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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: ___________________to________________
Commission File No. 0-21341
OCWEN FINANCIAL CORPORATION
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(Exact name of Registrant as specified in its charter)
FLORIDA 65-0039856
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1675 PALM BEACH LAKES BOULEVARD
WEST PALM BEACH, FLORIDA 33401
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(Address of principal executive office) (Zip Code)
(561) 682-8000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE (NYSE)
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12 (g) of the Act: Not applicable.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the Common Stock, $.01 par value, held by
nonaffiliates of the registrant, computed by reference to the closing price as
reported on the NYSE as of the close of business on March 09, 2000: $232,380,138
(for purposes of this calculation affiliates include only directors and
executive officers of the registrant).
Number of shares of Common Stock, $.01 par value, outstanding as of March 9,
2000: 67,733,475 shares
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to
Shareholders for fiscal year ended December 31, 1999 are incorporated by
reference into Part I, Items 1 and 3, and Part II, Items 5-8, and portions of
the Company's definitive Proxy Statement with respect to the Company's Annual
Meeting of Shareholders to be held on May 16, 2000, and as filed with the
Commission on or about March 30, 2000, are incorporated by reference into Part
III, Items 10-13.
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OCWEN FINANCIAL CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business............................................................ 5
General............................................................. 5
Segments............................................................ 5
Discount Loans.................................................... 5
Domestic Residential Mortgage Loan Servicing...................... 6
Investments in Low-Income Housing Tax Credit Interests............ 7
Commercial Real Estate Lending.................................... 7
UK Operations..................................................... 9
OTX............................................................... 10
Domestic Subprime Single Family Residential Lending............... 10
Investment Securities............................................. 11
OAC............................................................... 11
Unsecured Collections............................................. 12
Corporate Items and Other......................................... 12
Sources of Funds.................................................... 12
Risk Factors........................................................ 13
Competition......................................................... 13
Employees........................................................... 13
Regulation.......................................................... 14
The Company....................................................... 14
The Bank.......................................................... 15
Federal Taxation.................................................... 20
State Taxation...................................................... 21
Item 2. Properties.......................................................... 22
Item 3. Legal Proceedings................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................. 23
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters................................................. 23
Item 6. Selected Consolidated Financial Data................................ 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 23
Item 7A.Quantitative and Qualitative Disclosures About
Market Risk......................................................... 23
Item 8. Financial Statements and Supplementary Data......................... 23
2
OCWEN FINANCIAL CORPORATION
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
(CONTINUED)
PAGE
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................... 24
PART III
Item 10. Directors and Executive Officers of Registrant...................... 24
Item 11. Executive Compensation.............................................. 24
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................... 23
Item 13. Certain Relationships and Related Transactions...................... 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K....................................................... 25
Signatures............................................................ 27
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT, AND CERTAIN STATEMENTS CONTAINED IN
FUTURE FILINGS BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION"), IN THE COMPANY'S PRESS RELEASES OR IN THE COMPANY'S OTHER PUBLIC
OR SHAREHOLDER COMMUNICATIONS MAY NOT BE, BASED ON HISTORICAL FACTS AND ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. THESE FORWARD-LOOKING STATEMENTS, WHICH ARE BASED ON VARIOUS
ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL), MAY BE IDENTIFIED
BY REFERENCE TO A FUTURE PERIOD(S) OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "ANTICIPATE," "BELIEVE," "COMMITMENT," "CONSIDER," "CONTINUE," "COULD,"
"ENCOURAGE," "ESTIMATE," "EXPECT," "FORESEE," "INTEND," "IN THE EVENT OF,"
"MAY," "PLAN," "PRESENT," "PROPOSE," "PROSPECT," "UPDATE," "WHETHER," "WILL,"
"WOULD," FUTURE OR CONDITIONAL VERB TENSES, SIMILAR TERMS, VARIATIONS ON SUCH
TERMS OR NEGATIVES OF SUCH TERMS. ALTHOUGH THE COMPANY BELIEVES THE ANTICIPATED
RESULTS OR OTHER EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
BASED ON REASONABLE ASSUMPTIONS, IT CAN GIVE NO ASSURANCE THAT THOSE RESULTS OR
EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
INDICATED IN SUCH STATEMENTS DUE TO RISKS, UNCERTAINTIES AND CHANGES WITH
RESPECT TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, INTERNATIONAL,
NATIONAL, REGIONAL OR LOCAL ECONOMIC ENVIRONMENTS (PARTICULARLY IN THE MARKET
AREAS WHERE THE COMPANY OPERATES), GOVERNMENT FISCAL AND MONETARY POLICIES
(PARTICULARLY IN THE MARKET AREAS WHERE THE COMPANY OPERATES), PREVAILING
INTEREST OR CURRENCY EXCHANGE RATES, EFFECTIVENESS OF INTEREST RATE, CURRENCY
AND OTHER HEDGING STRATEGIES, LAWS AND REGULATIONS AFFECTING FINANCIAL
INSTITUTIONS, INVESTMENT COMPANIES AND REAL ESTATE (INCLUDING REGULATORY FEES,
CAPITAL REQUIREMENTS, ACCESS FOR DISABLED PERSONS AND ENVIRONMENTAL COMPLIANCE),
UNCERTAINTY OF FOREIGN LAWS, COMPETITIVE PRODUCTS, PRICING AND CONDITIONS
(INCLUDING FROM COMPETITORS THAT HAVE SIGNIFICANTLY GREATER RESOURCES THAN THE
COMPANY), CREDIT, PREPAYMENT, BASIS, DEFAULT, SUBORDINATION AND ASSET/LIABILITY
RISKS, LOAN SERVICING EFFECTIVENESS, ABILITY TO IDENTIFY ACQUISITIONS AND
INVESTMENT OPPORTUNITIES MEETING THE COMPANY'S INVESTMENT STRATEGY, 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, 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 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, 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 AND LEASING MARKETS AND SECURITIES
INVESTMENTS, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S REPORTS
AND FILINGS WITH THE COMMISSION, INCLUDING ITS REGISTRATION STATEMENTS ON FORMS
S-1 AND S-3 AND PERIODIC REPORTS ON FORMS 10-Q, 8-K AND 10-K AND EXHIBIT 99.1,
RISK FACTORS (filed herewith), TO THE COMPANY'S FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1999. GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON SUCH STATEMENTS. THE COMPANY DOES NOT UNDERTAKE, AND
SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULT OF ANY
REVISIONS THAT MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF SUCH STATEMENTS.
3
PART I
ITEM 1. BUSINESS
GENERAL
Ocwen Financial Corporation ("OCN" or the "Company") is a specialty
financial services company whose primary business activities consist of the
acquisition, servicing and resolution of subperforming and non-performing
residential and commercial mortgage loans, as well as the related development of
loan servicing technology and business-to-business e-commerce solutions for the
mortgage and real estate industries.
The Company is a Florida corporation which was organized in February 1988
in connection with its acquisition of Ocwen Federal Bank FSB (the "Bank"). The
Company is a registered savings and loan holding company subject to regulation
by the Office of Thrift Supervision (the "OTS"). The Bank is a wholly owned
subsidiary of the Company and is subject to regulation by the OTS, as its
chartering authority, and by the Federal Deposit Insurance Corporation ("FDIC"),
as a result of its membership in the Savings Association Insurance Fund
("SAIF"), which insures the Bank's deposits to the maximum extent permitted by
law. The Bank is also subject to certain regulation by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") and currently is a member
of the Federal Home Loan Bank ("FHLB") of New York, one of the 12 regional banks
which comprise the FHLB System.
SEGMENTS
The Company's business segments consisted of the following: (i) single
family residential and commercial real estate discount loan acquisition and
resolution activities; (ii) servicing of domestic residential mortgage loans for
others; (iii) investments in low-income housing tax credit interests; (iv)
commercial real estate lending; (v) United Kingdom ("UK") operations; (vi)
technology (which is conducted through Ocwen Technology Xchange ("OTX") and its
subsidiaries); (vii) domestic subprime single family residential lending; (viii)
investment securities; (ix) the operations of Ocwen Asset Investment Corp., a
Florida corporation (and together with its predecessor by merger, a Virginia
corporation, "OAC"); (x) unsecured collections; and (xi) corporate items and
other.
During 1999, segment activity reflects growth in the servicing segment, an
exit from the direct subprime originations business, both in the US and the UK,
the cessation of commercial and multi-family loan origination activity and the
acquisition of OAC.
DISCOUNT LOANS
Certain mortgage loans, for which the borrower is not current as to
principal and interest payments or for which there is a reason to believe the
borrower will be unable to continue to make scheduled principal and interest
payments, are acquired at a discount. Discount loans generally have collateral
coverage which is sufficiently in excess of the purchase price of the loan, such
that successful resolutions can produce total returns which are in excess of an
equivalent investment in performing mortgage loans.
The Company began its discount loan operations in 1991 and initially
focused on the acquisition of single family residential loans. In 1994 the
Company expanded this business to include the acquisition and resolution of
discount multi-family residential and commercial real estate loans (together,
unless the context otherwise requires, "commercial real estate loans"). Prior to
entering the discount loan business, management of the Company had substantial
loan resolution experience through former subsidiaries of the Company which had
been engaged in the business of providing private mortgage insurance for
residential loans. This experience assisted the Company in developing the
procedures, facilities and systems to evaluate, acquire and resolve such loans.
ACQUISITION OF DISCOUNT LOANS. Discount real estate loans generally are
acquired in pools, although discount commercial real estate loans may be
acquired individually. These pools generally are acquired in auctions or other
competitive bid circumstances. The Company obtains a substantial amount of
discount loans from various private sector sellers, such as banks, savings
institutions, mortgage companies, subprime lenders and insurance companies. In
addition, governmental agencies, including the Department of Housing and Urban
Development ("HUD"), are potential sources of discount loans.
4
The Company generally acquires discount loans solely for its own portfolio.
From time to time, however, the Company and one or more co-investors may submit
a joint bid to acquire a pool of discount loans in order to enhance the
prospects of submitting a successful bid. If successful, the Company and the
co-investors generally allocate ownership of the acquired loans in an agreed
upon manner, although in certain instances the Company and the co-investor may
continue to have a joint interest in the acquired loans. In addition, from time
to time the Company and a co-investor may acquire discount loans through a joint
venture.
Prior to making an offer to purchase a portfolio of discount loans, the
Company conducts an investigation and evaluation of the loans in the portfolio.
Evaluations of potential discount loan acquisitions are conducted primarily by
the Company's employees who specialize in the analysis of nonperforming loans,
often with further specialization based on geographic or collateral-specific
factors. The Company's employees regularly use third parties, such as brokers,
who are familiar with a property's type and location, to assist them in
conducting an evaluation of the value of collateral property, and depending on
the circumstances, particularly in the case of commercial real estate loans, may
use subcontractors, such as local counsel and engineering and environmental
experts, to assist in the evaluation and verification of information and the
gathering of other information not previously made available by a potential
seller.
The Company determines the purchase offer by using a proprietary modeling
system and loan information database which focuses on the anticipated recovery
amount and the timing and cost of the resolution of the loans. The amount
offered by the Company generally is at a discount from both the stated value of
the loan and the value of the underlying collateral which the Company estimates
is sufficient to generate an acceptable return on its investment.
RESOLUTION OF DISCOUNT LOANS. After a discount loan is acquired, the Company
utilizes its information technology software systems to resolve the loan as
expeditiously as possible in accordance with specified procedures. The various
resolution alternatives generally include the following: (i) the borrower brings
the loan current in accordance with original or modified terms; (ii) the
borrower repays the loan or a negotiated amount of the loan; (iii) the borrower
agrees to deed the property to the Company in lieu of foreclosure, in which case
it is classified as real estate owned and held for sale by the Company; or (iv)
the Company forecloses on the loan and the property is acquired at the
foreclosure sale either by a third party or by the Company, in which case it is
classified as real estate owned and held for sale by the Company. In addition,
in the case of single family residential loans, assistance is provided to
borrowers in the form of forbearance agreements under which the borrower either
makes a monthly payment less than or equal to the original monthly payment or
makes a monthly payment more than the contractual monthly payment to make up for
arrearages.
In appropriate cases, the Company works with borrowers to resolve the loan
in advance of foreclosure. One method is through forbearance agreements, which
generally allow the borrower to pay the contractual monthly payment plus a
portion of the arrearage each month, and other means. Although this strategy may
result in an initial reduction in the yield on a discounted loan, the Company
believes that it is advantageous because it (i) generally results in a higher
resolution value than foreclosure; (ii) reduces the amount of real estate owned
acquired by foreclosure or by deed-in-lieu thereof and related risks, costs and
expenses; (iii) enhances the ability of the Company to sell the loan in the
secondary market, either on a whole loan basis or through securitizations (in
which case the Company may continue to earn fee income from servicing such
loans); and (iv) permits the borrower to retain ownership of the home and, thus,
enhances relations between the Company and the borrower.
The general goal of the Company's asset resolution process is to maximize,
in a timely manner, cash recovery on each loan in the discount loan portfolio.
The Company generally anticipates a longer period (approximately 12 to 30
months) to resolve discount commercial real estate loans than to resolve
discount single family residential loans because of their complexity and the
wide variety of issues that may occur in connection with the resolution of such
loans.
The Credit Committee of the Board of Directors of the Bank actively monitors
the asset resolution process to identify discount loans which have exceeded
their expected foreclosure period and real estate owned which has been held
longer than anticipated. Plans of action are developed for each of these assets
to remedy the cause for delay and are reviewed by the Credit Committee.
SALE OF DISCOUNT LOANS. From time to time the Company sells performing
discount loans either on a whole loan basis or indirectly through the
securitization of such loans and sale of the mortgage-related securities backed
by them. During the third quarter of 1999, the Company made a strategic decision
to structure future securitizations as financing transactions, which will
preclude the use of gain-on-sale accounting. There were no securitizations of
loans executed by the Company during the second half of 1999.
5
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on page 21 and "Note 29: Business Segment
Reporting" on pages 113 to 114 of the Company's 2000 Annual Report to
Shareholders (the "Annual Report to Shareholders") and is incorporated herein by
reference.
DOMESTIC RESIDENTIAL MORTGAGE LOAN SERVICING
During 1996, the Company developed a program to provide loan servicing and
various other asset management and resolution services to third party owners of
nonperforming assets, underperforming assets and subprime assets such as Class
B, C and D single family residential mortgage loans. Servicing contracts entered
into by the Company provide for the payment to the Company of specified fees and
in some cases may include terms which allow the Company to participate in the
profits resulting from the successful resolution of the assets being serviced.
Servicing fees, generally expressed as a percent of the unpaid principal
balance, are collected from the borrowers' payments. During any period in which
the borrower is not making payments, the Company is required under certain
servicing agreements to advance its own funds to meet contractual principal and
interest remittance requirements for certain investors, maintain property taxes
and insurance, and process foreclosures. The Company generally recovers such
advances from borrowers for reinstated and performing loans and from investors
for foreclosed loans.
The Bank has been approved as a loan servicer by HUD, Federal Home Loan
Mortgage Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA"). The Bank is rated a Tier 1 servicer and as a preferred servicer for
high-risk mortgages by FHLMC, the highest rating categories. The Bank is one of
only six special servicers of commercial mortgage loans to have received a
"Strong" rating from Standard & Poor's. The Bank is recognized and/or designated
by four rating agencies (Standard & Poor's, Duff and Phelps, IBC Fitch
Investors, and Moody's) as a "Special Servicer" for both commercial and
residential mortgage loans and is the only special servicer with this
designation for all mortgage categories.
The Company developed the concept of residential special servicing in 1997
and, in 1998, began entering into special servicing arrangements wherein the
Company acted as a special servicer for third parties, typically as part of a
securitization. The Company services loans that become greater than 90 days past
due and receives incentive fees to the extent certain loss mitigation parameters
are achieved.
In connection with the securitization and sale of loans, the Company
generally retains the rights to service such loans for investors. The Company
also acquires mortgage servicing rights which are recorded at cost.
During 1999, the Company opened a 125,000 square foot national servicing
center in Orlando, Florida. The service center has capacity to house 900
employees per shift handling customer contact on up to one million loans.
In December 1999, OCN announced a joint venture with independent Italian
loan servicer, FBS SpA, to service mortgage loans in Italy. The new joint
venture gives OCN 50% ownership in a newly formed company, Ocwen FBS SpA.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS
The Company invests in low-income housing tax credit interests primarily
through limited partnerships for the purpose of obtaining Federal income tax
credits pursuant to Section 42 of the Internal Revenue Code of 1986, as amended
(the "Code"), which provides a tax credit to investors in qualified low-income
rental housing that is constructed, rehabilitated or acquired after December 31,
1986. To be eligible for housing tax credits, a property generally must first be
allocated an amount of tax credits by the tax credit allocating agency, which in
most cases also serves as the housing finance agency, of the state in which the
property is located. If the property is to be constructed or rehabilitated, it
must be completed and placed in service within a specified time, generally
within two years after the year in which the tax credit allocation is received.
A specified portion of the apartment units in a qualifying project may be rented
only to qualified tenants for a period of 15 years, or a portion of any
previously claimed tax credits will be subject to recapture, as discussed below.
6
The Company's investments in low-income housing tax credit interests are
made by the Company indirectly through its subsidiaries, which may be a general
partner and/or a limited partner in the partnership. Low-income housing tax
credit partnerships in which the Company, through a subsidiary, acts as a
general partner are presented on a consolidated basis.
The affordable housing projects owned by the low-income housing tax credit
partnerships in which the Company has invested are located throughout the United
States.
The ownership of low-income housing tax credit interests produces two
types of tax benefits. The primary tax benefit flows from the low-income housing
tax credits under the Code which are generated by the ownership and operation of
the real property in the manner required to obtain such tax credits. These
credits may be used to offset Federal income tax on a dollar for dollar basis
but may not offset the alternative minimum tax; tax credits thus may reduce the
overall Federal income tax to an effective rate of 20%. In addition, the
operation of the rental properties produces losses for financial statement and
tax purposes in the early years and sometimes throughout the anticipated
ownership period. These tax losses may be used to offset taxable income from
other operations and thereby reduce income tax which would otherwise be paid on
such taxable income.
Tax credits may be claimed over a ten-year period on a straight-line basis
once the underlying multi-family residential properties are placed in service.
Tax credits claimed reduce the tax payments computed based upon taxable income
to not less than the alternative minimum tax computed for that year or any year
not more than three years before or 15 years after the year the tax credit is
earned. The Taxpayer Relief Act of 1997 changed the tax credit carryback period
from 3 years to 1 year and the carry forward period from 15 years to 20 years
for credits that become available for use in years beginning after December 31,
1997. Tax credits are realized even if units in the project do not continue to
be occupied once the units in the project have been initially rented to
qualifying tenants, and tax credits are not dependent on a project's operating
income or appreciation. Tax credits can be claimed over a ten-year period and
generally can be lost or recaptured only if non-qualifying tenants are placed in
units, ownership of the project is transferred or the project is destroyed and
not rebuilt during a 15-year compliance period for the project. The Company has
established specific investment criteria for investment in multi-family
residential projects which have been allocated tax credits, which require, among
other things, a third party developer of the project and/or the seller of the
interest therein to provide a guarantee against loss or recapture of tax credits
and to maintain appropriate insurance to fund rebuilding in case of destruction
of the project. Notwithstanding the Company's efforts, there can be no assurance
that the multi-family residential projects owned by the low-income housing tax
credit partnerships in which it has invested will satisfy applicable criteria
during the 15-year compliance period and that there will not be loss or
recapture of the tax credits associated therewith.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
COMMERCIAL REAL ESTATE LENDING
The Company's investment in multi-familiy residential and commercial real
estate loans declined significantly during 1999, reflecting the Company's
decision to cease the origination of such loans. The Company's lending
activities have historically included the acquisition of loans secured by
commercial real estate, particularly loans secured by hotels and office
buildings, which the Company began originating in late 1994 and late 1995,
respectively. Commercial real estate loans have also been made to finance the
purchase and refinance of commercial properties, the refurbishment of distressed
properties and the construction of hotels. Additionally, the Company has
originated loans for the construction of multi-family residences, as well as
bridge loans to finance the acquisition and rehabilitation of distressed
multi-family residential properties.
Multi-family residential and commercial real estate loans are secured by a
first priority lien on the real property, all improvements thereon and, in the
case of hotel loans, all fixtures and equipment used in connection therewith, as
well as a first priority assignment of all revenue and gross receipts generated
in connection with the property. The liability of a borrower on multi-family
residential and commercial real estate loans generally is limited to the
borrower's interest in the property, except with respect to certain specified
circumstances.
In addition to stated interest, certain of the the large multi-family
residential and commercial real estate loans originated by the Company include
provisions pursuant to which the borrower agrees to pay the Company as
additional interest on the loan an amount based on specified percentages
(generally between 10-38%) of the net cash flow from the property during the
term of
7
the loan and/or the net proceeds from the sale or refinancing of the property
upon maturity of the loan. Participating interests have also been obtained in
the form of additional fees which must be paid by the borrower in connection
with a prepayment of the loan, generally after an initial lock-out period during
which prepayments are prohibited. The fees which could be payable by a borrower
during specified periods of the loan consist of either fixed exit fees or yield
maintenance payments, which are required to be paid over a specified number of
years after the prepayment and are intended to increase the yield to the Company
on the proceeds from the loan payoff to a level which is comparable to the yield
on the prepaid loan.
Construction loans generally have terms of three to four years and
interest rates which float on a monthly basis in accordance with designated
reference rates. Payments during the term of the loan may be made to the Company
monthly on an interest-only basis. The loan amount may include an interest
reserve which is maintained by the Company and utilized to pay interest on the
loan during a portion of its term.
Construction loans are secured by a first priority lien on the real
property, all improvements thereon and all fixtures and equipment used in
connection therewith, as well as a first priority assignment of all revenues and
gross receipts generated in connection with the property. Construction loans are
made without pre-leasing requirements or any requirement of a commitment by
another lender to "take-out" the construction loan by making a permanent loan
secured by the property upon completion of construction. Disbursements on a
construction loan are subject to a retainage percentage of 10% and are made only
after evidence that available funds have been utilized by the borrower,
available funds are sufficient to pay for all construction costs through the
date of the construction advance and funds remain in the construction budget and
from sources other than the loan to complete construction of the project.
The Company generally has required the general contractor selected by the
borrower, which along with the general construction contract is subject to the
Company's review and approval, to provide payment and performance bonds issued
by a surety approved by the Company in an amount at least equal to the costs
which are estimated to be necessary to complete construction of the project in
accordance with the construction contract. Moreover, the Company generally
conducts site inspections of projects under construction at least bi-monthly and
of completed projects at least semi-annually.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
UK OPERATIONS
The Company entered the UK subprime residential mortgage market in 1998
through the acquisition of 36.07% of the total outstanding common stock of
Norland Capital Group plc, doing business as Kensington Mortgage Company
("Kensington"), on February 25, 1998 for $45.9 million. The Company's investment
at December 31, 1999 represented 35.84% of Kensington's total outstanding common
stock. Kensington is an originator of subprime residential mortgages in the UK.
On April 24, 1998, the Company, through its then wholly-owned subsidiary
Ocwen UK plc ("Ocwen UK"), acquired substantially all of the assets, and certain
liabilities, of the UK operations of Cityscape Financial Corp. ("Cityscape UK").
As consummated, the Company acquired Cityscape UK's mortgage loan portfolio and
its residential subprime mortgage loan origination and servicing businesses. On
October 1, 1999, the Company sold all the shares of Ocwen UK Limited, formerly
known as Ocwen UK, to Malvern House Acquisition Limited for the pound sterling
equivalent of $122.1 million in cash. As a result of the transaction, the
Company recorded a pretax gain on sale of $50.4 million.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
OTX
OTX, which was formed in 1998, designs software solutions for mortgage and
real estate transactions, provides business-to-business e-commerce solutions via
the Internet for the mortgage and real estate industries, and also provides
implementation, integration and consulting services related to its software and
internet products. OTX's principal products are its REALTransSM
8
system, REAL-e(TM) software and REALSynergy(TM) software.
The REALTrans system is a web-based mortgage loan processing application
and vendor management system that facilitates the electronic ordering, tracking
and fulfillment of mortgage and real estate products and services. It automates
the mortgage process, eliminating duplicate manual data entry, reducing errors
and speeding delivery time. It also provides a task-based workflow management
system, allowing users to track the progress of all tasks and vendor requests
required to fulfill an order from any location, at any time.
The REAL-e software is a Windows-based, residential loan-servicing
platform that manages the total servicing life cycle of a loan. The REAL-e
software was developed through years of experience in the loan servicing
industry. It provides powerful workflow management capability, leading to
increased effectiveness and lower operational costs, and it integrates with the
Internet, call center telephony and data warehouse technology. It can be
implemented in its entirety or as a series of modules, including Loan Servicing,
Collections, Loss Mitigation, Default Loan Management, REO Management,
Construction Loan Servicing and Single Family Bond Series Tracking.
In June 1999, OTX acquired the assets of Synergy Software, LLC, a
developer of commercial and multifamily mortgage servicing systems. The
REALSynergy software is an advanced, Windows-based full-service commercial and
multi-family loan servicing software. It handles virtually any loan structure,
including complex remittance requirements, monitors multiple properties for each
loan, tracks building and site information reports, details extensive appraisal
summaries, and includes dynamic, easy-to-use contact management, call tracking
and task management capabilities.
The losses incurred by OTX in 1999 and 1998 reflect OCN's continuing
efforts to develop OTX and its suite of technology-based solutions.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
DOMESTIC SUBPRIME SINGLE FAMILY RESIDENTIAL LENDING
In August 1999, the Company closed its domestic subprime origination
business and reassigned or terminated employees who were involved in loan
origination and related management and support functions. Since late 1994, the
Company's lending activities have included the origination and purchase of
domestic single family residential loans to borrowers who because of prior
credit problems, the absence of a credit history or other factors are unable or
unwilling to qualify as borrowers for a single family residential loan under
guidelines of the FNMA and the FHLMC ("conforming loans") and who have
substantial equity in the properties which secure the loans.
Through 1996, the Company acquired subprime single family residential
loans primarily through a correspondent relationship with Admiral Home Loan
("Admiral") and, to a lesser extent, correspondent relationships with three
other financial services companies. Correspondent institutions originated loans
based on guidelines provided by the Company and promptly sold the loans to the
Company on a servicing-released basis.
The Company, through Ocwen Financial Services, Inc. ("OFS"), acquired
substantially all of the assets of Admiral in a transaction which closed on May
1, 1997. In connection with the Company's acquisition of assets from Admiral,
the Bank transferred its retail and wholesale subprime single family residential
lending operations to OFS.
The terms of the loan products offered by the Company directly or through
its correspondents emphasized real estate loans which generally were
underwritten with significant reliance on a borrower's level of equity in the
property securing the loan.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
9
INVESTMENT SECURITIES
Investment securities includes the results of the securities portfolio,
whether available for sale or investment, other than subprime residuals and
subordinate interests related to the Company's securitization activities (which
have been included in the related business activity). The investment policy of
the Company, which is established by the Investment Committee and approved by
the Board of Directors, is designed primarily to provide a portfolio of
diversified instruments while seeking to optimize net interest income within
acceptable limits of interest rate risk, credit risk and liquidity.
On July 27, 1998, the Company sold its entire portfolio of AAA-rated
agency interest-only securities ("IOs") for $137.5 million, which represented
book value. As a result of an increase in prepayment speeds due to declining
interest rates, the Company recorded impairment charges of $86.1 million in 1998
prior to the sale resulting from the Company's decision to discontinue this
investment activity and write down the book value of the IOs. The AAA-rated
agency IOs consisted of IOs, which are classes of mortgage-related securities
that are entitled to payments of interest but no (or only nominal) principal,
and inverse IOs, which bear interest at a floating rate that varies inversely
with (and often at a multiple of) changes in a specified index.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
OAC
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. A total of 12,371,750
shares of OCN stock at a value of $96.8 million were issued to OAC shareholders.
The Merger, which resulted in OCN acquiring the remaining interest in OAC,
reflects an aggregate purchase price of $101.3 million, including direct costs
of the acquisition. The Merger was accounted for as a purchase, and the purchase
price has been allocated to OAC's assets and liabilities based on their fair
market values. The resulting $60.0 million excess of net assets acquired over
the purchase price is being amortized on a straight-line basis over a period of
five years. Prior to the Merger, the Company, through IMI, owned 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.
On October 20, 1999, OAC merged into Small Commercial Properties
Corporation I ("SCP"), a Florida corporation and an indirect wholly-owned
subsidiary of OCN. Immediately thereafter, SCP changed its name to Ocwen Asset
Investment Corp. As a result of this merger, OAC ceased to qualify as a real
estate investment trust ("REIT") under the Code.
OAC is a real estate investment company which has invested in several
categories of real estate and real estate related assets, including (i)
subordinate interests in commercial and residential mortgage-backed securities;
(ii) distressed commercial and multi-family real property, including properties
acquired by a mortgage lender at foreclosure (or deed in lieu of foreclosure);
(iii) commercial, multi-family and single-family residential mortgage loans,
including construction and rehabilitation loans and mezzanine loans; (iv)
interest-only and inverse interest-only mortgage-related securities supported by
residential and commercial mortgage loans; and (v) discount loans. OAC also has
acquired real property or mortgage loans secured by such real property and other
real property interests that: (i) may be environmentally distressed; or (ii) are
located outside the United States.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
UNSECURED COLLECTIONS
In 1998, the Company began acquiring charged-off unsecured credit card
receivables at a discount. Collections of unsecured credit card receivables are
accounted for under the cost recovery method, whereby revenue is recognized only
to the
10
extent that collections have exceeded original cost.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
CORPORATE ITEMS AND OTHER
Corporate items and other consists primarily of individually insignificant
business activities, amounts not allocated to the operating segments,
distributions on the Company's 10-7/8% Capital Trust Securities, transfer
pricing mismatches and other general corporate expenses.
Additional financial information regarding this segment appears under the
captions "Segment Profitability" on pages 21 to 22 and "Note 29: Business
Segment Reporting" on pages 113 to 114 of the Annual Report to Shareholders and
is incorporated herein by reference.
SOURCES OF FUNDS
GENERAL. Deposits, FHLB advances, reverse repurchase agreements, lines of
credit, and maturities and payments of principal and interest on loans and
securities and proceeds from the sales and securitizations thereof currently are
the principal sources of funds for use in the Company's investment and lending
activities and for other general business purposes. Management of the Company
closely monitors rates and terms of competing sources of funds on a regular
basis and generally utilizes the sources which are the most cost effective.
DEPOSITS. The primary source of deposits for the Company is brokered
certificates of deposit obtained primarily through national investment banking
firms which, pursuant to agreements with the Company, solicit funds from their
customers for deposit with the Company ("brokered deposits"). In addition,
during 1995, the Company commenced a program to obtain certificates of deposit
from customers of regional and local investment banking firms which are made
aware of the Company's products by the Company's direct solicitation and
marketing efforts. The Company also solicits certificates of deposit from
institutional investors and high net worth individuals identified by the
Company. The Company's brokered deposits are reported net of unamortized
deferred fees, which have been paid to investment banking firms.
The Company believes that the effective cost of brokered and other
wholesale deposits is more attractive to the Company than deposits obtained on a
retail basis from branch offices after the general and administrative expense
associated with the maintenance of branch offices is taken into account.
Moreover, brokered and other wholesale deposits generally give the Company more
flexibility than retail sources of funds in structuring the maturities of its
deposits and in matching liabilities with comparably maturing assets.
Although management of the Company believes that brokered and other
wholesale deposits are advantageous in certain respects, such funding sources,
when compared to retail deposits attracted through a branch network, are
generally more sensitive to changes in interest rates and volatility in the
capital markets and are more likely to be compared by the investor to competing
investments. In addition, such funding sources may be more sensitive to
significant changes in the financial condition of the Company. There are also
various regulatory limitations on the ability of all but well-capitalized
insured financial institutions to obtain brokered deposits. See "Regulation -
The Bank - Brokered Deposits." These limitations currently are not applicable to
the Company because the Bank is a well-capitalized financial institution under
applicable laws and regulations. See "Regulation - The Bank -Regulatory Capital
Requirements." There can be no assurances, however, that the Company will not
become subject to such limitations in the future.
As a result of the Company's reliance on brokered and other wholesale
deposits, significant changes in the prevailing interest rate environment, in
the availability of alternative investments for individual and institutional
investors or in the Company's financial condition, among other factors, could
affect the Company's liquidity and results of operations much more significantly
than might be the case with an institution that obtained a greater portion of
its funds from retail or core deposits attracted through a branch network.
11
In addition to brokered and other wholesale deposits, the Company obtains
deposits from its office located in New Jersey. These deposits include
non-interest bearing checking accounts, NOW and money market checking accounts,
savings accounts and certificates of deposit and are obtained through
advertising, walk-ins and other traditional means. At December 31, 1999, the
deposits which were allocated to this office comprised approximately 5% of the
Company's total deposits.
BORROWINGS. Through the Bank, the Company can obtain advances from the
FHLB of New York upon the security of certain of its residential first mortgage
loans, mortgage-backed and mortgage-related securities and other assets,
including FHLB stock, provided certain standards related to the creditworthiness
of the Bank have been met. FHLB advances are available to member financial
institutions, such as the Bank, for investment and lending activities and other
general business purposes. FHLB advances are made pursuant to several different
credit programs, each of which has its own interest rate, which may be fixed or
adjustable, and range of maturities.
The Company also obtains funds pursuant to securities sold under reverse
repurchase agreements. Under these agreements, the Company sells securities
(generally mortgage-backed and mortgage-related securities) under an agreement
to repurchase such securities at a specified price at a later date. Reverse
repurchase agreements have short-term maturities (typically 90 days or less) and
are deemed to be financing transactions. All securities underlying reverse
repurchase agreements are reflected as assets in the Company's consolidated
financial statements and are held in safekeeping by broker-dealers.
The Company's borrowings also include lines of credit, notes, subordinated
debentures, bonds - match funded agreements and other interest-bearing
obligations.
OTHER. Additional information on the Company's sources of funds appears
under the captions "Liquidity, Commitments and Off-Balance Sheet Risks" on pages
60 to 61, "Deposits" on pages 54 to 55, "Note 16: Deposits" on page 96, "Note
17: Bonds-Match Funded Agreements" on pages 96 to 97, "Note 18: Obligations
Outstanding Under Lines of Credit" on page 97 and "Note 19: Notes, Debentures
and Other Interest-Bearing Obligations" on pages 98 to 99 of the Annual Report
to Shareholders and is incorporated herein by reference.
RISK FACTORS
Information related to risk factors which could directly or indirectly,
affect the Company's results of operations and financial condition set forth in
Exhibit 99.1 and are incorporated herein by reference.
COMPETITION
The information under the caption "Competition" set forth in Exhibit 99.1
is incorporated herein by reference.
SUBSIDIARIES
A list of the Company's significant subsidiaries is set forth in Exhibit
21.0 and is incorporated herein by reference.
EMPLOYEES
At December 31, 1999 the Company had 1,131 full time employees. The
employees are not represented by a collective bargaining agreement. Management
considers the Company's employee relations to be satisfactory.
REGULATION
Financial institutions and their holding companies are extensively
regulated under federal and state laws. As a result, the business, financial
condition and prospects of the Company can be materially affected not only by
management decisions and general economic conditions, but also by applicable
statutes and regulations and other regulatory pronouncements and policies
promulgated by regulatory agencies with jurisdiction over the Company and the
Bank, such as the OTS and the FDIC. The effect of such statutes, regulations and
other pronouncements and policies can be significant, cannot be predicted with a
high degree of certainty and can change over time. Moreover, such statutes,
regulations and other pronouncements and policies are intended to protect
depositors and the insurance funds administered by the FDIC and not stockholders
or holders of indebtedness which are not insured by the FDIC.
The enforcement powers available to Federal banking regulators are
substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief summaries
thereof as currently in effect. This discussion is not intended to constitute,
and does not purport
12
to be, a complete statement of all legal restrictions and requirements
applicable to the Company and the Bank and all such descriptions are qualified
in their entirety by reference to applicable statutes, regulations and other
regulatory pronouncements.
THE COMPANY
GENERAL. The Company is a registered savings and loan holding company
under the Home Owner's Loan Act (the "HOLA"). As such, the Company is subject to
regulation, supervision and examination by the OTS.
ACTIVITIES RESTRICTION. There are generally no restrictions on the
activities of a savings and loan holding company, such as the Company, which
holds only one subsidiary savings institution. However, if the Director of the
OTS determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
institution, the Director may impose such restrictions as are deemed necessary
to address such risk, including limiting: (i) payment of dividends by the
savings institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, if the savings institution subsidiary of such a holding company fails
to meet the qualified thrift lender ("QTL") test set forth in OTS regulations,
then such unitary holding company shall become subject to the activities and
restrictions applicable to multiple savings and loan holding companies and,
unless the savings institution requalifies as a QTL within one year thereafter,
shall register as, and become subject to the restriction applicable to, a bank
holding company. See "The Bank-Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisition and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution generally shall commence or continue for a limited period of
time after becoming a multiple savings and loan holding company or subsidiary
thereof any business activity, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting as trustee under deeds of trust; (vi) those activities authorized by
regulation as of March 5, 1987 to be engaged in by multiple savings and loan
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. Those activities described in clause (vii) above also must be
approved by the Director of the OTS prior to being engaged in by a multiple
savings and loan holding company.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS: (i) control of any other savings institution or
savings and loan holding company or substantially all of the assets thereof; or
(ii) more than 5% of the voting shares of a savings institution or holding
company thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company, or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state only if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office located in the state of the institution to be acquired as of March
5, 1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered savings institutions located in the state where the
acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between the
Company or any of its non-bank subsidiaries and
13
the Bank are subject to various restrictions, which are described below under
"The Bank-Affiliate Transactions."
THE BANK
GENERAL. The Bank is a federally-chartered savings bank organized under
the HOLA. As such, the Bank is subject to regulation, supervision and
examination by the OTS. The deposit accounts of the Bank are insured up to
applicable limits by the SAIF administered by the FDIC and, as a result, the
Bank also is subject to regulation, supervision and examination by the FDIC.
The business and affairs of the Bank are regulated in a variety of ways.
Regulations apply to, among other things, insurance of deposit accounts, capital
ratios, payment of dividends, liquidity requirements, the nature and amount of
the investments that the Bank may make, transactions with affiliates, community
and consumer lending laws, internal policies and controls, reporting by and
examination of the Bank and changes in control of the Bank.
INSURANCE OF ACCOUNTS. Pursuant to legislation enacted in September 1996,
a fee was required to be paid by all SAIF-insured institutions at the rate of
$0.657 per $100 of deposits held by such institutions at March 31, 1995. The
money collected recapitalized the SAIF reserve to the level of 1.25% of insured
deposits as required by law. In 1996, the Bank recorded a pre-tax charge of $7.1
million for this assessment. The recapitalization of the SAIF has resulted in
lower deposit insurance premiums for most SAIF-insured financial institutions,
including the Bank.
Insured institutions also are required to share in the payment of interest
on the bonds issued by a specially created government entity, the Finance
Corporation ("FICO"), the proceeds of which were applied toward resolution of
the thrift industry crisis in the 1980s. Beginning on January 1, 1997, in
addition to the insurance premiums paid by SAIF-insured institutions to maintain
the SAIF reserve at its required level pursuant to the current risk
classification system, SAIF-insured institutions pay deposit insurance premiums
towards the payment of interest on the FICO bonds. The FICO assessment rate is
adjusted quarterly.
Under the current risk classification system, institutions are assigned to
one of three capital groups which are based solely on the level of an
institution's capital - "well capitalized," "adequately capitalized" and
"undercapitalized" - which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the FDIA,
as discussed below. These three groups are then divided into three subgroups,
which are based on supervisory evaluations by the institution's primary federal
regulator, resulting in nine assessment classifications. Assessment rates
currently range from 0 basis points for well capitalized, healthy institutions
to 27 basis points for undercapitalized institutions with substantial
supervisory concerns.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally-insured savings associations
are subject to three capital requirements of general applicability: a tangible
capital requirement, a core or leverage capital requirement and a risk-based
capital requirement. All savings associations currently are required to maintain
tangible capital of at least 1.5% of adjusted total assets (as defined in the
regulations), core capital equal to 3% of adjusted total assets and total
capital (a combination of core and supplementary capital) equal to 8% of
risk-weighted assets (as defined in the regulations). For purposes of the
regulation, tangible capital is core capital less all intangibles other than
qualifying purchased mortgage servicing rights. Core capital includes common
stockholders' equity, non-cumulative perpetual preferred stock and related
surplus, minority interests in the equity accounts of fully consolidated
subsidiaries and certain nonwithdrawable accounts and pledged deposits. Core
capital generally is reduced by the amount of a savings association's intangible
assets, other than qualifying mortgage servicing rights.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, including subordinated debt (such as the Bank's
Debentures) which meets specified requirements, and general
14
valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. In determining the required amount of risk-based capital,
total assets, including certain off-balance sheet items, are multiplied by a
risk weight based on the risks inherent in the type of assets. The risk weights
assigned by the OTS for principal categories of assets currently range from 0%
to 100%, depending on the type of asset.
OTS policy imposes a limitation on the amount of net deferred tax assets
that may be included in regulatory capital. (Net deferred tax assets represent
deferred tax assets, reduced by any valuation allowances, in excess of deferred
tax liabilities.) Application of the limit depends on the possible sources of
taxable income available to an institution to realize deferred tax assets.
Deferred tax assets that can be realized from the following generally are not
limited: taxes paid in prior carryback years and future reversals of existing
taxable temporary differences. To the extent that the realization of deferred
tax assets depends on an institution's future taxable income (exclusive of
reversing temporary differences and carryforwards), or its tax-planning
strategies, such deferred tax assets are limited for regulatory capital purposes
to the lesser of the amount that can be realized within one year of the
quarter-end report date or 10% of core capital.
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest rate risk
will be subject to a deduction of its interest rate risk component from total
capital for purposes of determining whether it has met the risk-based capital
requirement. As a result, such an institution will be required to maintain
additional capital in order to comply with the risk-based capital requirement.
Although the final rule was originally scheduled to be effective as of January
1994, the OTS has indicated that it will delay invoking its interest rate risk
rule until appeal procedures are implemented and evaluated. The OTS has not yet
established an effective date for the capital deduction. Management of the
Company does not believe that the adoption of an interest rate risk component to
the risk-based capital requirement will adversely affect the Bank if it becomes
effective in its current form.
Effective April 1, 1999, the OTS minimum core capital ratio provides that
only those institutions with Uniform Financial Institution Rating System
("UFIRS") rating of "1" are subject to a 3% minimum core capital ratio. All
other institutions are subject to a 4% minimum core capital ratio. The 3%
minimum core capital ratio currently applies to all federal savings
associations.
CLASSIFIED ASSETS. OTS regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured associations, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as a loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified as a loss, the
insured institution must either establish specific allowances for loan losses in
the amount of 100% of the portion of the asset classified as a loss or charge
off such amount. In this regard, the Company establishes required reserves and
charges off loss assets as soon as administratively practicable. General loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses do not
qualify as regulatory capital.
In 1996, based upon discussions with the OTS and as a result of an OTS
bulletin issued on December 13, 1996 entitled "Guidance on the Classification
and Regulatory Reporting of Certain Delinquent Loans and Other Credit Impaired
Assets," the Company has classified all discount loans that are 90 or more days
contractually past due, not otherwise classified, as special mention and all
real estate owned, not otherwise classified, as special mention. The Company
also modified its policy for classifying nonperforming discount loans and real
estate owned related to its discount loan portfolio ("nonperforming discount
assets") to take into account both the holding period of such assets from the
date of acquisition and the ratio of book value to market value of such assets.
All nonperforming discount assets which are held 15 months or more after the
date of acquisition are classified substandard; nonperforming discount assets
held 12 months to less than 15 months from the date of acquisition are
classified as substandard if a ratio of book value to market value is 80% or
more; and nonperforming discount assets held less than
15
12 months from the date of acquisition are classified as substandard if they
have a ratio of book value to market value of more than 85%. In addition,
nonperforming discount assets which are performing for a period of time
subsequent to acquisition by the Company are classified as substandard at the
time such loans become nonperforming. The Company also modified its classified
assets policy to classify all real estate owned which is not generating a cash
flow and which has been held for more than 15 months and three years as
substandard and doubtful, respectively. The Company's past experience indicates
that classified discount assets do not necessarily correlate to probability or
severity of loss.
Excluding assets which have been classified loss and fully reserved by the
Bank, the Bank's classified assets at December 31, 1999 under the above policy
consisted of $217.4 million of assets classified as substandard and $7.8 million
of assets classified as doubtful. In addition, at the same date, $479.4 million
of assets were designated as special mention.
Substandard assets at December 31, 1999 under the above policy consisted
primarily of $118.6 million of loans and real estate owned related to the
Company's discount single family residential loan program and $58.0 million of
loans and real estate owned related to the Company's discount commercial real
estate loan program. Special mention assets at December 31, 1999 under the
policy consisted primarily of $384.1 million and $77.1 million of loans and real
estate owned related to the Company's discount single family residential and
discount commercial real estate loan programs, respectively.
PROMPT CORRECTIVE ACTION. Federal law provides the Federal banking
regulators with broad power to take "prompt corrective action" to resolve the
problems of undercapitalized institutions. The extent of the regulators' powers
depends on whether the institution in question is "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Under regulations adopted by the Federal
banking regulators, an institution shall be deemed to be: (i) "well capitalized"
if it has a total risk-based capital ratio of 10.0% or more, has a Tier 1
risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of
5.0% or more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is
less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based
capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is
less than 3.0% and; (v) "critically undercapitalized" if it has a ratio of
tangible equity to adjusted total assets that is equal to or less than 2.0%. The
regulations also permit the appropriate Federal banking regulator to downgrade
an institution to the next lower category (provided that a significantly
undercapitalized institution may not be downgraded to critically
undercapitalized) if the regulator determines: (i) after notice and opportunity
for hearing or response, that the institution is in an unsafe or unsound
condition or (ii) that the institution has received (and not corrected) a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent exam. At December 31, 1999,
the Bank was a "well capitalized" institution under the prompt corrective action
regulations of the OTS.
Depending upon the capital category to which an institution is assigned,
the regulators' corrective powers, many of which are mandatory in certain
circumstances, include: prohibition on capital distributions; prohibition on
payment of management fees to controlling persons; requiring the submission of a
capital restoration plan; placing limits on asset growth; limiting acquisitions,
branching or new lines of business; requiring the institution to issue
additional capital stock (including additional voting stock) or to be acquired;
restricting transactions with affiliates; restricting the interest rates that
the institution may pay on deposits; ordering a new election of directors of the
institution; requiring that senior executive officers or directors be dismissed;
prohibiting the institution from accepting deposits from correspondent banks;
requiring the institution to divest certain subsidiaries; prohibiting the
payment of principal or interest on subordinated debt; and, ultimately,
appointing a receiver for the institution.
QUALIFIED THRIFT LENDER TEST. All savings associations are required to
meet the QTL test set forth in the HOLA to avoid certain restrictions on their
operations. Under the QTL test provisions, a savings institution must maintain
at least 65% of its portfolio assets in qualified thrift investments. In
general, qualified thrift investments include loans, securities and other
investments that are related to housing, small business and credit card lending,
and to a more limited extent, consumer lending and community service purposes.
Portfolio assets are defined as an institution's total assets less goodwill and
other intangible assets, the institution's business property and a limited
amount of the institution's liquid assets. A savings association that does not
16
meet the QTL test set forth in the HOLA and implementing regulations must either
convert to a bank charter or comply with the following restrictions on its
operations: (i) the association may not engage in any new activity or make any
new investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the association
shall be restricted to those of a national bank; (iii) the association shall not
be eligible to obtain any advances from its FHLB; and (iv) payment of dividends
by the association shall be subject to the rules regarding payment of dividends
by a national bank. Upon the expiration of three years from the date the
association ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations). The
Bank met the QTL test throughout 1999, and its qualified thrift investments
comprised 68.83% of its portfolio assets at December 31, 1999.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. Prior to amendments which became
effective April 1, 1999 (see below), the OTS regulation governing capital
distributions by savings associations, which included cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings association as a capital distribution, created three tiers of
associations for capital distribution purposes. These three tiers were based on
regulatory capital, with the top two tiers providing a safe harbor for specified
levels of capital distributions from associations so long as such associations
notified the OTS and received no objection to the distribution from the OTS.
Associations that did not qualify for the safe harbor provided for the top two
tiers of associations were required to obtain prior OTS approval before making
any capital distributions.
Tier 1 associations could make the highest amount of capital
distributions, and were defined as savings associations that, before and after
the proposed distribution, met or exceeded their fully phased-in regulatory
capital requirements. Tier 1 associations were permitted to make capital
distributions during any calendar year equal to the greater of: (i) 100% of net
income for the calendar year-to-date plus 50% of its "surplus capital ratio" at
the beginning of the calendar year; and (ii) 75% of its net income over the most
recent four-quarter period. The "surplus capital ratio" is defined to mean the
percentage by which the association's ratio of total capital to assets exceeds
the ratio of its fully phased-in capital requirement to assets, and "fully
phased-in capital requirement" is defined to mean an association's capital
requirement under the statutory and regulatory standards applicable on December
31, 1994, as modified to reflect any applicable individual minimum capital
requirement imposed upon the association.
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 prior to 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 an 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 prior to 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 "undercapitalized," "significantly
undercapitalized" or "critically under capitalized," as defined in the OTS
capital regulations, following the capital distribution, (b) the proposed
capital distribution raises safety and soundness concerns or (c) the proposed
capital distribution violates a prohibition contained in any statute, regulation
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 new rule also amends the definition of "capital distribution" to
include any payment to repurchase, redeem, retire, or otherwise acquire debt
instruments included in total risk-based capital.
LOAN-TO-ONE BORROWER. Under applicable laws and regulations, the amount of
loans and extensions of credit which may be extended by a savings institution
such as the Bank to any one borrower, including related entities, generally may
not exceed the greater of $500,000 or 15% of the unimpaired capital and
unimpaired surplus of the institution. Loans in an amount equal to an additional
10% of unimpaired capital and unimpaired surplus also may be made to a borrower
if the loans are fully secured by readily marketable securities. An
institution's "unimpaired capital and unimpaired surplus" includes, among other
things, the amount of its core capital and supplementary capital included in its
total capital under OTS regulations.
At December 31, 1999, the Bank's unimpaired capital and surplus amounted
to $332.8 million, resulting in a general loans-to-one borrower limitation of
$49.9 million under applicable laws and regulations.
17
BROKERED DEPOSITS. Under applicable laws and regulations, an insured
depository institution may be restricted in obtaining, directly or indirectly,
funds by or through any "deposit broker," as defined, for deposit into one or
more deposit accounts at the institution. The term "deposit broker" generally
includes any person engaged in the business of placing deposits, or facilitating
the placement of deposits, of third parties with insured depository institutions
or the business of placing deposits with insured depository institutions for the
purpose of selling interests in those deposits to third parties. In addition,
the term "deposit broker" includes any insured depository institution, and any
employee of any insured depository institution, which engages, directly or
indirectly, in the solicitation of deposits by offering rates of interest (with
respect to such deposits) which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
having the same type of charter in such depository institution's normal market
area. As a result of the definition of "deposit broker," all of the Bank's
brokered deposits, as well as possibly its deposits obtained through customers
of regional and local investment banking firms and the deposits obtained from
the Bank's direct solicitation efforts of institutional investors and high net
worth individuals, are potentially subject to the restrictions described below.
Under FDIC regulations, well-capitalized institutions are not subject to the
brokered deposit limitations, while adequately capitalized institutions are able
to accept, renew or roll over brokered deposits only: (i) with a waiver from the
FDIC; and (ii) subject to the limitation that they do not pay an effective yield
on any such deposit which exceeds by more than (a) 75 basis points, the
effective yield paid on deposits of comparable size and maturity in such
institution's normal market area for deposits accepted in its normal market area
or (b) 120% for retail deposits and 130% for wholesale deposits, respectively,
of the current yield on comparable maturity U.S. Treasury obligations for
deposits accepted outside the institution's normal market area. Undercapitalized
institutions are not permitted to accept brokered deposits and may not solicit
deposits by offering an effective yield that exceeds by more than 75 basis
points the prevailing effective yields on insured deposits of comparable
maturity in the institution's normal market area or in the market area in which
such deposits are being solicited. At December 31, 1999, the Bank was a
well-capitalized institution which was not subject to restrictions on brokered
deposits. See "Sources of Funds - Deposits."
LIQUIDITY REQUIREMENTS. All savings associations are required to maintain
an average daily balance of liquid assets, which include specified short-term
assets and certain long-term assets, equal to a certain percentage of the sum of
its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. The liquidity requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings associations. In November 1997, the OTS amended its liquidity
regulations to, among other things, provide that a savings association shall
maintain liquid assets of not less than 4% of the amount of its liquidity base
at the end of the preceding calendar quarter as well as to provide that each
savings association must maintain sufficient liquidity to ensure its safe and
sound operation. Prior to November 1997, the required liquid asset ratio was 5%.
Historically, the Bank has operated in compliance with these requirements.
AFFILIATE TRANSACTIONS. Under federal law and regulation, transactions
between a savings association and its affiliates are subject to quantitative and
qualitative restrictions. Affiliates of a savings association include, among
other entities, companies that control, are controlled by or are under common
control with the savings association. As a result, the Company, OAC and the
Company's non-bank subsidiaries are affiliates of the Bank.
Savings associations are restricted in their ability to engage in "covered
transactions" with their affiliates. In addition, covered transactions between a
savings association and an affiliate, as well as certain other transactions with
or benefiting an affiliate, must be on terms and conditions at least as
favorable to the savings association as those prevailing at the time for
comparable transactions with non-affiliated companies. Savings associations are
required to make and retain detailed records of transactions with affiliates.
Notwithstanding the foregoing, a savings association is not permitted to
make a loan or extension of credit to any affiliate unless the affiliate is
engaged only in activities the Federal Reserve Board has determined to be
permissible for bank holding companies. Savings associations also are prohibited
from purchasing or investing in securities issued by an affiliate, other than
shares of a subsidiary.
Savings associations are also subject to various limitations and reporting
requirements on loans to insiders. These limitations require, among other
things, that all loans or extensions of credit to insiders (generally executive
officers, directors or 10% stockholders of the institution) or their "related
interests" be made on substantially the same terms (including interest rates and
collateral) as, and follow credit underwriting procedures that are not less
stringent than, those prevailing for comparable transactions with the general
public and not involve more than the normal risk of repayment or present other
unfavorable features.
18
COMMUNITY INVESTMENT AND CONSUMER PROTECTIONS LAWS. In connection with its
lending activities, the Bank is subject to a variety of federal laws designed to
protect borrowers and promote lending to various sectors of the economy and
population. Included among these are the Federal Home Mortgage Disclosure Act,
Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit
Opportunity Act, Fair Credit Reporting Act and the Community Reinvestment Act.
SAFETY AND SOUNDNESS. Other regulations include: (i) real estate lending
standards for insured institutions, which provide guidelines concerning
loan-to-value ratios for various types of real estate loans; (ii) risk-based
capital rules to account for interest rate risk, concentration of credit risk
and the risks posed by "non-traditional activities;" (iii) rules requiring
depository institutions to develop and implement internal procedures to evaluate
and control credit and settlement exposure to their correspondent banks; and
(iv) rules addressing various "safety and soundness" issues, including
operations and managerial standards, standards for asset quality, earnings and
stock valuations, and compensation standards for the officers, directors,
employees and principal stockholders of the insured institution.
FEDERAL TAXATION
GENERAL. The Company and all of its domestic subsidiaries currently file,
and expect to continue to file, a consolidated Federal income tax return based
on a calendar year. Ocwen UK, a foreign subsidiary previously owned by the
Company, was not included in the consolidated federal income tax return, but
filed its own tax return in the UK. Consolidated returns have the effect of
eliminating inter-company transactions, including dividends, from the
computation of taxable income.
ALTERNATIVE MINIMUM TAX. In addition to the regular corporate income tax,
corporations, including qualifying savings institutions, are subject to an
alternative minimum tax. The 20% tax is computed on Alternative Minimum Taxable
Income ("AMTI") and applies if it exceeds the regular tax liability. AMTI is
equal to regular taxable income with certain adjustments. For taxable years
beginning after 1989, AMTI includes an adjustment for 75% of the excess of
"adjusted current earnings" over regular taxable income. Net operating loss
carrybacks and carryforwards are permitted to offset only 90% of AMTI.
Alternative minimum tax paid can be credited against regular tax due in later
years.
TAX RESIDUALS. From time to time, the Company acquires Real Estate
Mortgage Investment Conduit ("REMIC") residuals or retains residual securities
in REMICs which were formed by the Company in connection with the securitization
and sale of loans. Although a tax residual may have little or no future economic
cash flows from the REMIC from which it has been issued, the tax residual does
bear the income tax liability or benefit resulting from the difference between
the interest rate paid on the securities by the REMIC and the interest rate
received on the mortgage loans held by the REMIC. This generally results in
taxable income for the Company in the first several years of the REMIC and equal
amounts of tax deductions thereafter. The Company receives cash payments in
connection with the acquisition of tax residuals to compensate the Company for
the time value of money associated with the tax payments related to these
securities and the costs of modeling, recording, monitoring and reporting the
securities. The Company defers all fees received and recognizes such fees in
interest income on a level yield basis over the expected life of the deferred
tax asset related to tax residuals. The Company also adjusts the recognition in
interest income of fees deferred based upon the changes in the actual prepayment
rates of the underlying mortgages held by the REMIC and periodic reassessments
of the expected life of the deferred tax asset related to tax residuals. At
December 31, 1999, the Company's gross deferred tax assets included $2.4 million
which was attributable to the Company's tax residuals and related deferred
income.
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. For a discussion
of the tax effects of investments in low-income housing tax credit interests,
see "Segments-Investment in Low-Income Housing Tax Credit Interests."
EXAMINATIONS. The most recent examination by the IRS of the Company's
Federal income tax return was of the tax return filed for 1996. The statute of
limitations has run with respect to 1995 and all prior tax years. Thus, the
Federal income tax returns for the years 1996 through 1998 are open for
examination. Management of the Company does not anticipate any material
adjustments as a result of any examination, although there can be no assurances
in this regard.
19
STATE TAXATION
The Company's income is subject to tax by the States of Florida and
California, which have statutory tax rates of 5.5% and 10.84%, respectively, and
is determined based on certain apportionment factors. The Company is taxed in
New Jersey on income, net of expenses, earned in New Jersey at a statutory rate
of 3.0%. No state return of the Company has been examined, and no notification
has been received by the Company that any state intends to examine any of the
Company's tax returns.
20
ITEM 2. PROPERTIES
The following table sets forth information relating to the Company's
facilities at December 31, 1999.
Net Book Value of
Property or
Leasehold
Location Owned/Leased Improvements
-------------------------------------- ------------ -----------------
(Dollars in Thousands)
EXECUTIVE OFFICES:
1675 Palm Beach Lakes Boulevard
West Palm Beach, FL................ Leased $ 5,376
MAIN OFFICE:
2400 Lemoine Ave
Fort Lee, NJ....................... Leased $ 15
SERVICING CENTER:
12650 Ingenuity Drive
Orlando, FL........................ Owned $23,021
OTX OFFICES:
Main office:
1675 Palm Beach Lakes Boulevard
West Palm Beach, FL............... Leased $ 45
DTS Communications, Inc:
5050 Avenida Encinas, Suite 200.
Carlsbad, CA...................... Leased $ 123
Amos, Inc.:
10 Research Parkway
Wallingford, CT................... Leased $ 104
Synergy Software, LLC:
109 Westpark Drive.
Brentwood, TN..................... Leased $ 9
OAC does not maintain an office. It relies on the facilities provided by
the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various pending legal proceedings. Management is
of the opinion that the resolution of these claims will not have a material
adverse effect on the results of operations or financial condition of the
Company. See "Note 30: Commitments and Contingencies" on page 115 of the
Company's Annual Report to Shareholders which is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 7, 1999 a special meeting of shareholders of Ocwen Financial
Corporation was held to vote on a proposal to acquire OAC, which was approved.
The results of the vote were 48,558,971 votes for, 23,483 votes against and 8
votes abstaining. Because more than 50% of the shares entitled to vote on the
proposal were so voted, broker nonvotes could not have elected to vote and thus
were not recorded.
21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information required by this Item appears under the caption "Shareholder
Information" on page 119 of the Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information required by this Item appears under the caption "Selected
Consolidated Financial Information" on pages 18 to 20 of the Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information required by this Item appears under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 21 to 63 of the Annual Report to Shareholders and is incorporated herein
by reference. In addition, please also note the information below.
RECENT DEVELOPMENTS
On January 4, 2000 the Company repurchased in the open market $20.0
million of its 11.5% Redeemable Notes for a $3.2 million pre tax gain. The Notes
are due in 2005 and had an outstanding balance of $140.5 million at December 31,
1999.
On January 18, 2000 the Company acquired 44 commercial discount loans for
a cost of $167.6 million. The portfolio includes both performing and
non-performing loans.
On February 3, 2000 the Company sold a commercial mortgage-backed security
for net proceeds of $40.9 million, resulting in a pre tax gain of $2.8 million.
For the period from January 1, 2000 through March 22, 2000, the Company
repurchased 1.4 million shares of its common stock at an average price of $6.48
per share. To date, the Company has repurchased 6.0 million shares, the maximum
amount authorized under its stock repurchase program, at an average price of
$6.61 per share.
On March 24, 2000 the Company announced that it had retained Grubb & Ellis
to exclusively market and sell its portfolio of office buildings located in San
Francisco. This portfolio consists of four properties which total approximately
900,000 square feet.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item appears under the captions "Asset and
Liability Management" on pages 55 to 60, "Note 1: Summary of Significant
Accounting Policies" on pages 72 to 78 and "Note 22: Derivative Financial
Instruments" on pages 101 to 104 of the Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item appears on pages 65 to 118 in the Annual
Report to Shareholders and is incorporated herein by reference.
22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the Company's definitive Proxy Statement with
respect to the Company's Annual Meeting of Shareholders to be held on May 16,
2000, and as filed with the Commission on or about March 30, 2000 (the
"Company's 2000 Proxy Statement") under the captions "Election of Directors -
Nominees for Director," "Executive Officers Who Are Not Directors," and
"Security Ownership of Certain Beneficial Owners - Section 16(a) Beneficial
Ownership Reporting Compliance" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Company's 2000 Proxy Statement under the
captions "Executive Compensation," "Board of Directors Compensation" and
"Performance Graph" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's 2000 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners - Beneficial Ownership
of Common Stock" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Company's 2000 Proxy Statement under the
caption "Certain Relationships and Related Transactions" is incorporated herein
by reference.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS.
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated Bylaws (2)
4.0 Form of Certificate of Common Stock (1)
4.1 Form of Indenture between the Company and Bank One, Columbus, NA as
Trustee (1)
4.2 Form of Note due 2003 (included in Exhibit 4.1) (1)
4.3 Certificate of Trust of Ocwen Capital Trust I (3)
4.4 Amended and Restated Declaration of Trust of Ocwen Capital
Trust I (3)
4.5 Form of Capital Security of Ocwen Capital Trust I (4)
4.6 Form of Indenture relating to 10 7/8% Junior Subordinated
Debentures due 2027 of the Company (3)
4.7 Form of 10 7/8% Junior Subordinated Debentures due 2027 of
the Company (4)
4.8 Form of Guarantee of the Company relating to the Capital
Securities of Ocwen Capital Trust I (3)
4.9 Form of Indenture between the Company and The Bank of New
York as Trustee (5)
4.10 Form of Subordinated Debentures due 2005 (5)
4.11 Form of Indenture between OAC and Norwest Bank Minnesota, National
Association, as Trustee thereunder for the 11.5% Redeemable Notes due
2005 (6)
10.1 Ocwen Financial Corporation 1991 Non-Qualified Stock Option
Plan, as amended (7)
10.2 Ocwen Financial Corporation 1996 Stock Plan for Directors,
as amended (8)
10.3 Ocwen Financial Corporation 1998 Annual Incentive Plan (8)
10.4 Ocwen Financial Corporation Long-Term Incentive Plan (8)
10.5 Loan Facility Agreement dated April 23, 1999 among Ocwen
Limited, National Westminster Bank plc and Ocwen Financial
Corporation (9)
10.6 Agreement of Merger dated as of July 25, 1999 among Ocwen
Financial Corporation, Ocwen Asset Investment Corp. and
Ocwen Acquisition Company (10)
10.7 Loan Agreement, dated as of April 7, 1998, between OAIC Bush Street,
LLC and Salomon Brothers Realty Corp. (11)
10.8 Loan Agreement, dated as of April 24, 1998, between OAC and Greenwich
Financial Products Inc. (12)
10.9 Amended and Restated Loan Agreement, dated as of June 10, 1998, by
and among, inter alia, OAIC California Partnership, L.P., OAIC
California partnership II, L.P., Salomon Brothers Realty Corp. and
LaSalle National Bank (12)
10.10 Compensation and Indemnification Agreement, dated as of May 6, 1999,
between OAC and the independent committee of the Board of
Directors (13)
10.11 Second Amendment to Guarantee of Payment, dated as of July 9, 1999,
made by and between Salomon Brothers Realty Corp. and Ocwen
Partnership, L.P. (13)
10.12 Indemnity agreement, dated August 24, 1999, among OCN, and OAC's
directors (13)
11.1 Computation of earnings per share (14)
12.1 Ratio of earnings to fixed charges (filed herewith)
13.1 Excerpts from the Annual Report to Shareholders for the
year ended December 31, 1999 (filed herewith)
21.0 Subsidiaries (filed herewith)
23.0 Consent of PricewaterhouseCoopers LLP (filed herewith)
27.1 Financial Data Schedule for the year ended December 31,
1999 (filed herewith)
99.1 Risk factors (filed herewith)
(1) Incorporated by reference from the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-1 (File
No. 333-5153) as amended, declared effective by the commission on
September 25, 1996.
(2) Incorporated by reference from the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998
(3) Incorporated by reference from the similarly described exhibit filed in
connection with the Company's Registration Statement on Form S-1 (File No.
333-28889), as amended, declared effective by the Commission on August 6,
1997.
(4) Incorporated by reference from similarly described exhibit included with
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
(5) Incorporated by reference from the similarly described exhibit filed in
connection with Amendment No. 2 to Offering Circular on Form OC (on Form
S-1) filed on June 7, 1995.
(6) Incorporated by reference from OAC's Registration Statement on Form S-4
(File No. 333-64047), as amended, as declared effective by the Commission
on February 12, 1999.
(7) Incorporated by reference from the similarly described exhibit filed in
connection with the Registrant's Registration .
24
Statement on Form S-8 ( File No. 333-44999), effective when filed with the
Commission on January 28, 1998.
(8) Incorporated by reference from the similarly described exhibit to the
Company's definitive Proxy Statement with respect to the Company's 1998
Annual Meeting of Shareholders as filed with the Commission on March 31,
1998.
(9) Incorporated by reference from the similarly described exhibit filed in
connection with the Registrant's Quarterly Report on Form 10Q for the
quarter ended June 30, 1999.
(10) Incorporated by reference from the similarly described exhibit included
with the Registrant's current report on Form 8-K filed with the Commission
on July 26, 1999.
(11) Incorporated by reference from OAC's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998.
(12) Incorporated by reference from the Current Report on Form 8-K filed by OAC
with the Commission on April 23, 1998.
(13) Incorporated by reference from OAC's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999.
(14) Incorporated by reference from "Note 21: Basic and Diluted Earnings per
Share" on pages 100 to 101 of the Annual Report to Shareholders.
FINANCIAL STATEMENTS AND SCHEDULES. The following Consolidated Financial
Statements of Ocwen Financial Corporation and Report of PricewaterhouseCoopers
LLP, Independent Certified Public Accountants, are incorporated herein by
reference from pages 65 to 118 of the Annual Report to Shareholders:
Report of Independent Certified Public Accountants
Consolidated Statements of Financial Condition at December 31, 1999
and 1998
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1999
Consolidated Statements of Changes in Shareholders' Equity for each of the
three years in the period ended December 31, 1999
Consolidated statements of Comprehensive Income for each of the three years
in the period ended December 31, 1999
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1999
Notes to Consolidated Financial Statements
Financial statement schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or notes thereto.
(b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 1999
(1) A Form 8-K was filed by the Company on October 1, 1999 which contained a
news release announcing the sale of Ocwen UK, its estimated 1999 third
quarter results and certain other information.
(2) A Form 8-K was filed by the Company on October 7, 1999 which contained a
news release announcing its acquisition of OAC and information regarding
its stock repurchase program.
(3) A Form 8-K was filed on October 15, 1999 which contained the pro forma
financial information required as a result of the sale of Ocwen UK.
(4) A Form 8-K was filed by the Company on November 12, 1999 which contained
a news release announcing the Company's financial results for the three
and nine months ended September 30, 1999, and certain other information.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
OCWEN FINANCIAL CORPORATION
BY: /s/ WILLIAM C. ERBEY
------------------------------------
William C. Erbey
Chairman of the Board and
Chief Executive Officer
(duly authorized representative)
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ WILLIAM C. ERBEY Date: March 30, 2000
- --------------------------------------------------
William C. Erbey, Chairman of the
Board and Chief Executive Officer
(principal executive officer)
/s/ BARRY N. WISH Date: March 30, 2000
- --------------------------------------------------
Barry N. Wish, Director
/s/ W. C. MARTIN Date: March 30, 2000
- --------------------------------------------------
W.C. Martin, Director
/s/ HOWARD H. SIMON Date: March 30, 2000
- --------------------------------------------------
Howard H. Simon, Director
/s/ HON. THOMAS F. LEWIS Date: March 30, 2000
- --------------------------------------------------
Hon. Thomas F. Lewis, Director
/s/ MARK S. ZEIDMAN Date: March 30, 2000
- --------------------------------------------------
Mark S. Zeidman, Senior Vice President and
Chief Financial Officer
(principal financial officer)
/s/ ROBERT J. LEIST, JR. Date: March 30, 2000
- --------------------------------------------------
Robert J. Leist, Jr., Vice President and Chief
Accounting Officer (principal accounting
officer)