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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, 2000
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)
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(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 9, 2001: $354,631,433
(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,
2001: 67,152,363 shares
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to
Shareholders for fiscal year ended December 31, 2000 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 17, 2001, and as filed with the
Commission on or about March 30, 2001, are incorporated by reference into Part
III, Items 10-13.
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OCWEN FINANCIAL CORPORATION
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business...................................................... 5
General..................................................... 5
Business Acquisitions and Dispositions...................... 5
Segments.................................................... 6
Single Family Residential Discount Loans.................. 6
Commercial Loans.......................................... 7
Domestic Residential Mortgage Loan Servicing.............. 8
Investments in Low-Income Housing Tax Credit Interests.... 9
OTX....................................................... 10
Commercial Real Estate.................................... 11
UK Operations............................................. 11
Domestic Subprime Single Family Residential Lending....... 11
Unsecured Collections..................................... 12
Ocwen Realty Advisors..................................... 12
Corporate Items and Other................................. 12
Sources of Funds............................................ 13
Risk Factors................................................ 14
Competition................................................. 14
Subsidiaries................................................ 14
Employees................................................... 14
Regulation.................................................. 14
The Company............................................... 15
The Bank.................................................. 16
Federal Taxation............................................ 21
State Taxation.............................................. 21
Item 2. Properties.................................................... 22
Item 3. Legal Proceedings............................................. 22
Item 4. Submission of Matters to a Vote of Security Holders........... 22
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
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
(CONTINUED)
PAGE
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Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 23
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................................................... 24
Item 13. Certain Relationships and Related Transactions................ 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K..................................................... 25
Signatures.................................................... 28
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," "estimate," "expect," "foresee," "intend," "in
the event of," "may," "plan," "propose," "prospect," "whether," "will," "would,"
future or conditional verb tenses, similar terms, variations on such terms or
negatives of such terms. Although 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, change to the Company's computer equipment and the
information stored in its data centers, availability of and costs associated
with obtaining adequate and timely sources of liquidity, ability to repay or
refinance indebtedness (at maturity or upon acceleration), to meet collateral
calls by lenders (upon re-valuation of the underlying assets or otherwise), to
generate revenues sufficient to meet debt service payments and other operating
expenses, availability of discount loans and servicing rights for purchase, size
of, nature of and yields available with respect to the secondary market for
mortgage loans, financial, securities and securitization markets in general,
allowances for loan losses, changes in real estate conditions (including
liquidity, valuation, revenues, rental rates, occupancy levels and competing
properties), adequacy of insurance coverage in the event of a loss, other
factors generally understood to affect the real estate acquisition, mortgage,
servicing and leasing markets, securities investments and the software and
3
technology industry, 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). 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.
4
PART I
ITEM 1. BUSINESS (DOLLARS IN THOUSANDS)
GENERAL
Ocwen Financial Corporation ("OCN" or the "Company") is a financial
services company headquartered in West Palm Beach, Florida. The Company's
primary businesses are the servicing and resolution of subperforming and
nonperforming 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 also 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 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.
The Company's business activities in recent years reflect a change in
strategic direction from capital-intensive lines of business to fee-based lines
of business such as mortgage loan servicing and developing technology solutions
for the mortgage and real estate industries.
BUSINESS ACQUISITIONS AND DISPOSITIONS
On November 22, 2000, the Company sold its minority investment in
Kensington Group plc ("Kensington"), an originator of subprime residential
mortgages in the United Kingdom ("UK"), for the pound sterling equivalent of
approximately $48,600, net of stamp duty and other fees. The Company had
purchased 36.07% of the total outstanding common stock of Kensington in February
1998. See "Segments - UK Operations."
On October 7, 1999, Ocwen Acquisition Company, an indirect wholly-owned
subsidiary of OCN, merged with (the "Merger") and into Ocwen Asset Investment
Corp. ("OAC"). OAC was a real estate investment company that invested in several
categories of real estate and real estate related assets. Prior to the Merger,
the Company, through Investors Mortgage Insurance Holding Company, owned 8.12%
of the outstanding common stock of OAC and 8.71% of the outstanding partnership
units of Ocwen Partnership L.P. ("OPLP"). OPLP is the operating partnership
subsidiary of OAC. In accordance with the terms of the Merger, OAC shareholders
(except for OCN or its subsidiaries) received 0.71 shares of OCN stock for each
outstanding share of OAC common stock, and a total of 12,371,750 shares of OCN
stock at a value of $96,809 were issued to OAC shareholders. The Merger, which
resulted in OCN acquiring the remaining interest in OAC, reflected an aggregate
purchase price of $101,271, including direct costs of the acquisition. The
Merger was accounted for as a purchase, and the purchase price was allocated to
OAC's assets and liabilities based on their fair market values, resulting in
$60,042 of excess of net assets acquired over the purchase price.
On September 30, 1999, the Company sold all the shares of its
wholly-owned subsidiary, Ocwen UK plc ("Ocwen UK"), to Malvern House Acquisition
Limited for the pound sterling equivalent of $122,101 in cash. Ocwen UK was
originally formed to acquire the UK mortgage loan portfolio and residential
subprime mortgage loan origination and servicing operations of Cityscape
Financial Corp. ("Cityscape UK") in April 1998. See "Segments - UK Operations."
On June 2, 1999, Ocwen Technology Xchange ("OTX"), a wholly-owned
subsidiary of OCN, acquired the assets of Synergy Software, LLC ("Synergy"), a
developer of commercial and multifamily mortgage servicing systems for $10,000,
of which $5,000 has been paid and $5,000 is a holdback which will be released
over time if certain performance objectives are attained. The acquisition was
accounted for as a purchase. See "Segments - OTX."
On January 20, 1998, the Company acquired DTS Communications, Inc.
("DTS"), a real estate technology company located in San Diego, California, for
a purchase price of $13,025 in cash, common stock of the Company and repayment
of certain indebtedness. The acquisition was accounted for as a purchase. DTS
has developed technology tools to automate real estate transactions. DTS is a
wholly-owned subsidiary of OTX. See "Segments - OTX."
On November 6, 1997, the Company acquired AMOS, Inc. ("AMOS"), a
Connecticut-based company engaged primarily in the development of residential
mortgage loan servicing software. The acquisition was accounted for as a
purchase. The aggregate purchase price was $9,718, including $4,815 that is
contingent on AMOS meeting certain software development performance criteria.
AMOS is a wholly-owned subsidiary of OTX. See "Segments - OTX."
5
SEGMENTS
The Company's business segments consist of the following: (i) single
family residential discount loan acquisition and resolution activities,
including real estate owned; (ii) commercial loan activities, including
commercial discount loans and real estate owned; (iii) servicing of domestic
residential mortgage loans for others; (iv) investments in low-income housing
tax credit interests (v) technology, which is conducted through OTX and its
subsidiaries; (vi) commercial real estate; (vii) United Kingdom ("UK")
operations; (viii) domestic subprime single family residential lending; (ix)
unsecured collections; (x) Ocwen Realty Advisors ("ORA"); and (xi) corporate
items and other.
Segment activity in recent years reflects growth in the domestic loan
servicing segment, continued investment in the development of new technology
products at OTX, an exit from the subprime loan origination business, both in
the US and the UK, the cessation of commercial and multi-family loan origination
activity and the acquisition of OAC. This activity reflects the Company's
transition in business strategy from capital-intensive businesses to fee-based
businesses.
SINGLE FAMILY RESIDENTIAL 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.
The volume of discount loan acquisitions has declined in recent years,
primarily because of two factors: the strength of the domestic economy, which
has led to a decline in the volume of nonperforming loans being brought to the
market; and the Company's change in strategic direction from capital intensive
lines of business to fee-based businesses.
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.
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.
6
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, including OTX's
residential loan servicing system REAL-e(TM), 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 has sold
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 2000 or the second half of 1999.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 14 to 15 and "Note 32: Business
Segment Reporting" on pages 113 to 115 of the Company's 2000 Annual Report to
Shareholders (the "Annual Report to Shareholders") and is incorporated herein by
reference.
COMMERCIAL LOANS
Commercial loan activities include both discount loans and originated
loans. See "Single Family Residential Discount Loans" above for a discussion
regarding discount loan acquisition, resolution and sale activities, including
commercial. A discussion regarding commercial loans originated by the Company
follows.
The Company's investment in multi-family residential and commercial
real estate loans have declined significantly during 1999 and 2000, 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.
7
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 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 of the net cash flow from
the property during the term of 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 14 to 15 and "Note 32: Business
Segment Reporting" on pages 113 to 115 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
In connection with the securitization and sale of loans, the Company
generally retained the rights to service such loans for investors. More
recently, the Company also purchased mortgage servicing rights, which are
recorded at the amount paid.
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
8
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.
The Company continues to grow and develop its servicing business as
part of its change in strategic focus from capital intensive to fee-based
businesses. As a result, the Company has seen steady growth in the average
unpaid principal balance of loans serviced for others from $7,998,093 during
1998 to $10,798,857 during 2000. In 2001, the Company will be boarding
approximately an additional $1,027,600 of loans under a servicing agreement that
was concluded on December 31, 2000 and approximately an additional $3,184,200 of
loans under a servicing agreement that was concluded on January 11, 2001.
The Company's loan servicing operations are conducted out of its
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 14 to 15 and "Note 32: Business
Segment Reporting" on pages 113 to 115 of the Company's 2000 Annual Report to
Shareholders (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.
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
9
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.
During 2000, the Company began reducing its investment in low-income
housing tax credit interests both as part of its change in strategic focus away
from capital intensive lines of business and because the volume of tax credits
being generated was exceeding its ability to utilize them effectively. As a
result, the Company has sold or has entered into agreements to sell the majority
of the properties that represent its investment in such interests. The Company
will continue to develop those projects that are currently under construction,
which may also be sold in the future.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 14 to 15 and "Note 32: Business
Segment Reporting" on pages 113 to 115 of the Company's 2000 Annual Report to
Shareholders (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 REALTrans(SM), REAL-e(SM) and
REALSynergy(TM).
The Company's acquisition of DTS and its product in 1998 served as the
basis for the REALTrans system, an internet-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.
REALTrans also provides for bulk order management that allows customers to order
real estate documents and services for an entire portfolio of loans.
The Company's acquisition of AMOS, Inc. and its products in 1997 became
the basis for the REAL-e software, a Microsoft(R) Windows(R)-based, residential
loan-servicing platform that manages the entire servicing life cycle of single
family loans. 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. The table-driven architecture of REAL-e permits workflow customization
by users without requiring support from their information technology staffs.
REAL-e was fully implemented by the Bank on January 1, 2001. The Bank has used
REAL-e since that time as the platform for managing both its own portfolio of
single family residential mortgage loans and the loans that it services for
third parties.
The acquisition of Synergy's product in 1999 was the basis for the
REALSynergy software, 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. REALSynergy and its MS-DOS(R)-based
predecessor, AMICUS, represent one of the most widely used commercial and
multi-family loan servicing systems in the country.
The losses incurred by OTX to date reflect OCN's continuing efforts to
develop and market OTX and its suite of technology products.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 14 to 15 and "Note 32: Business
Segment Reporting" on pages 113 to 115 of the Company's 2000 Annual Report to
Shareholders (the "Annual Report to Shareholders") and is incorporated herein by
reference.
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COMMERCIAL REAL ESTATE
The Company entered the commercial real estate business largely as a
result of its acquisition of OAC in 1999. OAC had followed a strategy that
sought to capitalize on inefficiencies in the real estate markets by investing
in distressed commercial and multi-family real properties, including properties
acquired by a mortgage lender at foreclosure (or through deed in lieu of
foreclosure), as well as in properties that were environmentally distressed or
located outside the United States. Most of the properties purchased as part of
this strategy were in markets, such as San Francisco, that were characterized by
limited new supply and barriers to entry as a result of government regulation of
development and lack of developable land.
The properties acquired were substantially renovated, including tenant
improvements and improvements to lobbies and other public areas. The Company
also upgraded mechanical, HVAC, electrical, fire and life/safety systems and
made other improvements necessary to comply with the Americans with Disabilities
Act of 1990. As a result of these improvements, the Company has been able to
increase occupancy rates greatly while at the same time significantly increasing
average rents.
The enhanced cash flow and improved physical condition of the
properties has increased market values and marketability for most properties. As
a result, the Company has been able to successfully market and sell several of
the properties at gains. As of December 31, 2000, the Company was actively
marketing two of its four remaining properties, one of which was sold in January
2001.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 14 to 15 and "Note 32: Business
Segment Reporting" on pages 113 to 115 of the Company's 2000 Annual Report to
Shareholders (the "Annual Report to Shareholders") and is incorporated herein by
reference.
UK OPERATIONS
The Company completed its exit from the UK subprime loan origination
business in 2000 with the sale of Kensington on November 22, 2000 for a pretax
gain of $20,025. The Company had entered the UK subprime residential mortgage
market in 1998 through the acquisition of 36.07% of the total outstanding common
stock of Kensington on February 25, 1998 for $45,858. The Company's investment
was accounted for under the equity method. Kensington is an originator of
subprime residential mortgages in the UK. The Company's investment at December
31, 1999 represented 35.84% of Kensington's total outstanding common stock.
On September 30, 1999, the Company sold all the shares of Ocwen UK and
recorded a pretax gain on sale of $50,371. On April 24, 1998, the Company,
through its then wholly-owned subsidiary Ocwen UK, had acquired substantially
all of the assets, and certain liabilities, of Cityscape UK. The Company
acquired Cityscape UK's mortgage loan portfolio and its residential subprime
mortgage loan origination and servicing businesses for the pound sterling
equivalent of $421,326 and assumed $12,393 of Cityscape UK's liabilities. The
acquisition was accounted for as a purchase.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 14 to 15 and "Note 32: Business
Segment Reporting" on pages 113 to 115 of the Company's 2000 Annual Report to
Shareholders (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 residential
loan origination offices 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 had 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 had 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.
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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 14 to 15 and "Note 32: Business
Segment Reporting" on pages 113 to 115 of the Company's 2000 Annual Report to
Shareholders (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 extent that collections have exceeded original cost. The Company's
contractual obligations to acquire these receivables expired June 2000. No
purchases were made in the third and fourth quarters of 2000 and no future
purchases are contemplated at this time. This business segment also provides
collection services for third party mortgage investors as well as for the
Company's own portfolio of loans.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 14 to 15 and "Note 32: Business
Segment Reporting" on pages 113 to 115 of the Company's 2000 Annual Report to
Shareholders (the "Annual Report to Shareholders") and is incorporated herein by
reference.
OCWEN REALTY ADVISORS
As part of its strategic focus on fee-based businesses, the Company
established Ocwen Realty Advisors ("ORA") in 1999 as a new division within the
Company. ORA provides valuation services to external customers in the wholesale
lending community as well as due diligence and research analysis for the
Company's own commercial and residential real estate transactions.
An important part of the process of acquiring and managing mortgage
loans portfolios is the accurate review and analysis of the collateral offered
as security for the loans. ORA not only provides traditional valuation products
such as appraisals and broker price opinions, it also employs proprietary
Internet-based valuation models and other alternative valuation products that
can more precisely meet the specific risk management needs of its customers.
ORA also monitors the state of the economy in 60 of the largest U.S
real estate markets. The resulting data allows ORA to assist customers in making
loan decisions in riskier markets and in timing loan and asset dispositions. ORA
can customize reports down to the specific property level to fit the needs of a
customer.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 14 to 15 and "Note 32: Business
Segment Reporting" on pages 113 to 115 of the Company's 2000 Annual Report to
Shareholders (the "Annual Report to Shareholders") and is incorporated herein by
reference.
CORPORATE ITEMS AND OTHER
Corporate items and other consists primarily of extraordinary gains on
repurchases of debt, 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.
Corporate items and other also includes the results of the securities
portfolio, whether available for sale, trading or held for investment, other
than subprime residuals and subordinate interests (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") at book value. As a result of an
increase in prepayment speeds due to declining interest rates, the Company
recorded significant impairment charges on the IOs in 1998 prior to the sale
resulting from the Company's decision to discontinue this investment activity
and write down the book value. The AAA-rated agency IOs consisted of IOs, which
12
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 14 to 15 and "Note 32: Business
Segment Reporting" on pages 113 to 115 of the Company's 2000 Annual Report to
Shareholders (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, proceeds from the sales thereof and servicing fees 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. A significant 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.
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, 2000, the
deposits which were allocated to this office comprised approximately 11% 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.
13
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
58 to 59, "Deposits" on pages 51 to 52, "Note 18: Deposits" on pages 95 to 96,
"Note 19: Bonds - Match Funded Agreements" on page 96, "Note 20: Lines of Credit
and Other Short-Term Borrowings" on pages 96 to 97 and "Note 21: Notes,
Debentures and Other Interest-Bearing Obligations" on pages 97 to 98 of the 2000
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, 2000 the Company had 1,217 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, which insures up to legal limits deposits
placed at the bank. 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 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.
14
ACTIVITIES RESTRICTION. There are generally no restrictions on the
activities of a savings and loan holding company, such as the Company, that held
only one savings institution subsidiary as of May 4, 1999. 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
after one year be subject to the restrictions 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 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, as well as
subsidiaries established by the Bank.
15
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 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 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.
OTS has adopted 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.
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.
16
The OTS and other banking regulators proposed revisions to their
capital rules concerning the treatment of residual interests in asset
securitizations and other transfers of financial assets. Generally, the proposed
rule would require that risk-based capital be held in an amount equal to the
amount of residual interests retained on an institution's balance sheet and
would limit the amount of residual interests that may be included in Tier 1
capital.
In January 2001, the four federal banking agencies jointly issued
expanded examination and supervision guidance relating to subprime lending
activities. In the guidance, "subprime" lending generally refers to programs
that target borrowers with weakened credit histories or lower repayment
capacity. The guidance principally applies to institutions with subprime lending
programs with an aggregate credit exposure equal to or greater than 25 percent
of an institution's Tier 1 capital. Such institutions would be subject to more
stringent risk management standards and, in many cases, additional capital
requirements. As a starting point, the guidance generally expects that such an
institution would hold capital against subprime portfolios in an amount that is
one and one half to three times greater than the amount appropriate for similar
types of non-subprime assets. The guidance is primarily directed at insured
depository institutions. Management is currently analyzing the impact of the
guidance on the conduct of its business.
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 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, 2000 under the above
policy consisted of $280,249 of assets classified as substandard and $1,569 of
assets classified as doubtful. In addition, at the same date, $272,834 of assets
were designated as special mention.
Substandard assets at December 31, 2000 under the above policy
consisted primarily of $156,316 of loans and real estate owned related to the
Company's discount single family residential loan program and $102,899 of loans
and real estate owned related to the Company's discount commercial real estate
loan program. Special mention assets at December 31, 2000 under the policy
consisted primarily of $124,445 and $129,787 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
17
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 any written agreement, order or directive 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, 2000, 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
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; and (iii) 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 unless that activity or investment would be permissible if the
association were a national bank and for the association as a savings
association. The Bank met the QTL test throughout 2000, and its qualified thrift
investments comprised 72.36% of its portfolio assets at December 31, 2000.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. Effective April 1, 1999, the
Bank is required to file a notice with the OTS at least 30 days prior to making
any payment to repurchase, redeem, retire or otherwise acquire debt instruments
included in total risk-based capital (each 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 undercapitalized," 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.
18
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 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 collateral. 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, 2000, the Bank's unimpaired capital and surplus
amounted to $293,093, resulting in a general loans-to-one borrower limitation of
$43,964 under applicable laws and regulations.
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 75 basis points (a) 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% (130% deposits at least half of which is uninsured) 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, 2000, 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.
In December, 2000, Congress passed the Financial Regulatory Relief and Economic
Efficiency Act of 2000 (Pub. L. 106-569), which repealed the statutory liquidity
requirement for savings associations formerly found in HOLA. Accordingly, in
March 2001, the OTS issued and Interim Final Rule that eliminated the 4%
liquidity requirement. The Interim Rule requires savings associations to
maintain sufficient liquidity to ensure their safe and sound operation.
19
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, OTX 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.
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.
GRAMM-LEACH-BLILEY ACT. The Bank is also subject to the
Gramm-Leach-Bliley Act ("GLB Act"), which was signed into law at the end of
1999. The GLB Act contains comprehensive consumer financial privacy
restrictions. Various federal enforcement agencies, including the Federal Trade
Commission, have issued final regulations to implement the GLB Act; however,
compliance with the new regulations is voluntary until July 1, 2001. The
restrictions fall into two basic categories. First, a financial institution must
provide various notices to consumers about an institution's privacy policies and
practices. Second, the GLB Act act gives consumers the right to prevent the
financial institution from disclosing non-public personal information about the
consumer to non-affiliated third parties, with exceptions. As with all new
regulations, we intend to prepare the appropriate disclosures and internal
procedures to assure compliance with these new requirements.
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 RESERVE REGULATION. Under Federal Reserve Board regulations,
the Bank is required to maintain a reserve against its transaction accounts
(primarily interest-bearing and noninterest-bearing checking accounts). Because
reserves must generally be maintained in cash or in noninterest-bearing
accounts, the effect of the reserve requirements is to increase an institution's
cost of funds. These regulations generally require that the Bank maintain
reserves against net transaction accounts. Institutions may designate and exempt
$5,000 of certain reservable liabilities from these reserve requirements. This
amount is subject to adjustment by the Federal Reserve Board. The Bank, like
other depository institutions maintaining reservable accounts, may borrow from
the Federal Reserve Bank discount window, but the Federal Reserve Board's
regulations require the Bank to exhaust other reasonable alternative sources
before borrowing from the Federal Reserve Bank. Numerous other regulations
promulgated by the Federal Reserve Board affect the business operations of the
Bank. These include regulations relating to equal credit opportunity, electronic
fund transfers, collection of checks, truth in lending, truth in savings and
availability of funds.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System was created in 1932 and
consists of twelve regional FHLBs. The FHLBs are federally chartered but
privately owned institutions created by Congress. The Federal Housing Finance
Board ("Finance Board") is an agency of the federal government and is generally
responsible for regulating the FHLB System. Each FHLB is owned by its member
institutions. The primary purpose of the FHLBs is to provide funding to their
members for making housing loans as well as for affordable housing and community
development lending. FHLBs are generally able to make advances to their member
institutions at interest rates that are lower than could otherwise be obtained
by such institutions. Under current rules, an FHLB member is generally required
to purchase FHLB stock in an amount equal to at least 5% of the aggregate
outstanding advances made by the FHLB to the member. The GLB Act and new
regulations adopted by the Finance Board in December 2000 require a new capital
structure for the FHLBs. The new capital structure will contain risk-based and
leverage capital requirements similar to those currently in place for depository
institutions. Each FHLB must submit a capital structure plan to the Finance
Board for approval within 270 days of the publication of the new regulations.
Generally, an institution is eligible to be a member of the FHLB for the
district where the member's principal place of business is located. The Bank ,
whose home office is in Ft. Lee, New Jersey, is a member of the New York FHLB.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act ("CRA")
requires financial institutions regulated by the federal financial supervisory
agencies to ascertain and help meet the credit needs of their delineated
communities, including low- to moderate-income neighborhoods within those
communities, while maintaining safe and sound banking practices. The regulatory
agency assigns one of four possible ratings to an institution's CRA performance
and is required to make public an institution's rating and written evaluation.
The four possible ratings of meeting community credit needs are outstanding,
satisfactory, needs to improve, and substantial noncompliance. In 1999, the Bank
received a "satisfactory" CRA rating from the OTS. This rating reflects our
commitment to meeting the credit needs of the communities we serve. Under
regulations that apply to all CRA performance evaluations after July 1, 1997,
many factors play a role in assessing a financial institution's CRA performance.
The institution's regulator must consider its financial capacity and size, legal
impediments, local economic conditions and demographics, including the
competitive environment in which it operates. The evaluation does not rely on
absolute standards, and the institutions are not required to perform specific
activities or to provide specific amounts or types of credit. We maintain a CRA
file available for public viewing.
The bank has filed an application with the OTS to be designated a
Wholesale Bank for CRA purposes beginning in May 2001. The Wholesale Bank
designation is available to institutions that are not in the business of
extending home mortgage, small business, small farm or consumer loans to retail
customers. Wholesale Banks are subject to a separate CRA test that measures its
community development loans, investments and services.
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. 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
20
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, 2000, the Company's gross deferred tax assets included $4,374,
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 1996 and all prior tax years. Thus, the
Federal income tax returns for the years 1997 through 1999 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.
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.
21
ITEM 2. PROPERTIES
The following table sets forth information relating to the Company's
facilities at December 31, 2000.
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 $ 5,016
BANK MAIN OFFICE:
2400 Lemoine Ave
Fort Lee, NJ........................................... Leased $ 13
SERVICING CENTER:
12650 Ingenuity Drive
Orlando, FL............................................ Owned $ 22,732
SOFTWARE DEVELOPMENT AND SERVICING OPERATIONS CENTER:
Information Technology Park
Bangalore, India....................................... Leased $ 252
OTX OFFICES:
California office:
5050 Avenida Encinas, Suite 200
Carlsbad, CA........................................... Leased $ 166
Amos, Inc.:
10 Research Parkway
Wallingford, CT........................................ Leased $ 79
Synergy Software, LLC:
Two Creekside Crossing
10 Cadillac Drive, Suite 350
Brentwood, TN.......................................... Leased $ 188
OTX's main offices are located in facilities provided by the Company.
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 33: Commitments and Contingencies" on page 115 to 116 of the
Company's 2000 Annual Report to Shareholders which is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
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 120 of the 2000 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 10 to 13 of the 2000 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 14 to 60 of the 2000 Annual Report to Shareholders and is
incorporated herein by reference. In addition, please also note the information
below, which is not discussed in the 2000 Annual Report to Shareholders.
RECENT DEVELOPMENTS (DOLLARS IN THOUSANDS)
On January 30, 2001, OCN was hired as an advisor to Jamaica's Financial
Sector Adjustment Company ("FINSAC") to resolve or liquidate approximately
$1,000,000 in non-performing loans and real estate assets. Since 1997, FINSAC
has assumed over 15,000 assets as a result of bank insolvencies within the
Jamaican financial sector.
Subsequent to yearend through March 27, 2001, the Company repurchased
in the open market an aggregate of $15,845 of its 10 7/8% Capital Securities for
aggregate pretax gains of $3,336. Additionally, on March 23, 2001, the Company
repurchased $4,200 of its 11.875% Notes in the open market for a pretax gain of
$97.
On March 19, 2001, OTX announced that Washington Mutual Home Loans and
Insurance Services group will utilize REALTrans to order many of the real estate
settlement services necessary to close a mortgage transaction. Washington Mutual
is the eighth largest banking company, the largest savings institution and one
of the top five mortgage originators in the United States.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item appears under the captions "Asset and
Liability Management" on pages 53 to 58, "Note 1: Summary of Significant
Accounting Policies" on pages 70 to 77 and "Note 24: Derivative Financial
Instruments" on pages 100 to 103 of the 2000 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 62 to 119 in the
2000 Annual Report to Shareholders and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
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
17, 2001, and as filed with the Commission on or about March 30, 2001 (the
"Company's 2001 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 2001 Proxy Statement under
the captions "Executive Compensation," "Board of Directors Compensation" and
"Comparison of Cumulative Total Return" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Company's 2001 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 2001 Proxy Statement under
the caption "Certain Relationships and Related Transactions" is incorporated
herein by reference.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS.
2.1 Agreement of Merger dated as of July 25, 1999 among Ocwen
Financial Corporation, Ocwen Asset Investment Corp. and Ocwen
Acquisition Company (1)
3.1 Amended and Restated Articles of Incorporation (2)
3.2 Amended and Restated Bylaws (3)
4.0 Form of Certificate of Common Stock (2)
4.1 Form of Indenture between the Company and Bank One, Columbus,
NA as Trustee (2)
4.2 Form of Note due 2003 (included in Exhibit 4.1) (2)
4.3 Certificate of Trust of Ocwen Capital Trust I (4)
4.4 Amended and Restated Declaration of Trust of Ocwen Capital
Trust I (4)
4.5 Form of Capital Security of Ocwen Capital Trust I (included in
Exhibit 4.4) (4)
4.6 Form of Indenture relating to 10.875% Junior Subordinated
Debentures due 2027 of the Company (4)
4.7 Form of 10.875% Junior Subordinated Debentures due 2027 of the
Company (included is Exhibit 4.6)(4)
4.8 Form of Guarantee of the Company relating to the Capital
Securities of Ocwen Capital Trust I (4)
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)
4.12 Form of 11.5% Redeemable Note due 2005 (7)
4.13 Form of Second Supplemental Indenture between OAC and Wells
Fargo Bank Minnesota, National Association as successor to
Norwest Bank Minnesota, National Association, as trustee
thereunder for the 11.5% Redeemable Notes due 2005 (8)
10.1 Ocwen Financial Corporation 1996 Stock Plan for Directors, as
amended (9)
10.2 Ocwen Financial Corporation 1998 Annual Incentive Plan (10)
10.3 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 (11)
10.4 Compensation and Indemnification Agreement, dated as of May 6,
1999, between OAC and the independent committee of the Board
of Directors (12)
10.5 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. (12)
10.6 Indemnity agreement, dated August 24, 1999, among OCN, and
OAC's directors (13)
10.7 Amended Ocwen Financial Corporation 1991 Non-Qualified Stock
Option Plan, dated October 26, 1999 (13)
10.8 First Amendment to Agreement, dated March 30, 2000 between HCT
Investments, Inc. and OAIC Partnership I, L.P. (13)
10.9 Form of Separation Agreement and Full Release, dated as of
February 28, 2001, by and among Christine A. Reich, Ocwen
Federal Bank FSB and Ocwen Financial Corporation (filed
herewith)
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, 2000 (filed herewith)
21.0 Subsidiaries (filed herewith)
23.0 Consent of PricewaterhouseCoopers LLP (filed herewith)
99.1 Risk factors (filed herewith)
(1) Incorporated by reference from a similarly described exhibit included
with the Registrant's Current Report on Form 8-K filed with the
Commission on July 26, 1999.
(2) Incorporated by reference from the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-1
(File No. 333-5153) as amended, declared effective by the commission on
September 25, 1996.
25
(3) Incorporated by reference from the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.
(4) Incorporated by reference from the similarly described exhibit filed in
connection with the Company's Registration Statement on Form S-1 (File
No. 333-28889), as amended, declared effective by the Commission on
August 6, 1997.
(5) Incorporated by reference from the similarly described exhibit filed in
connection with Amendment No. 2 to Offering Circular on Form OC (on
Form S-1) filed on June 7, 1995.
(6) Incorporated by reference from OAC's Current Report on Form 8-K filed
with the Commission on July 11, 1998.
(7) 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.
(8) Pursuant to Item 601 of Regulation S-K, Instruction (4)(iii), the
Registrant agrees to furnish a copy to the Commission upon request.
(9) Incorporated by reference from the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-8 (
File No. 333-44999), effective when filed with the Commission on
January 28, 1998.
(10) 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.
(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 OAC's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999.
(13) Incorporated by reference from the similarly described exhibit included
with the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2000.
(14) Incorporated by reference from "Note 23: Basic and Diluted Earnings per
Share" on pages 99 to 100 of the 2000 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 62 to 119 of the 2000 Annual Report
to Shareholders:
Report of Independent Certified Public Accountants
Consolidated Statements of Financial Condition at December 31, 2000 and
1999
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 2000
Consolidated Statements of Changes in Shareholders' Equity for each of
the three years in the period ended December 31, 2000
Consolidated statements of Comprehensive Income for each of the three
years in the period ended December 31, 2000
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2000
Notes to Consolidated Financial Statements
26
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, 2000
(1) A Form 8-K was filed by the Company on November 9, 2000 which contained
a news release announcing its 2000 third quarter results and certain
other information.
27
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, 2001
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, 2001
- --------------------
William C. Erbey, Chairman of the
Board and Chief Executive Officer
(principal executive officer)
/s/ BARRY N. WISH Date: March 30, 2001
- -----------------
Barry N. Wish, Director
/s/ W. C. MARTIN Date: March 30, 2001
- ----------------
W.C. Martin, Director
/s/ HOWARD H. SIMON Date: March 30, 2001
- -------------------
Howard H. Simon, Director
/s/ HON. THOMAS F. LEWIS Date: March 30, 2001
- ------------------------
Hon. Thomas F. Lewis, Director
/s/ MARK S. ZEIDMAN Date: March 30, 2001
- -------------------
Mark S. Zeidman, Senior Vice President and
Chief Financial Officer
(principal financial officer)
/s/ ROBERT J. LEIST, JR. Date: March 30, 2001
- -----------------------
Robert J. Leist, Jr., Vice President and Chief
Accounting Officer
(principal accounting officer)
28