginning of year...................................... $ 20,871 $ 19,181 $ 21,402
Provision for loan losses......................................... 12,960 15,266 5,434
Charge-offs....................................................... (16,761) (14,213) (8,052)
Recoveries........................................................ 484 637 397
----------- ----------- -----------
Balance at end of year............................................ $ 17,554 $ 20,871 $ 19,181
=========== =========== ===========
Significant ratios:
Allowances for loan losses as a percentage of:
Total loans (1)............................................... 12.82% 3.75% 2.06%
Total assets.................................................. 1.03% 0.93% 0.58%
Net charge-offs as a percentage of average discount loans......... (4.54)% (1.66)% (0.80)%
<FN>
(1) Total loans are net of unaccreted discount.
</FN>
At December 31, 2001, we had seven commercial discount loans with an
aggregate carrying value of $4,771, net of allowance for loan losses of $591,
that were impaired. The average carrying value of our impaired loans during 2001
was $21,925. At December 31, 2000, we had six commercial discount loans with an
aggregate carrying value of $19,744, net of allowance for loan losses of $1,267,
which were impaired. Impaired discount loans at December 31, 2000 were primarily
comprised of one loan with a carrying value of $17,896 and secured by a hotel
property. The average carrying value of our impaired loans for the year ended
December 31, 2000 was $25,572.
87
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 7: MATCH FUNDED ASSETS
Our match funded assets are comprised of the following at December 31:
2001 2000
---------- ----------
Single family residential loans (1)................ $ 53,123 $ 80,834
Allowance for loan losses.......................... (170) (285)
---------- ----------
Match funded loans, net......................... 52,953 80,549
---------- ----------
Match funded securities............................ 19,435 36,438
---------- ----------
Match funded advances on loans serviced for others:
Principal and interest.......................... 65,705 --
Taxes and insurance............................. 21,900 --
Other........................................... 14,358 --
---------- ----------
101,963 --
---------- ----------
Balance at end of period........................... $ 174,351 $ 116,987
========== ==========
(1) Included $4,405 and $2,831 of non-performing loans at December 31, 2001
and 2000, respectively.
Match funded loans were acquired as a result of our acquisition of OAC.
These loans were securitized and transferred by OAC to OAC Mortgage Residential
Securities, Inc., a real estate mortgage investment conduit (the "Trust") on
November 13, 1998. On that date, the Trust issued two classes of notes secured
by the related group of mortgage loans. At December 31, 2001, Loan Group I
consisted of approximately 383 mortgage loans with original terms of up to 30
years that are secured by first liens on single family residential properties.
At that same date, Loan Group II consisted of approximately 239 mortgage loans
with original terms of up to 30 years that are secured by first or second liens
on single family residential properties. Upon the transfer, OAC received
approximately $173,900 of proceeds. The transfer did not qualify as a sale for
accounting purposes. Accordingly, the proceeds received from the transfer are
reported as a secured borrowing with pledge of collateral (bonds-match funded
agreements) in our consolidated statement of financial condition. See Note 16.
Our match funded loans are secured by mortgages on properties located
throughout the United States. The following table sets forth the five states in
which the largest amount of properties securing our loans were located at
December 31, 2001:
Michigan........................................................ $ 8,731
California...................................................... 6,078
Texas........................................................... 4,201
Florida......................................................... 3,183
Massachusetts................................................... 3,048
Other (1)....................................................... 27,882
----------
$ 53,123
==========
(1) Consists of properties located in 40 other states, none of which
aggregated over $2,244 in any one state.
Match funded securities, which had a fair value of $19,435, resulted from
our transfer of four unrated residual securities to Ocwen NIMs Corp. on December
16, 1999 in exchange for $43,000 in non-recourse notes (Series 1999-OAC1). Upon
the transfer, we received approximately $40,100 of proceeds. The transfer did
not qualify as a sale for accounting purposes. Accordingly, the amount of
proceeds from the transfer is reported as a secured borrowing with pledge of
collateral (bonds-match funded agreements) in our consolidated statement of
financial condition. See Note 16.
88
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
The following table summarizes the maturities of our match-funded
securities at December 31, 2001. Maturities are based on weighted-average unpaid
principal balance and reflect anticipated future prepayments based on a
consensus of dealers in the market.
Fair Value
----------
Due within one year............................................... $ 4,334
Due after 1 through 5 years....................................... 6,319
Due after 5 through 10 years...................................... 3,598
Due after 10 years................................................ 5,184
----------
$ 19,435
==========
As disclosed in Note 4, the change in net unrealized holding gains or
losses related to match funded securities are included in gain (loss) on trading
and match funded securities, net, in our consolidated statement of operations.
Match funded advances on loans serviced for others resulted from the
transfer of certain advances on loans serviced for others to a third party in
December 2001 in exchange for cash. The transfer did not qualify as a sale for
accounting purposes. As a result, the proceeds we received from the transfer are
reported as a secured borrowing with pledge of collateral (bonds-match funded
agreements) in our consolidated statement of financial condition. See Note 16.
NOTE 8: REAL ESTATE OWNED
Our real estate owned consists almost entirely of properties acquired by
foreclosure or deed-in-lieu thereof on loans in our discount loan portfolio.
Real estate owned, net of valuation allowance, is held for sale and came from
the following loan portfolios:
2001 2000
---------- ----------
Discount loan portfolio:
Single family residential........................ $ 16,150 $ 55,751
Multi-family residential......................... -- 149
Commercial real estate........................... 93,664 88,214
---------- ----------
Total........................................ 109,814 144,114
Loan portfolio...................................... 377 1,384
Loans available for sale............................ 274 921
---------- ----------
Total........................................ $ 110,465 $ 146,419
========== ==========
The following table sets forth by type of property certain geographical
information related to our real estate owned at December 31, 2001:
Multi-family Residential
Single Family Residential and Commercial Total
------------------------- ------------------------ ------------------------
No. of No. of No. of
Amount Properties Amount Properties Amount Properties
--------- ---------- ---------- ---------- ---------- ----------
Florida................................. $ 407 10 $ 50,287 4 $ 50,694 14
Michigan................................ 1,320 34 21,606 1 22,926 35
Georgia................................. 689 7 14,361 1 15,050 8
Minnesota............................... 117 2 4,915 1 5,032 3
Washington.............................. 231 4 2,447 1 2,678 5
Other (1)............................... 13,660 323 425 1 14,085 324
-------- -------- --------- -------- --------- --------
Total................................ $ 16,424 380 $ 94,041 9 $ 110,465 389
======== ======== ========= ======== ========= ========
<FN>
(1) Consists of properties located in 38 other states, none of which
aggregated over $2,059 in any one state.
</FN>
89
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
The following schedule presents the activity, in aggregate, in the
valuation allowance on our real estate owned for the years ended December 31:
2001 2000 1999
---------- ---------- ----------
Balance at beginning of year........... $ 18,142 $ 17,181 $ 15,325
Provision for losses................... 17,766 26,674 28,008
Charge-offs and sales.................. (16,810) (25,713) (26,152)
---------- ---------- ----------
Balance at end of year................. $ 19,098 $ 18,142 $ 17,181
========== ========== ==========
NOTE 9: REAL ESTATE HELD FOR SALE
Our real estate held for sale consisted of the following at December 31:
2001 2000
---------- ----------
Shopping centers (1)................................ $ -- $ 22,670
Assisted living facilities (2)...................... 13,418 --
---------- ----------
$ 13,418 $ 22,670
========== ==========
(1) During 2001, we transferred our shopping center in Bradenton, Florida to
real estate held for investment after the contract to sell the property
was terminated. We recorded impairment charges of $1,471 on this property
during 2001. Also, during 2001, we sold another shopping center located in
Havre, Montana, which had a carrying value of $1,034, for no gain.
(2) Our three assisted living facilities were transferred from real estate
held for investment during 2001. Impairment charges of $2,225 were
recorded on these properties at the time of transfer based on anticipated
sales proceeds.
See Note 10.
90
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 10: INVESTMENT IN REAL ESTATE
Our investment in real estate consisted of the following at December 31:
2001 2000
------------- -------------
Properties held for investment (1):
Office buildings.................................................................... $ 32,132 $ 32,112
Retail.............................................................................. 29,637 9,515
Building improvements............................................................... 17,513 11,346
Tenant improvements and lease commissions........................................... 4,537 1,744
Furniture and fixtures.............................................................. 52 52
------------- -------------
83,871 54,769
Accumulated depreciation............................................................ (5,327) (2,359)
------------- -------------
78,544 52,410
------------- -------------
Loans accounted for as investments in real estate (2):
Multi-family residential............................................................ -- 97
Nonresidential...................................................................... 30,436 45,689
------------- -------------
30,436 45,786
------------- -------------
Properties held for lease (3):
Land and land improvements.......................................................... -- 1,256
Building............................................................................ -- 15,641
Accumulated depreciation............................................................ -- (855)
------------- -------------
-- 16,042
------------- -------------
Investment in real estate partnerships (4)............................................. 7,916 8,523
------------- -------------
$ 116,896 $ 122,761
============= =============
<FN>
(1) We acquired these properties as a result of our acquisition of OAC. Our
properties held for investment at December 31, 2001 are comprised of one
commercial office building and two retail shopping centers. During 2001,
we transferred our shopping center in Bradenton, Florida from held for
sale to held for investment.
(2) We acquired certain acquisition, development and construction loans in
January 2000 in which we participate in the expected residual profits of
the underlying real estate, and where the borrower has not contributed
substantial equity to the project. As such we account for these loans
under the equity method of accounting as though we had an investment in a
real estate limited partnership.
(3) Consisted of three assisted living facilities which were transferred to
real estate held for sale during 2001.
(4) Consists of interests in four limited partnerships operating as real
estate ventures, consisting of multi-family type properties.
</FN>
NOTE 11: MORTGAGE SERVICING
Under contractual servicing agreements with investors, we service mortgage
and non-mortgage loans which we do not own. The total unpaid principal balance
of such loans we serviced for others was $23,164,012 and $11,360,523 at December
31, 2001 and 2000, respectively, and is excluded from our consolidated
statements of financial condition. We similarly exclude funds representing
collections of principal and interest we have received from borrowers which are
on deposit with an unaffiliated bank from our statements of financial condition.
Those funds amounted to $324,027 and $101,461 at December 31, 2001 and 2000,
respectively. Domestic servicing fees and other servicing-related income we
earned on loans we serviced for others, included in servicing and other fees,
amounted to $113,002, $78,685 and $73,224 for the years ended December 31, 2001,
2000 and 1999, respectively. In general, these servicing agreements include
guidelines and procedures for servicing the loans, including servicing,
remittance and reporting requirements, among other provisions.
91
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
We earn servicing and sub-servicing income primarily on mortgage loans
secured by real estate in 50 states. At December 31, 2001, the geographic
distribution based on the unpaid principal balance of the loans we serviced was
as follows:
No. of Loans (2) Amount (2)
---------------- ------------
California..................................... 48,079 $ 5,581,275
New York....................................... 19,087 1,685,048
Florida........................................ 24,254 1,537,766
Illinois....................................... 12,649 1,275,094
Texas.......................................... 20,417 1,188,924
Other (1)...................................... 179,067 11,895,905
--------- ------------
303,553 $ 23,164,012
========= ============
(1) Consisted of loans in 45 other states, none of which aggregated over
$794,206 in any one state.
(2) Included 1,571 non-mortgage loans with an unpaid principal balance of
$220,343.
The risk inherent in such concentrations is dependent upon regional and
general economic conditions that affect property values.
The unamortized balance of our servicing rights was as follows at December
31:
2001 2000
---------- ----------
Unamortized balance................................. $ 101,107 $ 53,056
Valuation allowance................................. -- (1,630)
---------- ----------
$ 101,107 $ 51,426
========== ==========
The following table summarizes the activity in our servicing rights for
the years ended December 31:
2001 2000
---------- ----------
Balance at the beginning of year.................... $ 51,426 $ 11,683
Purchases........................................... 79,522 49,779
Amortization........................................ (29,841) (10,036)
---------- ----------
Balance at the end of the year...................... $ 101,107 $ 51,426
========== ==========
The unamortized balance of $101,107 at December 31, 2001 was comprised of
$100,765 of purchased servicing rights and $342 of mortgage servicing rights
retained in connection with loan securitizations we completed in prior years. At
December 31, 2001, we estimated the fair value of our servicing rights to be
$200,528.
Advances related to our loans serviced for others consisted of the
following at December 31:
2001 (1)(2) 2000 (1)
------------- -------------
Principal and interest....................... $ 107,319 $ 95,191
Taxes and insurance.......................... 99,972 64,159
Other........................................ 69,543 44,697
------------- -------------
$ 276,834 $ 204,047
============= =============
(1) Does not include advances on our loan portfolios of $6,349 and $23,008 at
December 31, 2001 and 2000, respectively.
(2) Does not include $65,706 of principal and interest advances, $21,900 of
taxes and insurance advances and $14,358 of other advances that are
reported as part of match funded assets. See Note 7.
92
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 12: AFFORDABLE HOUSING PROPERTIES
Our investments in affordable housing properties were as follows at
December 31:
2001 2000
--------------- ---------------
Investments solely as a limited partner made before May 18, 1995................ $ 21,768 $ 53,399
Investments solely as a limited partner made on or after May 18, 1995........... 6,838 15,185
Investments both as a limited and, through subsidiaries, as a general partner... 73,463 74,228
--------------- ---------------
$ 102,069 $ 142,812
=============== ===============
The qualified affordable housing projects underlying our investments in
affordable housing properties are geographically located throughout the United
States. At December 31, 2001, our largest single investment was $14,028, which
related to a project located in Sacramento, California.
We record income on our limited partnership investments made before May
18, 1995 under the level yield method as a reduction of income tax expense. This
income amounted to $388, $2,093 and $2,953 for the years ended December 31,
2001, 2000 and 1999, respectively. For 2000, we also recorded additional income
tax expense of $6,875 related to certain of our limited partnership investments
made before May 18, 1995 resulting from the sale of those investments in advance
of their maturity for tax credit purposes. As a result, we could not realize all
of the deferred tax benefit that had been previously recorded by us under the
level yield method, and we reversed the related accrual for the excess benefits.
Had we accounted for our investments under the level yield method under the
equity method, income would have been reduced by $88, $337 and $60 for the years
ended December 31, 2001, 2000 and 1999, respectively. For limited partnership
investments made after May 18, 1995, and for investments as a limited and,
through subsidiaries, as a general partner, we recognized tax credits of $1,690,
$7,359 and $15,289 for the years ended December 31, 2001, 2000 and 1999,
respectively, and recorded a loss after depreciation of $993, $3,483 and $6,291
from operations on the underlying real estate for the years ended December 31,
2001, 2000 and 1999, respectively.
Included in our gains on other non-interest earning assets, net, for the
years ended December 31, 2001, 2000 and 1999, are gains (losses) of $(956), $497
and $6,591, respectively, on the sales of certain of our investments in
affordable housing properties which had carrying values of $11,469, $27,402 and
$41,744, respectively, at time of sale.
During 2001, we recorded impairment charges of $15,587 on properties not
subject to sales contracts to reflect their estimated net realizable values.
During 2000, we entered into transactions to sell twenty-five of our low-income
housing tax credit properties, together with the related tax credits. Although
these transactions resulted in the transfer of tax credits and operating results
for these properties to the purchasers, they did not qualify as sales for
accounting purposes, primarily due to insufficient cash received at signing, as
well as certain contingencies with respect to potential repurchase requirements.
We recorded a charge to earnings during 2000 of $6,448 reflecting the expected
net loss to be incurred upon completion of these transactions. At December 31,
2001 and 2000, our investments in affordable housing properties included $54,688
and $93,210, respectively of properties subject to sales agreements that had not
yet qualified as sales for accounting purposes.
NOTE 13: PREMISES AND EQUIPMENT
Our premises and equipment are summarized as follows at December 31:
2001 2000
-------------- --------------
Computer hardware and software.............................................. $ 53,557 $ 42,759
Buildings................................................................... 19,270 19,265
Leasehold improvements...................................................... 9,788 10,056
Land and land improvements.................................................. 4,041 4,814
Furniture and fixtures...................................................... 8,810 7,455
Office equipment............................................................ 1,773 746
Less accumulated depreciation and amortization.............................. (52,650) (41,943)
-------------- --------------
$ 44,589 $ 43,152
============== ==============
93
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
Depreciation expense amounted to $11,398, $12,248 and $13,546 for 2001,
2000 and 1999, respectively (of which $2,344, $2,353 and $2,343 for 2001, 2000
and 1999, respectively, related to computer software). Buildings represent our
nationwide customer service and collection facility in Orlando, Florida.
NOTE 14: DEPOSITS
Our deposits consisted of the following at December 31:
2001 2000
------------- -------------
Non-interest-bearing deposits................................................ $ 5,624 $ 13,523
NOW and money market checking accounts....................................... 15,479 14,670
Savings accounts............................................................. 1,287 1,274
------------- -------------
22,390 29,467
------------- -------------
Certificates of deposit (1)(2)............................................... 636,037 1,176,566
Unamortized deferred fees.................................................... (1,549) (3,989)
------------- -------------
634,488 1,172,577
------------- -------------
$ 656,878 $ 1,202,044
============= =============
<FN>
(1) At December 31, 2001 and 2000, certificates of deposit, net of unamortized
deferred fees, included $499,710 and $964,443, respectively, of brokered
deposits originated through national, regional and local investment
banking firms which solicit deposits from their customers, all of which
are non-cancelable. We did not issue any new brokered certificates of
deposit during 2001 and, at this time, do not intend to issue any such
deposits in the foreseeable future.
(2) At December 31, 2001 and 2000, certificates of deposit issued on an
uninsured basis amounted to $60,804 and $75,417, respectively. Of the
$60,804 of uninsured deposits at December 31, 2001, $2,149 were from
political subdivisions in New Jersey and are secured or collateralized as
required under state law.
</FN>
The contractual remaining maturity of our certificates of deposit at
December 31, 2001 is as follows:
Within one year............................................... $ 416,674
Within two years.............................................. 110,660
Within three years............................................ 60,403
Within four years............................................. 25,701
Within five years............................................. 1,107
Thereafter.................................................... 19,943
------------
$ 634,488
============
We amortize deferred fees on certificates of deposits on a straight-line
basis over the term of the respective certificates of deposit. Such amortization
amounted to $2,441, $4,419 and $5,098 for the years ended December 31, 2001,
2000 and 1999, respectively, and is included in interest expense on deposits.
Interest expense we incurred by type of deposit account was as follows for the
years ended December 31:
2001 2000 1999
----------- ----------- -----------
NOW accounts and money market checking................................ $ 393 $ 532 $ 1,313
Savings............................................................... 29 37 38
Certificates of deposit............................................... 59,545 97,655 97,019
----------- ----------- -----------
$ 59,967 $ 98,224 $ 98,370
=========== =========== ===========
Accrued interest payable on our deposits amounted to $6,858, $14,955
and $15,078 at December 31, 2001, 2000 and 1999, respectively.
94
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 15: ESCROW DEPOSITS ON LOANS AND LOANS SERVICED FOR OTHERS
Escrow deposits on loans we own and on loans we serviced for others
consisted of the following at December 31:
2001 2000
--------------- ---------------
Taxes and insurance payments held on loans serviced for others............... $ 63,235 $ 34,662
Escrow balances on loans held for sale, loan portfolio and discount loan
portfolio................................................................. 899 6,917
Other escrow deposits........................................................ 9,431 14,737
--------------- ---------------
$ 73,565 $ 56,316
=============== ===============
NOTE 16: BONDS-MATCH FUNDED AGREEMENTS
Our bonds-match funded agreements are accounted for as secured borrowings
with pledges of collateral and were comprised of the following at December 31:
Collateral 2001 2000
- ----------------------------------------------------------------------------- --------------- ---------------
Single family residential loans.............................................. $ 46,145 $ 72,101
Unrated residual securities.................................................. 18,997 34,949
Advances on loans serviced for others........................................ 91,766 --
--------------- ---------------
$ 156,908 $ 107,050
=============== ===============
At December 31, 2001 and 2000, our bonds-match funded agreements had a
weighted average interest rate of 3.97% and 8.07%, respectively. Accrued
interest payable on our bonds-match funded agreements amounted to $97 and $143
at December 31, 2001 and 2000, respectively. We incurred interest expense on our
bonds-match funded agreements of $7,315, $11,484 and $2,101 during 2001, 2000
and 1999, respectively.
NOTE 17: LINES OF CREDIT AND OTHER SHORT-TERM BORROWINGS
Through our subsidiaries we have obtained secured lines of credit from
various unaffiliated financial institutions as follows:
Balance Amount of Committed Maturity
Collateral Outstanding Facility Amount Date Interest Rate(3)
- ------------------------------------- ----------- --------------- ------------ --------------- -------------------------
December 31, 2001:
Real estate investments and
commercial loans (1)........ $ 32,463 $ 200,000 $ 115,580 June 2002 LIBOR + 240 basis points
Advances on loans serviced for
others (2).................. 51,841 100,000 51,841 October 2002 LIBOR + 200 basis points
---------
$ 84,304
=========
December 31, 2000:
Real estate investments and
commercial loans (1)........ $ 32,933 $ 200,000 $ 115,580 June 2001 LIBOR + 240 basis points
=========
<FN>
(1) Acquired in connection with our acquisition of OAC.
(2) This line was entered into during 2001 to fund servicing advances we
acquired in connection with our acquisition of servicing rights.
(3) LIBOR was 1.87% and 6.57% at December 31, 2001 and 2000, respectively.
</FN>
95
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
The maximum month end amount of our borrowings under lines of credit was
$119,648 and $184,750 for the years ended December 31, 2001 and 2000,
respectively. The average balance of obligations outstanding under lines of
credit was $82,604 and $152,424 during the years ended December 31, 2001 and
2000, respectively, and the weighted average interest rates were 6.67% and
9.11%, respectively.
Accrued interest payable on our obligations outstanding under lines of
credit amounted to $171 and $0 at December 31, 2001 and 2000, respectively.
Interest expense we incurred on our obligations outstanding under lines of
credits amounted to $5,511, $13,881 and $16,318 during 2001, 2000 and 1999,
respectively.
In addition to our lines of credit listed above, through the Bank, we have
the capacity to borrow from the Federal Home Bank of New York ("FHLB") up to an
aggregate of $50,000, at the prevailing market rate. This facility matures in
March 2002. We had no advances from the FHLB during the years ended December 31,
2001 and 2000.
We also have contractual relationships with eleven brokerage firms and the
FHLB under which we can obtain funds under reverse repurchase agreements. At
December 31, 2001, we had $79,405 of such reverse repurchase agreements
outstanding as compared to $0 at December 31, 2000. At December 31, 2001 reverse
repurchase agreements ranged in maturity from two to seven days and had interest
rates ranging from 1.80% to 1.89%. The maximum month end amount of our
borrowings through reverse repurchase agreements was $92,095 and $421,050 during
the years ended December 31, 2001 and 2000, respectively. The average balance of
reverse repurchase agreements outstanding was $19,500 and $167,337 during the
years ended December 31, 2001 and 2000, respectively, and the weighted average
interest rates were 2.71% and 6.41%, respectively.
As of December 31, the weighted average interest rates of our obligations
outstanding under lines of credit and reverse repurchase agreements were as
follows:
2001 2000
---------- ----------
Lines of credit.................................... 4.02% 8.97%
Reverse repurchase agreements...................... 1.87% --
NOTE 18: NOTES, DEBENTURES AND OTHER INTEREST-BEARING OBLIGATIONS
Our notes, debentures and other interest-bearing obligations mature as
follows:
December 31,
------------------------
2001 2000
---------- ----------
2003:
11.875% Notes due October 1......................... $ 87,025 $ 100,050
2004:
Loan due May 24 (LIBOR plus 250 basis points)....... 6,235 6,235
2005:
12% Subordinated Debentures due June 15............. 67,000 67,000
11.5% Notes due July 1.............................. 45 45
---------- ----------
$ 160,305 $ 173,330
========== ==========
We issued our 11.875% Notes due October 1, 2003, ("the Notes") in the
original amount of $125,000 with interest payable semiannually on April 1 and
October 1. The Notes are unsecured general obligations and are subordinated in
right of payment to the claims of creditors of our subsidiaries.
96
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
We may not redeem the Notes before October 1, 2001, except as described
below. On or after such date, we may redeem the Notes at any time at our option,
in whole or in part, at the following redemption prices (expressed as a
percentage of the principal amount) plus accrued and unpaid interest, if
redeemed during the twelve-month period beginning October 1 of the years
indicated below:
Year Redemption Price
- ---- ----------------
2001.................................................... 105.938%
2002.................................................... 102.969%
During 2001 and 2000, we repurchased $13,025 and $3,800, respectively, of
our Notes in the open market, resulting in extraordinary gains of $52 ($17 net
of taxes) and $439 ($276 net of taxes), respectively.
The indenture governing the Notes requires that we maintain, at all times
when the Notes are not rated in an investment grade category by one or more
nationally recognized statistical rating organizations, unencumbered liquid
assets with a value equal to 100% of the required interest payments due on the
Notes on the next two succeeding semiannual interest payment dates. We
maintained an investment in cash and cash equivalents of $10,366 and $12,057 at
December 31, 2001 and 2000, respectively, that is restricted for purposes of
meeting this liquidity requirement. The indenture further provides that we shall
not sell, transfer or otherwise dispose of shares of common stock of the Bank or
permit the Bank to issue, sell or otherwise dispose of shares of its common
stock unless in either case the Bank remains a wholly-owned subsidiary.
In connection with the issuance of the Notes, we incurred certain costs
that we capitalized and are amortizing on a straight-line basis over the life of
the Notes. The unamortized balance of these issuance costs amounted to $1,185
and $2,140 at December 31, 2001 and 2000, respectively, and is included in other
assets. Accrued interest payable on the Notes amounted to $2,583 and $2,970 at
December 31, 2001 and 2000, respectively. We incurred interest expense on the
Notes of $11,465, $12,293 and $14,656 during 2001, 2000 and 1999 respectively.
The Bank issued our 12% Subordinated Debentures due 2005 (the
"Debentures") in the original amount of $100,000 with interest payable
semiannually on June 15 and December 15. The Debentures are unsecured general
obligations of the Bank and are subordinated in right of payment to all existing
and future senior debt.
The Bank may redeem the Debentures at any time at its option, in whole or
in part, together with accrued and unpaid interest, if any, on not less than 30
nor more than 60 days notice at the following redemption prices (expressed as a
percentage of the principal amount), if redeemed during the twelve-month period
beginning June 15 of the years indicated below:
Year Redemption Price
- ---- ----------------
2001 ................................................... 104.000%
2002 ................................................... 102.667%
2003 ................................................... 101.333%
2004 and thereafter..................................... 100.000%
In connection with the issuance of the Debentures, the Bank incurred
certain costs that we capitalized and are amortizing on a straight-line basis
over the expected life of the Debentures. The unamortized balance of these
issuance costs amounted to $617 and $1,043 at December 31, 2001 and 2000,
respectively, and is included in other assets. Accrued interest payable on the
Debentures amounted to $335 at both December 31, 2001 and 2000. We incurred
interest expense on the Debentures of $8,040, $8,040 and $11,412 during 2001,
2000 and 1999, respectively. During 1999, the Bank repurchased $33,000 of its
Debentures in the open market, resulting in an extraordinary gain of $1,605
($1,323 net of taxes). There were no repurchases during 2001 or 2000.
As a result of our acquisition of OAC in October 1999, we assumed the
11.5% Redeemable Notes ("the Redeemable Notes") due 2005, which OAC issued
during 1998 in the original amount of $150,000. During 2000, we repurchased in
the open market $44,930 of the outstanding balance of its Redeemable Notes.
These repurchases resulted in extraordinary gains of $8,073 ($5,086 net of
taxes). Additionally, on December 21, 2000, we acquired $98,025 in aggregate
principal outstanding of the Redeemable Notes pursuant to our tender offer and
consent solicitation dated November 14, 2000. This repurchase resulted in an
extraordinary gain of $9,452 ($5,955 net of taxes). We incurred interest expense
on the Redeemable Notes of $5, $13,680 and $4,226 during 2001, 2000 and 1999,
respectively.
97
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 19: CAPITAL SECURITIES
In August 1997, Ocwen Capital Trust ("OCT") issued $125,000 of 10-7/8%
Capital Securities (the "Capital Securities"). OCT invested the proceeds from
issuance of the Capital Securities in 10-7/8% Junior Subordinated Debentures
issued by OCN. The Junior Subordinated Debentures, which represent the sole
assets of OCT, will mature on August 1, 2027. During 2001 and 2000, we
repurchased $18,371 and $30,470, respectively, of our Capital Securities in the
open market, resulting in extraordinary gains of $3,723 ($2,345 net of taxes)
and $11,739 ($7,396 net of taxes), respectively.
Holders of the Capital Securities are entitled to receive cumulative cash
distributions accruing from the date of original issuance and payable
semiannually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998, at an annual rate of 10-7/8% of the liquidation amount of
$1,000 per Capital Security. OCN guarantees payment of distributions out of
moneys held by OCT, and payments on liquidation of OCT or the redemption of
Capital Securities, to the extent OCT has funds available. If Ocwen Financial
Corporation does not make principal or interest payments on the Junior
Subordinated Debentures, OCT will not have sufficient funds to make
distributions on the Capital Securities, in which event the guarantee shall not
apply to such distributions until OCT has sufficient funds available therefore.
Accumulated distributions payable on the Capital Securities amounted to $2,771
and $3,533 at December 31, 2001 and 2000, respectively, and are included in
accrued interest payable.
We have the right to defer payment of interest on the Junior Subordinated
Debentures at any time or from time to time for a period not exceeding 10
consecutive semiannual periods with respect to each deferral period, provided
that no extension period may extend beyond the stated maturity of the Junior
Subordinated Debentures. Upon the termination of any such extension period and
the payment of all amounts then due on any interest payment date, we may elect
to begin a new extension period. Accordingly, there could be multiple extension
periods of varying lengths throughout the term of the Junior Subordinated
Debentures. If we defer interest payments on the Junior Subordinated Debentures,
distributions on the Capital Securities will also be deferred, and the we may
not, and may not permit any of our subsidiaries to, (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, their capital stock or (ii) make any
payment of principal, interest or premium, if any, on or repay, repurchase or
redeem any debt securities that rank pari passu with or junior to the Junior
Subordinated Debentures. During an extension period, interest on the Junior
Subordinated Debentures will continue to accrue at the rate of 10-7/8% per
annum, compounded semiannually.
We may redeem the Junior Subordinated Debentures before maturity at our
option, subject to the receipt of any necessary prior regulatory approval, (i)
in whole or in part on or after August 1, 2007, at a redemption price equal to
105.438% of the principal amount thereof on August 1, 2007, declining ratably on
each August 1 thereafter to 100% on or after August 1, 2017, plus accrued
interest thereon, or (ii) at any time, in whole (but not in part), upon the
occurrence and continuation of a special event (defined as a tax event,
regulatory capital event or an investment company event) at a redemption price
equal to the greater of (a) 100% of the principal amount thereof or (b) the sum
of the present values of the principal amount and premium payable with respect
to an optional redemption of such Junior Subordinated Debentures on August 1,
2007, together with scheduled payments of interest from the prepayment date to
August 1, 2007, discounted to the prepayment date on a semiannual basis at the
adjusted Treasury rate plus accrued interest thereon to the date of prepayment.
The Capital Securities are subject to mandatory redemption, in whole or in part,
upon repayment of the Junior Subordinated Debentures at maturity or their
earlier redemption, in an amount equal to the amount of the related Junior
Subordinated Debentures maturing or being redeemed and at a redemption price
equal to the redemption price of the Junior Subordinated Debentures, plus
accumulated and unpaid distributions thereon to the date of redemption.
For financial reporting purposes, we treat OCT as a subsidiary and,
accordingly, the accounts of OCT are included in our consolidated financial
statements. We eliminate intercompany balances and transactions with OCT,
including the balance of Junior Subordinated Debentures outstanding, in our
consolidated financial statements. We present the Capital Securities in a
separate caption between liabilities and stockholders' equity in our
consolidated statement of financial condition as "Company-obligated, mandatorily
redeemable securities of subsidiary trust holding solely Junior Subordinated
Debentures of the Company." We report distributions on the Capital Securities in
a separate caption immediately following non-interest expense in our
consolidated statement of operations. We intend to continue this method of
accounting in the future.
In connection with our issuance of the Capital Securities, we incurred
certain costs that we capitalized and are amortizing over the term of the
Capital Securities. The unamortized balance of these issuance costs amounted to
$2,083 and $2,815 at December 31, 2001 and 2000, respectively, and are included
it in other assets.
98
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 20: BASIC AND DILUTED EARNINGS PER SHARE
We are required to present both basic and diluted EPS on the face of our
statement of operations. Basic EPS excludes common stock equivalents and is
calculated by dividing net income by the weighted average number of common
shares outstanding during the year. We calculate diluted EPS by dividing net
income by the weighted average number of common shares outstanding, including
the dilutive potential common shares related to outstanding stock options.
The following is a reconciliation of the calculation of basic EPS to
diluted EPS for the years ended December 31:
2001 2000 1999
----------- ----------- -----------
Net income (loss)...................................................... $ (124,782) $ 2,192 $ 19,832
=========== =========== ===========
Basic EPS:
Weighted average shares of common stock............................. 67,227,058 67,427,662 63,051,015
=========== =========== ===========
Basic EPS........................................................... $ (1.86) $ 0.03 $ 0.31
========== ========== ==========
Diluted EPS:
Weighted average shares of common stock............................. 67,227,058 67,427,662 63,051,015
Effect of dilutive securities:
Stock options (1)................................................. -- 36,381 39,267
----------- ----------- -----------
67,227,058 67,464,043 63,090,282
=========== =========== ===========
Diluted EPS......................................................... $ (1.86) $ 0.03 $ 0.31
========== ========== ==========
<FN>
(1) Excludes the effect of 1,718,133 and 1,565,343 of options that are
antidilutive for 2000 and 1999, respectively.
</FN>
NOTE 21: DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative financial instruments for the purpose of managing our
exposure to adverse fluctuations in interest and foreign currency exchange
rates.
Because interest rate futures, swaptions, put options and foreign currency
futures contracts are exchange traded, holders of these instruments look to the
exchange for performance under these contracts and not the entity holding the
offsetting futures contract, thereby minimizing the risk of nonperformance under
these contracts. We are exposed to credit loss in the event of nonperformance by
the counterparty to the interest and currency swaps and control this risk
through credit monitoring procedures. The notional principal amount does not
represent our exposure to credit loss.
Interest Rate Management
In managing our interest rate risk, we enter into interest rate swaps from
time to time. Under interest rate swaps, we agree 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 interest rate swaps provided for us to receive
a floating rate of interest based on the London Interbank Offered Rate ("LIBOR")
and to pay fixed interest rates. We used these interest rate swaps to alter the
interest rate on LIBOR rate debt incurred to fund our acquisitions of real
estate, subordinate and residual securities and securities sold under agreements
to repurchase.
We are exposed to credit loss when we enter into interest rate swaps if:
(i) the counterparty to the interest rate swap does not perform and (ii) the
floating interest rate that we receive exceeds the fixed interest rate that we
pay. All the counterparties had long-term debt ratings of A+ or above by
Standard and Poor's and A1 or above by Moody's. Although a swap generally may
not be sold or transferred without the consent of the counterparty, management
does not believe that this consent would be withheld. Although none of our
interest rate swaps were exchange-traded, there are a number of financial
institutions which enter into these types of transactions as part of their
day-to-day activities.
99
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
We had no interest rate swaps outstanding at December 31, 2001. The terms
of our outstanding interest swaps at December 31, 2000 are as follows:
Notional LIBOR
Maturity Amount Index Fixed Rate Floating Rate Fair Value
- ------------------------- ------------ ----------------- -------------- --------------- ----------------
April 2001............ $ 33,000 1-Month 6.00% 6.80% $ 59
============ ============
Our swaps had the effect of increasing (decreasing) net interest income by
$2, $(148) and $(72) for the years ended December 31, 2001, 2000 and 1999,
respectively. During 2001 and 2000, we realized gains (losses) of $(9) and $575
on swaps that we included in net operating gains on investments in real estate.
We have purchased amortizing caps and floors to hedge our interest rate
exposure relating to our match funded loans and securities. An interest rate cap
or interest rate floor is designed to provide protection against the interest
rate on a floating-rate instrument rising above some level (cap) or falling
below some level (floor). The interest rate representing the cap or the floor is
referred to as the "strike rate." We receive payments from the seller on caps
when the current interest rate rises above the strike rate and on floors when
the current interest rate falls below the strike rate. The amount received
represents the difference between the current rate and the strike rate applied
to the notional amount. The terms of our outstanding caps and floors at December
31, 2001 and 2000 are as follows:
Notional
Amount Maturity Index Strike Rate Fair Value
----------------- -------------- ---------------- ----------- -------------
December 31, 2001:
Caps........................ $ 125,933 October 2003 LIBOR 1-Month 7.00% $ 104
Floors...................... 34,100 October 2003 CMT 2-Year 4.35 300
------------
$ 404
============
December 31, 2000:
Caps........................ $ 141,674 October 2003 LIBOR 1-Month 7.00% $ 345
Floors...................... 37,787 October 2003 CMT 2-Year 4.35 154
------------
$ 499
============
During 2001, we determined that our caps and floors no longer qualified
for hedge accounting. Unrealized gains included in earnings to record our caps
and floors at fair value during 2001 amounted to $404. Amortization of the caps
and floors amounted to $1,181and $295 during the years ended December 31, 2000
and 1999, respectively.
We have also managed our interest rate risk by purchasing European
swaptions and put options and U.S. Treasury and U.S. Agency futures contracts to
hedge anticipated future fundings related to affordable housing properties.
During the fourth quarter of 1999, these financial instruments ceased to qualify
for hedge accounting and subsequent gains or losses were included in earnings.
We closed these financial instruments during the fourth quarter of 2000.
We purchased no swaptions, put options, U.S. Treasury futures contracts or
US Agency futures contracts during 2001. The following table summarizes our net
realized gains and (losses) on the following financial instruments included in
earnings for years ended December 31, 2000 and 1999:
2000 1999
---------- ----------
Swaptions and put options......................... $ (374) $ 588
U.S. Treasury and Agency futures.................. (617) 208
100
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
The fair value of our interest rate swaps and caps and floors represents
the estimated amount that we would receive or pay to terminate these agreements
taking into account current interest rates. Market quotes are available for
these agreements. The following table summarizes our use of interest rate risk
management instruments:
Notional Amount
-------------------------------------------------------------------------------------
U.S.
Treasury and
Agency European European
Futures Sold Interest Treasury Treasury Put
Short Rate Swaps Swaptions Options Caps Floors
------------ ---------- --------- ------------ --------- ---------
Balance, December 31, 1999....... $ 19,000 $ 200,780 $ 18,400 $ 2,500 $ 159,211 $ 41,899
Purchases........................ 54,700 -- 14,500 -- -- --
Maturities....................... (15,600) -- (26,900) (2,500) (17,537) (4,112)
Terminations..................... (58,100) (167,780) (6,000) -- -- --
--------- --------- --------- --------- --------- ---------
Balance, December 31, 2000....... -- 33,000 -- -- 141,674 37,787
Maturities....................... -- (33,000) -- -- (15,741) (3,686)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 2001....... $ -- $ -- $ -- $ -- $ 125,933 $ 34,101
========= ========= ========= ========= ========= =========
Foreign Currency Management
We enter into foreign currency derivatives to hedge our investments in our
foreign subsidiaries which own residual interests backed by residential loans
originated in the UK ("UK residuals") and in our shopping center located in
Halifax, Nova Scotia ("the Nova Scotia shopping center"). It is our policy to
periodically adjust the amount of foreign currency derivative contracts we have
entered into in response to changes in our investments in these assets. Currency
futures are commitments to either purchase or sell foreign currency at a future
date for a specified price.
We have determined that the local currency of our investment in UK
residuals and our investment in the Nova Scotia Shopping Center is the
functional currency. Our foreign currency derivative financial instruments
qualify for hedge accounting. Accordingly, we include the gains or losses in the
net unrealized foreign currency translation in accumulated other comprehensive
income in stockholders' equity.
The following table sets forth the terms and values of our foreign
currency financial instruments at December 31, 2001 and 2000:
Strike
Position Maturity Notional Amount Rate Fair Value
-------- -------- ------------------- ---------- -------------
December 31, 2001:
Canadian Dollar currency futures............. Short March 2002 C$ 34,000 0.6380 $ 353
British Pound currency futures............... Short March 2002 (pound) 17,250 1.4350 (235)
----------
$ 118
==========
December 31, 2000:
Canadian Dollar currency futures............. Short March 2001 C$ 33,000 0.6795 $ (242)
British Pound currency futures............... Short March 2001 (pound) 14,688 1.5139 (339)
----------
$ (581)
==========
Before the sale of our equity investment in Kensington in 2000, we entered
into a British Pound currency forward ("currency forward") with a AAA-rated
counterparty to hedge our equity investment in Kensington. In connection with
the sale of the equity investment in Kensington, the currency forward was closed
in November 2000.
101
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 22: INCOME TAXES
The components of income tax expense (benefit) were as follows:
Years Ended December 31,
----------------------------------------
Current: 2001 2000 1999
---------- ---------- ----------
Federal..................................................................... $ -- $ (24,744) $ 33,930
State....................................................................... -- 261 3,293
---------- ---------- ----------
-- (24,483) 37,223
---------- ----------- ----------
Deferred:
Federal..................................................................... (22,752) 14,724 (41,734)
Foreign..................................................................... -- -- 5,987
State....................................................................... (2,009) 216 (1,368)
Provision for valuation allowance on prior year's deferred tax asset........ 83,000 17,500 2,500
Provision for valuation allowance on current year's deferred tax asset...... 23,348 -- --
---------- ---------- ----------
Income tax expense before extraordinary gains............................... 81,587 7,957 2,608
Income tax expense on extraordinary gains................................... 1,413 10,990 1,491
---------- ---------- ----------
Total....................................................................... $ 83,000 $ 18,947 $ 4,099
========== ========== ==========
Income tax expense before extraordinary gains differs from the amounts
computed by applying the U.S. Federal corporate income tax rate of 35% as
follows:
Years Ended December 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
Expected income tax expense (benefit) at statutory rate.................. $ (15,945) $ (2,997) $ 5,187
Differences between expected and actual expense (benefit):
Excess of cost over net assets acquired, net.......................... 1,108 1,078 1,249
Excess of net assets acquired over purchase price..................... (6,416) (4,939) --
State tax (after Federal tax benefit)................................. (1,306) 310 1,251
Low-income housing tax credits........................................ (2,078) (2,577) (18,242)
Sale of Ocwen UK...................................................... -- -- 9,730
OAC loss not included in consolidated tax group....................... -- -- 223
Deferred tax asset valuation allowance current year tax benefit....... 23,348 -- --
Deferred tax asset valuation allowance prior year..................... 83,000 17,500 2,500
Other................................................................. (124) (418) 710
---------- --------- ----------
Actual income tax expense (benefit)................................. $ 81,587 $ 7,957 $ 2,608
========== ========== ==========
For taxable years beginning before January 1, 1996, a savings institution
that met certain definitional tests relating to the composition of its assets
and the sources of its income (a "qualifying savings institution") was permitted
to establish reserves for bad debts and make annual additions thereto under the
experience method. Alternatively, a qualifying savings institution could elect,
on an annual basis, to use the percentage of taxable income method to compute
its allowable addition to its bad debt reserve on qualifying real property loans
(generally loans secured by an interest in improved real estate). The applicable
percentage was 8% for tax periods after 1987. The Bank utilized the percentage
of taxable income method for these years.
On August 20, 1996, President Clinton signed the Small Business Job
Protection Act (the "Act") into law. One provision of the Act repealed the
reserve method of accounting for bad debts for savings institutions effective
for taxable years beginning after 1995. The Bank, therefore, was required to use
the specific charge-off method on its 1996 and subsequent federal income tax
returns. The Bank will be required to recapture its "applicable excess
reserves," which are its federal tax bad debt reserves in excess of the base
year reserve amount described in the following paragraph. The Bank will include
one-sixth of its applicable excess reserves in taxable income in each year from
1996 through 2001. As of December 31, 1995, the Bank had approximately $42,400
of applicable excess reserves. As of December 31, 1996, the Bank had fully
provided for the tax related to this recapture.
102
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
The base year reserves will continue to be subject to recapture, and the
Bank could be required to recognize a tax liability if: (1) the Bank fails to
qualify as a "bank" for federal income tax purposes, (2) certain distributions
are made with respect to the stock of the Bank, (3) the bad debt reserves are
used for any purpose other than to absorb bad debt losses or (4) there is a
change in federal tax law. The enactment of this legislation has had no material
impact on the Bank's or OCN's operations or financial position.
We have not recognized a deferred tax liability for the tax bad debt base
year reserves of the Bank. The base year reserves are generally the balance of
reserves as of December 31, 1987, reduced proportionately for reductions in the
Bank's loan portfolio between that date and December 31, 1995. At December 31,
2001 and 2000, the amount of those reserves was approximately $5,700. This
reserve could be recognized in the future under the conditions described in the
preceding paragraph.
The net deferred tax asset was comprised of the following as of:
December 31,
----------------------------
2001 2000
------------ ------------
Deferred Tax Assets:
Tax residuals and deferred income on tax residuals ........................... $ 3,176 $ 4,374
State taxes .................................................................. 5,685 6,197
OAC purchase accounting adjustments .......................................... -- 8,117
Accrued profit sharing ....................................................... 2,271 1,972
Accrued other liabilities .................................................... 206 249
Interest expense related to discount loan portfolio .......................... 7,031 9,936
Valuation allowance on real estate owned ..................................... 6,873 6,360
Gain on loan foreclosure ..................................................... 7,009 12,834
Bad debt and allowance for loan losses ....................................... 11,021 16,210
Impairment on securities available for sale and unrealized gains and losses on
trading securities ......................................................... 71,866 57,951
Mortgage servicing rights amortization ....................................... 5,971 2,208
Goodwill amortization ........................................................ 451 21
Foreign currency exchange .................................................... 1,068 1,068
Capital loss carryforward .................................................... 4,160 4,160
Net operating loss carryforward .............................................. 15,647 --
Partnership losses and low-income housing tax credits ........................ 40,782 30,022
Other ........................................................................ -- 2,679
------------ ------------
183,217 164,358
------------ ------------
Deferred Tax Liabilities:
Deferred interest income on discount loan portfolio .......................... 6,421 7,047
Research and development costs ............................................... 1,294 1,719
Foreign currency translation adjustment ...................................... -- 229
Other ........................................................................ 1,870 499
------------ ------------
9,585 9,494
------------ ------------
173,632 154,864
Valuation allowances ............................................................ (165,221) (58,873)
------------ ------------
Net deferred tax asset .......................................................... $ 8,411 $ 95,991
============ ============
As of December 31, 2001, we had a deferred tax asset valuation allowance
totaling $165,221. This allowance is comprised of $38,873 relating to built-in
loss limitations arising from our acquisition of OAC and $103,000 relating to
our evaluation of the future realization of prior years deferred tax asset and
$23,348 related to the future realization of our current year tax benefit.
We conduct periodic evaluations to determine whether it is more likely
than not that the deferred tax asset can be realized in future periods. Among
the factors considered in this evaluation are estimates of future earnings, the
future reversal of temporary differences and the impact of tax planning
strategies that can be implemented if warranted. As a result of this evaluation,
we included in the tax provision an increase of $106,348, $17,500 and $2,500 to
the valuation allowance for 2001, 2000 and 1999 respectively.
103
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
Before our acquisition of OAC, OAC was a REIT for federal tax purposes and
filed a REIT federal income tax return through October 20, 1999. We have
included OAC in our consolidated federal income tax return since October 21,
1999. OAC had, at October 6, 1999, approximately $131,567 of net unrealized
built-in losses. Any such losses recognized within the five-year period
beginning on October 7, 1999 (the "recognition period") are treated as
pre-change losses and, as such, are subject to an annual limit as to the amount
which may offset the taxable income of Ocwen Financial Corporation and its
subsidiaries ("the IRC section 382 limitation"). A net unrealized built-in loss
is an amount by which the tax basis of the corporation's assets at the time of
the change in ownership exceeds the aggregate fair market value of those assets
at that time. The IRC section 382 limitation is determined by multiplying the
value of OAC's stock by the federal long-term tax-exempt rate and amounts to
approximately $5,700. If a deduction is denied for any recognized built-in loss
in any post-change year, the loss is carried forward to subsequent years under
rules similar to the standard loss carryforward rules. As a result of these
limitations, we established a corresponding deferred tax asset valuation
allowance at the acquisition date as part of purchase accounting in the amount
of $38,873.
International Hotel Group ("IHG"), a wholly-owned subsidiary of IMI, and
IHG's subsidiaries had at December 31, 2001, approximately $1,079 of Separate
Return Limitation Year ("SRLY") net operating loss carryforwards. The SRLY net
operating loss carryforward can only offset the future taxable income of IHG and
its subsidiaries. The $1,079 operating loss carryforward will expire, if unused,
in the year 2008. At December 31, 2001 we had net operating loss carryforwards
of $44,706, of which $12,898 expire in 2018 and $31,808 expire in 2021. At
December 31, 2001, we had tax credit carryforwards of $30,479 related to our
low-income housing tax credits, which expire in 2018, 2019, 2020 and 2021.
NOTE 23: EMPLOYEE BENEFIT AND COMPENSATION PLANS
We maintain a defined contribution plan to provide postretirement benefits
to our eligible employees. We also adopted a number of compensation plans for
certain of our employees. We designed these plans to facilitate a
pay-for-performance policy, further align the interests of our officers and key
employees with the interests of our shareholders and assist in the attraction
and retention of employees vital to our long-term success. These plans are
summarized below.
Retirement Plan
We maintain a defined contribution 401(k) plan. We match 50% of each
employee's contributions, limited to 2% of the employee's compensation. Our
contributions to the 401(k) plan for the years ended December 31, 2001, 2000 and
1999, were $613, $694 and $702, respectively.
In connection with our acquisition of Berkeley Federal Savings Bank in
June 1993, the Bank assumed the obligations under a noncontributory defined
benefit pension plan (the "Plan") covering substantially all employees upon
their eligibility under the terms of the Plan. We froze and fully funded the
Plan after the plan year ended December 31, 1993.
Annual Incentive Plan
In May 1998, our shareholders approved the Ocwen Financial Corporate 1998
Annual Incentive Plan (the "AIP") to replace our former annual incentive plan
(the "Former Plan"). Participation in the AIP is limited to officers and other
key employees and designated subsidiaries that are selected by the AIP
Committee. We establish performance targets based on the achievement of
specified levels of increases in net earnings, return on equity, average net
equity used or growth in assets, as well as individual participant performance
targets. We base awards under the AIP on achieving the performance targets, and
we pay them in cash or a combination of cash and non-qualified stock options to
purchase common stock of Ocwen Financial Corporation. We grant such
non-qualified stock options pursuant to the Ocwen Financial Corporation 1991
Non-Qualified Stock Option Plan.
104
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
The following table provides a summary of our stock option activity for
the years ended December 31, 2001, 2000 and 1999, respectively, and stock
options exercisable at the end of each of those year:
2001 2000 1999
------------------------ ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
----------- ---------- ----------- ----------- ----------- -----------
Outstanding at beginning of year....... 3,424,594 $ 13.11 2,013,201 $ 14.09 1,918,181 $ 15.64
Granted (1)............................ 1,584,093 7.67 1,617,461 4.09 358,858 6.25
Exercised.............................. (128,156) 4.59 -- -- (5,080) 2.82
Forfeited.............................. (225,262) 4.87 (206,068) 14.74 (258,758) 14.92
----------- ----------- -----------
Outstanding at end of year............. 4,655,269 9.01 3,424,594 9.33 2,013,201 14.09
=========== =========== ===========
Exercisable at end of year............. 2,483,697 11.29 1,885,048 13.11 1,559,850 15.77
=========== =========== ===========
<FN>
(1) The weighted average grant-date fair value was $7.67 in 2001, $5.84 in
2000 and $6.25 in 1999.
</FN>
The following table summarizes information about our stock options
outstanding at December 31:
Options Outstanding Options Exercisable
----------------------------------------- ------------------------------
Weighted Weighted
Average Remaining Average
Number of Exercise Contractual Number of Exercise
Granted For Service In: Options Price Life Options Price
- --------------------------------------------------- -------------- ----------- ----------- --------------- -------------
2001............................................... 1,584,093 $ 7.67 10 228,819 $ 7.67
2000............................................... 1,343,601 4.09 9 606,412 4.09
1999............................................... 237,327 6.25 8 158,218 6.25
1998............................................... 122,545 12.31 7 122,545 12.31
1997............................................... 746,071 20.35 6 746,071 20.35
1996............................................... 532,632 11.00 5 532,632 11.00
1995............................................... 89,000 2.88 4 89,000 2.88
----------- -------------
4,655,269 9.01 2,483,697 11.29
=========== =============
After the award of 1,584,093 options in 2002 for service in 2001,
7,359,764 authorized shares remain and are available for future awards of stock
options.
Stock options we awarded under the Former Plan have a one-year vesting
period. Stock options we awarded under the AIP in 1998 and 1999 vest ratably
over a three-year period. Stock options we awarded under the AIP in 2001 and
2000 vest ratably over a five-year period including the award year. The term of
all options granted is ten years from the grant date. We treat the difference,
if any, between the fair market value of our stock at the date of grant and the
exercise price as compensation expense. We record compensation expense ratably
over the vesting period of the grant. Included in compensation expense for the
years ended December 31, 2001 and 2000 was $568 and $572, respectively, related
to options granted. There was no compensation expense recognized for the year
ended December 31, 1999 related to options granted.
Long-Term Incentive Plan
In May 1998, our shareholders approved the Ocwen Financial Corporation
Long-Term Incentive Plan (the "LIP"). Participation in the LIP was limited to
officers and other key employees and designated subsidiaries that were selected
by the LIP Administrator. We suspended the LIP in 2000 and reversed the related
accrual of $6,012 for 1999 and 1998. We recorded compensation expense of $3,645
and $2,367 in 1999 and 1998, respectively, under the LIP.
105
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
Pro Forma Effect of SFAS No. 123
We have retained our current accounting method for our stock-based
employee compensation plans under the provisions of APB 25. However, entities
such as ours continuing to apply APB 25 are required to disclose pro forma net
income and earnings per share as if the fair value method of accounting for
stock-based employee compensation plans as prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, had been utilized. The following is a
summary of our pro forma information for the years ended December 31:
2001 2000 1999
---------- ---------- ----------
Net income (loss), as reported......................................... $(124,782) $ 2,192 $ 19,832
Pro forma net (loss) income............................................ (127,914) (228) 18,917
Earnings per share, as reported:
Basic............................................................... (1.856) 0.032 0.314
Diluted............................................................. (1.856) 0.032 0.314
Pro forma earnings per share:
Basic............................................................... (1.903) 0.003 0.300
Diluted............................................................. (1.903) 0.003 0.300
We estimate the fair value of our option grants using the Black-Scholes
option-pricing model with the following assumptions:
Years Ended December 31,
---------------------------------------------
2001 2000 1999
---------- ---------- ----------
Expected dividend yield................................................ 0.00% 0.00% 0.00%
Expected stock price volatility........................................ 52.00 54.00 47.00
Risk-free interest rate................................................ 4.23 4.98 6.34
Expected life of options............................................... 5 years 5 years 5 years
NOTE 24: STOCKHOLDERS' EQUITY
On April 16, 1999, we announced that our Board of Directors authorized the
repurchase of up to six million of our issued and outstanding shares of common
stock. As of December 31, 1999, we had repurchased 4,611,700 shares at an
average price of $6.66 per share. During the first quarter of 2000, we
repurchased the remaining 1,388,300 authorized shares at an average price of
$6.48 per share. On May 9, 2000, we announced that our Board of Directors
approved an additional stock repurchase program to repurchase up to an
additional six million of our issued and outstanding shares of common stock. As
of December 31, 2001, we had not repurchased any additional shares.
On October 7, 1999, as a result of our acquisition of OAC, we issued to
OAC shareholders (except for Ocwen Financial Corporation or its subsidiaries)
0.71 shares of Ocwen Financial Corporation stock for each outstanding share of
OAC common stock, or a total of 12,371,750 shares. See Note 2.
106
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 25: REGULATORY REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
and the regulations promulgated thereunder established certain minimum levels of
regulatory capital for savings institutions subject to OTS supervision. The Bank
must follow specific capital guidelines stipulated by the OTS which involve
quantitative measures of the Bank's assets, liabilities and certain off-balance
sheet items. An institution that fails to comply with its regulatory capital
requirements must obtain OTS approval of a capital plan and can be subject to a
capital directive and certain restrictions on its operations. At December 31,
2001, the minimum regulatory capital requirements were:
o Tangible and core capital of 1.50% and 3.00% of total adjusted assets,
respectively, consisting principally of stockholders' equity, but
excluding most intangible assets, such as goodwill and any net
unrealized gains or losses on debt securities available for sale.
Effective April 1, 1999, the OTS minimum core capital ratio provides
that only those institutions with a Uniform Financial Institution
Rating System rating of "1" are subject to a 3.00% minimum core capital
ratio. All other institutions are subject to a 4.00% minimum core
capital ratio.
o Risk-based capital consisting of core capital plus certain subordinated
debt and other capital instruments and, subject to certain limitations,
general valuation allowances on loans receivable, equal to 8.00% of the
value of risk-weighted assets.
At December 31, 2001 and 2000, the Bank was "well capitalized" under the
prompt corrective action regulations adopted by the OTS pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991. To be categorized as
"well capitalized," the Bank must maintain minimum core capital, Tier 1
risk-based capital and risk-based capital ratios as set forth in the following
table. The Bank's capital amounts and classification are subject to review by
federal regulators regarding components, risk-weightings and other factors.
There are no conditions or events since December 31, 2001 that we believe have
changed the Bank's category.
Following an examination by the OTS in late 1996 and early 1997, the Bank
committed to the OTS to maintain a core capital (leverage) ratio and a total
risk-based capital ratio of at least 9.00% and 13.00%, respectively. The Bank
continues to be in compliance with this commitment as well as with the
regulatory capital requirements of general applicability (as indicated in the
table below). Based on discussions with the OTS, the Bank believes that this
commitment does not affect its status as a "well-capitalized" institution,
assuming the Bank's continued compliance with the regulatory capital
requirements required to be maintained by it pursuant to such commitment.
As a result of an examination in 2000, the Bank was required to submit a
written plan to the OTS by October 16, 2000 to address issues raised by the
agency under Part 570 of the rules and regulations. Under the plan, the Bank is
taking certain actions regarding its operations with respect to asset reviews
and the management of interest rate risk exposure and has periodic reporting
obligations to the OTS. In addition, as part of the plan, the Bank submitted a
business plan and budget outlining the Bank's operations through 2003. The
business plan submitted reflects proposed changes in the Bank's deposit
gathering strategies and potential future sources of revenue as the Bank
continues its shift away from capital-intensive businesses into fee-based
sources of income. On November 9, 2000 the OTS requested the Bank to supply
additional information regarding the plan. The Bank responded to this request on
November 29, 2000, December 28, 2000 and January 10, 2001, and the OTS approved
the plan on February 2, 2001.
107
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
The following table summarizes the Bank's actual and required regulatory
capital at December 31, 2001 and 2000:
To Be Well
Capitalized Committed
Minimum For Capital For Prompt Corrective Capital
Actual Adequacy Purposes Action Provisions Requirements
--------------------- -------------------- --------------------- ------------
Ratio Amount Ratio Amount Ratio Amount Ratio
-------- ---------- --------- --------- --------- ---------- ------------
December 31, 2001:
Stockholders' equity, and ratio to total assets 14.62% $ 204,640
Non-includable subsidiary...................... (1,233)
Disallowed deferred tax assets................. (4,515)
Disallowed servicing assets.................... (10,077)
-----------
Tier 1 (core) capital, and ratio to adjusted
total assets................................ 13.64% 188,815 4.00% $ 55,359 5.00% $ 69,199 9.00%
========= =========
Non-mortgage servicing assets.................. (3,447)
----------
Tangible capital ratio to tangible assets...... 13.43% $ 185,368 1.50% $ 20,708
========== =========
Tier 1 capital, and ratio to risk-weighted
assets...................................... 18.41% $ 188,815 6.00% $ 61,546
---------- =========
Allowance for loan losses...................... 10,290
Qualifying subordinated debentures............. 40,200
----------
Tier 2 capital................................. 50,490
----------
Total risk-based capital, and ratio to
risk-weighted assets........................ 23.33% $ 239,305 8.00% $ 82,062 10.00% $ 102,577 13.00%
========== ========== =========
Total regulatory assets........................ $1,399,676
==========
Adjusted total assets.......................... $1,383,980
==========
Tangible assets................................ $1,380,533
==========
Risk-weighted assets........................... $1,025,775
==========
December 31, 2000:
Stockholders' equity, and ratio to total assets 16.09% $ 267,295
Non-includable subsidiary...................... (7,801)
Acquired real estate........................... (850)
Disallowed deferred tax assets................. (29,397)
Disallowed servicing assets.................... (5,027)
----------
Tangible capital, and ratio to adjusted total
assets.................................... 13.83% $ 224,220 1.50% $ 24,313
========== =========
Tier 1 (core) capital, and ratio to adjusted
total assets.............................. 13.83% $ 224,220 4.00% $ 64,834 5.00% $ 81,042 9.00%
========== ========= =========
Tier 1 capital, and ratio to risk-weighted
assets.................................... 16.70% $ 224,220 6.00% $ 80,571
---------- =========
Allowance for loan losses.................... 15,273
Qualifying subordinated debentures........... 53,600
----------
Tier 2 capital............................... 68,873
----------
Total risk-based capital, and ratio to
risk-weighted assets...................... 21.83% $ 293,093 8.00% $ 107,429 10.00% $ 134,286 13.00%
========== ========= =========
Total regulatory assets...................... $1,660,767
==========
Adjusted total assets/tangible assets........ $1,620,846
==========
Risk-weighted assets......................... $1,342,858
==========
The OTS amended its capital distribution regulation effective April 1,
1999. Under the revised regulation, the Bank is required to file a notice with
the OTS at least 30 days before making a capital distribution unless (a) it is
not eligible for expedited treatment under the OTS application processing
regulations, (b) the total amount of the Bank's capital distributions (including
the proposed distribution) for the calendar year exceeds the Bank's net income
for the year to date plus retained net income for the previous two years, (c)
the Bank would not be "adequately capitalized" following the proposed
distribution or (d) the proposed distribution would violate any applicable
statute, regulation or agreement between the Bank and the OTS, or a condition
imposed upon the Bank by an OTS-approved application or notice. If one of these
four criteria is present, the Bank is required to file an application with the
OTS at least 30 days before making the proposed capital distribution. The OTS
may deny the Bank's application or disapprove its notice if the OTS determines
that (a) the Bank will be "under capitalized," "significantly under capitalized"
or "critically under capitalized," as defined in the OTS capital regulations,
following the capital distribution, (b) the proposed capital distribution raises
safety and soundness concerns or (c) the proposed capital distribution
108
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
violates a prohibition contained in any statute, regulation or agreement between
the Bank and the OTS or a condition imposed on the Bank in an application or
notice approved by the OTS. The revised rule also amended the definition of
"capital distribution" to include any payment to repurchase, redeem, retire or
otherwise acquire debt instruments included in total risk-based capital.
In addition to these OTS regulations governing capital distributions, the
indenture governing the Debentures 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.
NOTE 26: NET INTEREST INCOME (EXPENSE) BEFORE PROVISION FOR LOAN LOSSES
The following table presents the components of net interest income
(expense) for each category of our interest-earning assets and interest-bearing
liabilities for the years ended December 31:
2001 2000 1999
------------ ------------ ------------
Interest income:
Federal funds sold and repurchase agreements....................... $ 7,328 $ 8,700 $ 8,847
Trading securities................................................. 18,865 8,200 --
Securities available for sale...................................... -- 42,507 62,698
Loans available for sale........................................... 526 2,474 25,724
Investment securities and other.................................... 743 1,501 2,181
Loan portfolio..................................................... 6,807 20,586 28,683
Match funded loans and securities.................................. 10,345 11,022 3,237
Discount loan portfolio............................................ 38,757 89,826 121,854
------------ ------------ ------------
83,371 184,816 253,224
------------ ------------ ------------
Interest expense:
Deposits........................................................... 59,967 98,224 98,370
Securities sold under agreements to repurchase..................... 529 10,729 7,456
Bonds - match funded agreements.................................... 7,315 11,484 2,101
Obligations outstanding under lines of credit...................... 5,511 13,881 16,318
Notes, debentures and other interest bearing obligations........... 20,007 34,772 31,297
------------ ------------ ------------
93,329 169,090 155,542
------------ ------------ ------------
Net interest income (expense) before provision for loan losses..... $ (9,958) $ 15,726 $ 97,682
============ ============ ============
NOTE 27: OTHER INCOME
The following table presents the principal components of other income we
earned during the years ended December 31:
2001 2000 1999
----------- ----------- -----------
Software revenue (OTX)................................................ $ 2,181 $ 2,236 $ 2,043
Consulting fees....................................................... 2,041 78 84
Brokerage commissions (1)............................................. 1,386 -- 12,896
Management fees (2)................................................... 80 -- 4,503
Other................................................................. 3,071 3,770 4,820
----------- ----------- -----------
$ 8,759 $ 6,084 $ 24,346
=========== =========== ===========
<FN>
(1) Brokerage commissions for 1999 were earned by Ocwen UK.
(2) Management fees for 1999 were earned for management services we provided
to OAC prior to our acquisition of OAC in October 1999.
</FN>
109
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 28: OTHER OPERATING EXPENSES
The following table presents the principal components of other operating
expenses we incurred during the years ended December 31:
2001 2000 1999
----------- ----------- -----------
Travel, lodging, meals and entertainment.............................. $ 2,388 $ 2,864 $ 4,107
Amortization of deferred costs........................................ 917 1,878 1,226
Acquisition expenses.................................................. 330 1,912 441
Marketing............................................................. 757 1,820 5,556
Deposit related expenses.............................................. 897 531 406
Conferences and seminars.............................................. 534 530 773
Investment and treasury services...................................... 272 332 448
Other................................................................. 2,840 2,240 3,131
----------- ----------- -----------
$ 8,935 $ 12,107 $ 16,088
=========== =========== ===========
NOTE 29: BUSINESS SEGMENT REPORTING
Public enterprises like ours are required to report financial and
descriptive information about their reportable operating segments. An operating
segment is defined as a component of an enterprise that (a) engages in business
activities from which it may earn revenues and incur expenses, (b) whose
operating results are regularly reviewed by the enterprise's chief operating
decision maker to make decisions about resources to be allocated to the segment
and assess its performance and (c) for which discrete financial information is
available. We conduct a variety of business activities within the following
segments:
Net
Interest Provision Pre-Tax
Income for Loan Non-Interest Non-Interest Income Total
(Expense) Losses Income Expense (Loss) Assets
---------- ---------- ---------- ---------- ---------- ----------
At or for the year ended December 31, 2001:
Residential Loan Servicing...................... $ (16,529) $ -- $ 119,503 $ 68,383 $ 34,591 $ 420,134
OTX............................................. -- -- 2,150 38,542 (36,392) 13,231
Ocwen Realty Advisors........................... -- -- 11,913 10,968 944 1,351
Unsecured Collections........................... 140 1,176 3,058 7,042 (5,020) --
Residential Discount Loans...................... 15,125 6,060 (4,733) 8,727 (4,396) 115,691
Commercial Loans................................ (400) 7,223 (1,574) 13,043 (22,236) 280,220
Affordable Housing.............................. (7,917) 1,207 (849) 19,945 (29,917) 132,724
Commercial Real Estate.......................... (2,820) -- 4,941 898 1,222 83,794
Subprime Residential Lending.................... 2,657 -- 13,742 2,849 13,549 83,599
Corporate Items and Other....................... (214) -- 21,190 12,049 2,098 580,406
---------- ---------- ---------- ---------- ---------- ----------
$ (9,958) $ 15,666 $ 169,341 $ 182,446 $ (45,557) $1,711,150
========== ========== ========== ========== ========== ==========
At or for the year ended December 31, 2000:
Residential Loan Servicing...................... (5,756) -- 84,137 58,773 19,609 218,981
OTX............................................. (719) -- 2,424 35,655 (33,951) 20,462
Ocwen Realty Advisors (1)....................... -- -- 12,738 12,824 (86) 1,625
Unsecured Collections........................... (104) 6,867 1,481 8,908 (14,398) 8,417
Residential Discount Loans...................... 24,549 (637) 7,725 11,757 21,154 396,305
Commercial Loans................................ 9,917 9,195 16,703 16,853 648 555,040
Affordable Housing.............................. (9,912) (248) 702 14,702 (23,664) 171,070
Commercial Real Estate.......................... (18,121) -- 37,299 2,649 16,530 80,561
Subprime Residential Lending.................... (180) -- (22,267) 2,086 (24,532) 135,617
Corporate Items and Other....................... 16,052 -- 36,583 5,802 30,126 661,342
---------- ---------- ---------- ---------- ---------- ----------
$ 15,726 $ 15,177 $ 177,525 $ 170,009 $ (8,564) $2,249,420
========== ========== ========== ========== ========== ==========
110
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
Net
Interest Provision Pre-Tax
Income for Loan Non-Interest Non-Interest Income Total
(Expense) Losses Income Expense (Loss) Assets
---------- ---------- ---------- ---------- ---------- ----------
At or for the year ended December 31, 1999:
Residential Loan Servicing...................... $ 5,630 $ -- $ 59,876 $ 44,990 $ 20,515 $ 219,048
OTX............................................. -- -- 2,056 20,398 (18,343) 4,829
Ocwen Realty Advisors........................... -- -- -- -- -- --
Unsecured Collections........................... 477 870 17 6,373 (6,750) 16,401
Residential Discount Loans...................... 27,669 8,435 (12,773) 26,912 (20,451) 711,104
Commercial Loans................................ 54,146 4,610 19,633 40,908 28,404 1,016,366
Affordable Housing.............................. (9,360) (105) 6,605 15,284 (17,934) 169,521
Commercial Real Estate.......................... (1,803) -- 3,443 4,976 (3,336) 301,438
Subprime Residential Lending.................... 14,972 -- (31,102) 13,974 (30,103) 223,403
Corporate Items and Other....................... 5,951 (7,100) 96,887 21,253 62,817 619,564
---------- ---------- ---------- ---------- ---------- ----------
$ 97,682 $ 6,710 $ 144,642 $ 195,068 $ 14,819 $3,281,674
========== ========== ========== ========== ========== ==========
<FN>
(1) Non-interest income for the year ended December 31, 2000 included $975 of
intercompany revenues we have eliminated in consolidation.
</FN>
A brief description of our segments follows:
o Residential Loan Servicing. Includes our fee-for-services business of
providing loan servicing, including asset management and resolution
services, to third-party owners of non-performing, underperforming and
subprime assets.
o OTX. Formed in 1998, develops and markets advanced technology solutions
for the mortgage and real estate industries, including residential and
commercial mortgage servicing systems.
o Ocwen Realty Advisors. Provides property valuation services and real
estate research for residential and commercial properties.
o Unsecured Collections. Primarily comprised of activities related to our
charged-off unsecured credit card receivables, which were acquired at a
discount.
o Residential Discount Loans. Activities of this segment include asset
acquisition and resolution of single family residential loans and the
related real estate owned.
o Commercial Loans. Activities of this segment include our resolution of
commercial discount loans and related real estate owned. Commercial
loan activities previously included our origination of multi-family and
commercial real estate loans held for investment, a business which we
ceased in 1999.
o Affordable Housing Properties. Includes our investments, primarily
through limited partnerships, in qualified low-income rental housing
for the purpose of obtaining Federal income tax credits pursuant to
Section 42 of the Code.
o Commercial Real Estate. Principally comprised of activities related to
our real estate investments acquired in connection with our acquisition
of OAC in October 1999.
o Subprime Residential Lending. In August 1999, we closed our domestic
subprime origination business, which had been conducted primarily
through OFS. Previously, activities of this segment included our
acquisition and origination of single family residential loans to
non-conforming borrowers.
o Corporate Items and Other. Consists primarily of extraordinary gains on
repurchases of debt, individually insignificant business activities,
amounts not allocated to our operating segments, distributions on our
Capital Securities, transfer pricing mismatches, other general
corporate expenses and the results of the securities portfolio other
than residuals and subordinates. Residuals and subordinate interests,
including those related to our securitization activities have been
included in the related business activity. Also includes our UK
operations, including our equity investment in Kensington, which was
sold during November 2000, as well as the activities of our previously
owned subsidiary, Ocwen UK, which was sold on September 30, 1999. Ocwen
UK was primarily engaged in the origination and servicing of subprime
loans in the United Kingdom.
We allocate interest income and expense to each business segment for the
investment of funds raised or funding of investments made taking into
consideration the duration of such liabilities or assets. Ocwen Realty Advisors
charges other segments based on cost
111
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
plus a standard mark-up that varies based on the type valuation service being
provided. We make allocations of non-interest expense generated by corporate
support services to each business segment based upon our estimate of time and
effort spent in the respective activity. As such, the resulting amounts
represent estimates of the contribution of each business activity to our overall
results.
NOTE 30: COMMITMENTS AND CONTINGENCIES
We lease certain premises under various non-cancelable operating leases
with terms expiring at various times through 2007, exclusive of renewal option
periods. Our annual aggregate minimum rental commitments under these leases are
summarized as follows:
2002.......................................................... $ 4,033
2003.......................................................... 3,914
2004.......................................................... 3,181
2005.......................................................... 966
2006.......................................................... 71
Thereafter.................................................... --
-----------
Minimum lease payments ....................................... $ 12,165
===========
We converted rental commitments for our facilities outside the United
States of America to U.S. dollars using exchange rates in effect at December 31,
2001. Rent expense for the years ended December 31, 2001, 2000 and 1999 was
$3,533, $3,374 and $6,101, respectively.
At December 31, 2001, we had commitments of $3,432 to fund construction
loans (including loans accounted for as investments in real estate) secured by
multi-family and commercial properties. In addition, we had commitments under
outstanding letters of credit in the amount of $210. Through our investment in
subordinated securities and subprime residuals, which had a fair value of
$65,058 at December 31, 2001, we support senior classes of securities.
On April 20, 1999, a complaint was filed on behalf of a putative class of
public shareholders of the Company in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida against OCN and OAC. On April 23,
1999, a complaint was filed on behalf of a putative class of public shareholders
of OAC in the Circuit Court of the Fifteenth Judicial Circuit, Palm Beach
County, Florida, against OAC and certain directors of OAC. The plaintiffs in
both complaints sought to enjoin consummation of the acquisition of OAC by OCN.
The cases were consolidated, and on September 13, 1999 a consolidated amended
complaint was filed. The injunction was denied, and on October 14, 1999 OCN was
dismissed as a party. Plaintiffs' remaining claims were for damages for alleged
breaches of common law fiduciary duties. In October 2001, the parties reached an
agreement in principle.
On June 3, 1999, Walton Street Capital, L.L.C. ("Walton") filed suit
against OAC and Ocwen Partnership, L.P. in the Circuit Court of Cook County,
Illinois. Walton has alleged that OAC committed an anticipatory breach of
contract with respect to the proposed sale by OAC of all of its interest in its
commercial mortgage-backed securities portfolio to Walton. Walton has claimed
damages in an amount in excess of $20,000. As of October 20, 2000, both Walton
and OAC filed motions for Summary Judgement. On December 21, 2000, the Circuit
Court granted Walton's Limited Motion for Summary Judgement concerning
liability. Ocwen filed a Motion for Certification of an Interlocutory Appeal and
is seeking an Entry of Stay pending appeal. On February 20, 2001, Ocwen filed a
motion for reconsideration requesting the Circuit Court vacate its order
granting summary judgment to Walton. On January 29, 2002, after oral argument,
the Circuit Court reversed its earlier ruling by vacating the order granting
summary judgment. The parties are engaged in discovery.
On February 4, 2002 we were notified by the California Tax Credit
Allocation Committee of a challenge to our receipt of previously allocated
federal low-income housing tax credits for a recently constructed affordable
housing development in which we invested. We intend to contest this challenge,
which stems from an issue regarding a determination of the date the development
was made available for occupancy. If the Committee prevails in its challenge, we
could incur a loss of up to $7,500.
We are subject to various other pending legal proceedings. In management's
opinion, the resolution of these other claims will not have a material effect on
the consolidated financial statements.
112
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 31: PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed Statements of Financial Condition of Ocwen Financial Corporation
December 31,
----------------------------
2001 2000
----------- -----------
Assets:
Cash and cash equivalents.............................................................. $ 1,114 $ 77,244
Cash held at Bank subsidiary........................................................... 26,872 13,482
Investments in subsidiaries:
Bank subsidiary..................................................................... 198,813 256,833
Non-Bank subsidiaries............................................................... 400,297 399,187
Advance due from Bank subsidiary....................................................... 3,138 2,808
Investment in unconsolidated entity.................................................... 113 --
Loan portfolio, net.................................................................... -- 408
Discount loan portfolio, net........................................................... -- 8,417
Investment in real estate.............................................................. 1,797 3,300
Income taxes receivable................................................................ 16,824 17,749
Deferred tax asset..................................................................... -- 22,375
Other assets........................................................................... 2,631 2,737
----------- -----------
$ 651,599 $ 804,540
=========== ===========
Liabilities and Stockholders' Equity:
11.875% Note payable................................................................... $ 87,025 $ 100,050
Notes and debentures payable to non-Bank subsidiaries.................................. 131,251 137,251
Accrued interest payable to non-Bank subsidiaries...................................... 7,847 7,537
Advance due to non-Bank subsidiaries................................................... 20,515 47,388
Deferred tax liability................................................................. 16,249 --
Other liabilities...................................................................... 9,606 8,888
----------- -----------
Total liabilities................................................................... 272,493 301,114
Stockholders' equity................................................................... 379,106 503,426
----------- -----------
$ 651,599 $ 804,540
=========== ===========
113
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
Condensed Statements of Operations of Ocwen Financial Corporation
For the Years Ended December 31,
----------------------------------------------
2001 2000 1999
----------- ----------- -----------
Interest income....................................................... $ 1,946 $ 907 $ 2,510
Interest income from subsidiaries:
Bank subsidiary.................................................. 776 1,438 1,941
Non-Bank subsidiaries............................................ -- 2,394 3,669
Interest expense...................................................... 11,465 12,293 14,656
Interest expense - non-Bank subsidiaries.............................. 14,387 14,518 14,372
----------- ----------- -----------
Net interest expense before provision for loan losses................. (23,130) (22,072) (20,908)
Provision for loan losses............................................. 1,495 7,504 1,176
----------- ----------- -----------
Net interest expense after provision for loan losses.................. (24,625) (29,576) (22,084)
Non-interest income................................................... 527 22,499 51,464
Non-interest expense.................................................. -- 3,783 5,721
Servicing fee expense - Bank subsidiary............................... 5,907 7,173 3,074
Equity in earnings (losses) in unconsolidated entities................ -- (5,280) (9,154)
----------- ----------- -----------
Income (loss) before income taxes and extraordinary gain......... (30,005) (23,313) 11,431
Income tax expense (benefit).......................................... 37,175 (16,271) (3,990)
----------- ----------- -----------
Income (loss) before equity in net income (losses) of subsidiaries
and extraordinary gain........................................ (67,180) (7,042) 15,421
Equity in net income (losses) of subsidiaries:
Bank subsidiary.................................................. (57,590) 6,043 45,166
Non-bank subsidiaries............................................ (45) 2,915 (41,182)
Extraordinary gain on repurchase of debt, net of tax.................. 33 276 427
----------- ----------- -----------
Net income (loss)..................................................... $ (124,782) $ 2,192 $ 19,832
=========== =========== ===========
114
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
Condensed Statements of Cash Flows of Ocwen Financial Corporation
For the Years Ended December 31,
----------------------------------------------
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss)...................................................... $ (124,782) $ 2,192 $ 19,832
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Equity in income of Bank subsidiary............................... 57,590 (6,043) (45,166)
Equity in (income) loss of non-Bank subsidiaries.................. 45 (2,915) 41,182
Equity in loss (income) of unconsolidated entity, net............. -- 5,280 9,154
Premium amortization, net......................................... 408 (3) (5,913)
Provision for loan losses......................................... 1,495 7,503 1,176
Loss on interest-earning assets................................... -- -- (81)
Extraordinary gain on repurchase of long-term debt................ (53) (439) (1,322)
Gain on sale of real estate held for investment................... -- (1,155) (297)
Gain on sale of Ocwen UK.......................................... -- -- (50,371)
Gain on sale of investment in Kensington Group plc................ -- (20,025) --
Decrease (increase) in deferred tax assets........................ 38,624 21,988 (22,581)
Increase (decrease) in deferred tax liability..................... -- (50) (1,952)
Decrease (increase) in other assets............................... (152) (70) 21,483
Decrease (increase) in income taxes receivable.................... 925 (2,556) 21,718
Increase (decrease) in income taxes payable....................... -- (637) (953)
Increase (decrease) in accrued expenses and other liabilities..... 719 (5,305) (2,962)
----------- ----------- -----------
Net cash provided (used) by operating activities.................. (25,181) (2,235) (17,053)
----------- ----------- -----------
Cash flows from investing activities:
Net investments in and advances to subsidiaries................... (33,731) (21,967) (21,603)
Proceeds from sale of Ocwen UK.................................... -- -- 122,101
Proceeds from sale of investment in Kensington Group plc.......... -- 48,556 --
Distributions from (investment in) unconsolidated entity.......... -- 3,143 --
Principal payments received on loans held for investment.......... -- -- 2,119
Principal payments received on discount loans..................... 6,922 10,207 17,596
Purchase of discount loans........................................ -- (9,730) (8,788)
Increase in investment in real estate............................. 1,503 (2,145) --
----------- ----------- -----------
Net cash provided (used) by financing activities.................. (25,306) 28,064 111,425
----------- ----------- -----------
Cash flows from financing activities:
Repurchase of notes............................................... (13,233) (3,361) (19,828)
Repayments of loans to executive officers, net.................... -- -- 763
Exercise of common stock options.................................. 902 -- 23
Issuance of shares of common stock................................ 78 56 43
Repurchase of common stock........................................ -- (8,996) (30,691)
----------- ----------- -----------
Net cash provided (used) by investing activities....................... (12,253) (12,301) (49,690)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents................... (62,740) 13,528 44,682
Cash and cash equivalents at beginning of year......................... 90,726 77,198 32,516
----------- ----------- -----------
Cash and cash equivalents at end of year............................... $ 27,986 $ 90,726 $ 77,198
=========== =========== ===========
115
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2001, 2000, AND 1999
(Dollars in thousands, except share data)
NOTE 32: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarters Ended
----------------------------------------------------------------
December 31, September 30, June 30, March 31,
2001 2001 2001 2001
------------ ------------ ----------- -----------
Interest income......................................... $ 14,742 $ 18,594 $ 25,218 $ 24,817
Interest expense........................................ 19,414 22,307 24,728 26,880
Provision for loan losses............................... (2,363) (388) 10,297 8,120
----------- ----------- ----------- -----------
Net interest income (expense) after provision for
loan losses........................................ (2,309) (3,325) (9,807) (10,183)
Non-interest income..................................... 41,107 41,742 43,362 43,130
Non-interest expense.................................... 44,132 44,602 42,856 50,856
Distributions on Capital Securities..................... 1,719 1,663 1,697 2,053
Equity in income (losses) of investments in
unconsolidated entities.............................. 204 (84) 139 45
----------- ----------- ----------- -----------
Income (loss) before income taxes and extraordinary
gain .................................................. (6,849) (7,932) (10,859) (19,917)
Income taxes expense (benefit).......................... -- 65,000 10,825 5,762
----------- ----------- ----------- -----------
Income (loss) before extraordinary gain................. (6,849) (72,932) (21,684) (25,679)
Extraordinary gain (loss) on repurchase of debt,
net of tax ............................................ (44) -- 243 2,163
----------- ----------- ----------- -----------
Net income (loss)....................................... $ (6,893) $ (72,932) $ (21,441) $ (23,516)
=========== =========== =========== ===========
Earnings (loss) per share:
Basic................................................ $ (0.10) $ (1.08) $ (0.32) $ (0.35)
========== ========== ========== ==========
Diluted.............................................. $ (0.10) $ (1.08) $ (0.32) $ (0.35)
========== ========== ========== ==========
Quarters Ended
----------------------------------------------------------------
December 31, September 30, June 30, March 31,
2000 2000 2000 2000
------------ ------------ ----------- -----------
Interest income......................................... $ 40,984 $ 45,287 $ 50,455 $ 48,090
Interest expense........................................ 35,599 44,433 45,662 43,396
Provision for loan losses............................... 2,573 6,861 3,134 2,609
----------- ----------- ----------- -----------
Net interest income (expense) after provision for
loan losses......................................... 2,812 (6,007) 1,659 2,085
Non-interest income..................................... 59,810 49,536 37,234 30,945
Non-interest expense.................................... 45,391 44,700 41,844 38,074
Distributions on Capital Securities..................... 2,538 2,730 2,918 3,194
Equity in income (losses) of investments in
unconsolidated entities................................ (284) (893) (1,812) (2,260)
----------- ----------- ----------- -----------
Income (loss) before income taxes and extraordinary
gain .................................................. 14,409 (4,794) (7,681) (10,498)
Income taxes expense (benefit).......................... 15,079 (1,486) (2,381) (3,255)
----------- ----------- ----------- -----------
Income (loss) before extraordinary gain................. (670) (3,308) (5,300) (7,243)
Extraordinary gain (loss) on repurchase of debt,
net of tax ............................................ 10,039 2,628 3,901 2,145
----------- ----------- ----------- -----------
Net income (loss)....................................... $ 9,369 $ (680) (1,399) $ (5,098)
=========== =========== =========== ==========
Earnings (loss) per share:
Basic................................................ $ 0.14 $ (0.01) $ (0.02) $ 0.07
========== ========== ========== ==========
Diluted.............................................. $ 0.14 $ (0.01) $ (0.02) $ 0.07
========== ========== ========== ==========
116
SHAREHOLDER INFORMATION
Price Range of the Company's Common Stock
Our common stock is traded under the symbol "OCN" on the New York Stock
Exchange ("NYSE"). The following table sets forth the high and low sales prices
for our common stock, as traded on the NYSE:
High Low
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2001:
First quarter.................................... $ 9.80 $ 6.38
Second quarter................................... 10.44 8.54
Third quarter.................................... 11.20 6.40
Fourth quarter................................... 9.01 6.75
2000:
First quarter.................................... $ 9.25 $ 5.25
Second quarter................................... 8.63 5.44
Third quarter.................................... 6.88 5.44
Fourth quarter................................... 6.44 4.50
At the close of business on March 8, 2002, our common stock price was
$6.90.
We do not currently pay cash dividends on common stock and have no current
plans to do so in the future. The timing and amount of future dividends, if any,
will be determined by our Board of Directors and will depend, among other
factors, upon our earnings, financial condition, cash requirements, the capital
requirements of the Bank and other subsidiaries and investment opportunities at
the time any such payment is considered. In addition, the indentures relating to
the Notes and the Junior Subordinated Debentures contain certain limitations on
the payment of dividends by us.
As a holding company, the payment of any dividends by us will be
significantly dependent on dividends and other payments received from our
subsidiaries, including the Bank. For a description of limitations on our
ability to pay dividends on our common stock and on the ability of the Bank to
pay dividends, see Notes 18, 19 and 25 to our Consolidated Financial Statements.
Number of Holders of Common Stock
At March 8, 2002, 67,308,819 shares of our common stock were outstanding
and held by approximately 1,255 holders of record. Such number of stockholders
does not reflect the number of individuals or institutional investors holding
our stock in nominee name through banks, brokerage firms and others.
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