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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, 2001
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 our charter)
Florida 65-0039856
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1675 Palm Beach Lakes Boulevard
West Palm Beach, Florida 33401
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(Address of principal executive office) (Zip Code)
(561) 682-8000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value New York Stock Exchange (NYSE)
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12 (g) of the Act: Not applicable.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the Common Stock, $.01 par value, held by
nonaffiliates of the registrant, computed by reference to the closing price as
reported on the NYSE as of the close of business on March 8, 2002: $260,831,633
(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 8,
2002: 67,308,819 shares
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to
Shareholders for fiscal year ended December 31, 2001 are incorporated by
reference into Part I, Items 1 and 3, and Part II, Items 5-8, and portions of
our definitive Proxy Statement with respect to our Annual Meeting of
Shareholders to be held on May 16, 2002, and as filed with the Commission on or
about March 29, 2002, are incorporated by reference into Part III, Items 10-13.
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OCWEN FINANCIAL CORPORATION
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business......................................................... 4
General........................................................ 4
Recent Business Acquisitions and Dispositions.................. 4
Segments....................................................... 4
Residential Loan Servicing................................... 5
Ocwen Technology Exchange ("OTX")............................ 5
Ocwen Realty Advisors........................................ 6
Unsecured Collections........................................ 7
Residential Discount Loans................................... 7
Commercial Loans............................................. 8
Affordable Housing........................................... 9
Commercial Real Estate....................................... 10
Subprime Residential Lending................................. 10
Corporate Items and Other.................................... 11
Sources of Funds............................................... 11
Risk Factors................................................... 13
Competition.................................................... 13
Subsidiaries................................................... 13
Employees...................................................... 13
Regulation..................................................... 13
The Holding Company.......................................... 13
The Bank..................................................... 14
Federal Taxation............................................... 20
State Taxation................................................. 21
Item 2. Properties....................................................... 22
Item 3. Legal Proceedings................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders.............. 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
1
OCWEN FINANCIAL CORPORATION
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
(CONTINUED)
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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......................................................... 24
Signatures....................................................... 27
2
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are not, and certain statements
contained in future filings by us with the Securities and Exchange Commission
(the "Commission"), in our press releases or in the our other public or
shareholder communications may not be, based on historical facts and are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements, which are based on various
assumptions (some of which are beyond our control), may be identified by
reference to a future period(s) or by the use of forward-looking terminology
such as "anticipate," "believe," "commitment," "consider," "continue," "could,"
"estimate," "expect," "foresee," "intend," "in the event of," "may," "plan,"
"propose," "prospect," "whether," "will," "would," future or conditional verb
tenses, similar terms, variations on such terms or negatives of such terms.
Although we believe the anticipated results or other expectations reflected in
such forward-looking statements are based on reasonable assumptions, we can give
no assurance that those results or expectations will be attained. Actual results
could differ materially from those indicated in such statements due to risks,
uncertainties and changes with respect to a variety of factors, including, but
not limited to, international, national, regional or local economic environments
(particularly in the market areas where we operate), government fiscal and
monetary policies (particularly in the market areas where we operate),
prevailing interest or currency exchange rates, effectiveness of interest rate,
currency and other hedging strategies, laws and regulations affecting financial
institutions, investment companies and real estate (including regulatory fees,
capital requirements, access for disabled persons and environmental compliance),
uncertainty of foreign laws and potential political issues related to operations
outside of the USA, competitive products, pricing and conditions (including from
competitors that have significantly greater resources than our Company), credit,
prepayment, basis, default, subordination and asset/liability risks, loan
servicing effectiveness, ability to identify acquisitions and investment
opportunities meeting our investment strategy, the course of negotiations and
the ability to reach agreement with respect to the material terms of any
particular transaction, satisfactory due diligence results, satisfaction or
fulfillment of agreed upon terms and conditions of closing or performance, the
timing of transaction closings, software integration, development and licensing,
damage to our computer equipment and the information stored our data centers,
availability of and costs associated with obtaining adequate and timely sources
of liquidity, ability to repay or refinance indebtedness (at maturity or upon
acceleration), to meet collateral calls by lenders (upon re-valuation of the
underlying assets or otherwise), to generate revenues sufficient to meet debt
service payments and other operating expenses, availability of discount loans
and servicing rights for purchase, size of, nature of and yields available with
respect to the secondary market for mortgage loans, financial, securities and
securitization markets in general, adequacy of allowances for loan losses,
changes in real estate conditions (including liquidity, valuation, revenues,
rental rates, occupancy levels and competing properties), adequacy of insurance
coverage in the event of a loss, other factors generally understood to affect
the real estate acquisition, mortgage, servicing and leasing markets, securities
investments and the software and technology industry, and other risks detailed
from time to time in our reports and filings with the Commission, including our
Registration Statements on Forms S-1 and S-3 and our periodic reports on Forms
10-Q, 8-K and 10-K and Exhibit 99.1, Risk Factors (filed herewith) 10-K for the
year ended December 31, 2001. Given these uncertainties, readers are cautioned
not to place undue reliance on such. We do not undertake, and specifically
disclaim any obligation, to release publicly the results of any revisions that
may be made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
3
PART I
ITEM 1. BUSINESS (Dollars in thousands)
GENERAL
Ocwen Financial Corporation ("OCN") is a financial services company
headquartered in West Palm Beach, Florida. OCN is a Florida corporation that was
organized in February 1988 in connection with the acquisition of Ocwen Federal
Bank FSB (the "Bank"). OCN 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 OCN and is also subject to regulation by the
OTS, as our 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 that comprise the FHLB System.
Our 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 technology solutions for the mortgage and real
estate industries. Our business activities in recent years reflect a change in
strategic direction from capital-intensive lines of business to fee-based lines
of business: primarily mortgage loan servicing and developing technology
solutions for the mortgage and real estate industries. See "Segments" below.
RECENT BUSINESS ACQUISITIONS AND DISPOSITIONS
On November 22, 2000, we sold our 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. We originally purchased 36.07% of the
total outstanding common stock of Kensington in February 1998.
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,
OCN, 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 was 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. We accounted for
the Merger as a purchase and allocated the purchase price 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, we sold all the shares of our wholly-owned
subsidiary, Ocwen UK plc ("Ocwen UK"), to Malvern House Acquisition Limited for
the pound sterling equivalent of $122,101 in cash. We originally formed Ocwen UK
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.
SEGMENTS
Our business segments consist of the following:
o Residential Loan Servicing
o OTX (technology solutions)
o Ocwen Realty Advisors
o Unsecured Collections
o Residential Discount Loans
o Commercial Loans
o Affordable Housing
o Commercial Real Estate
o Subprime Residential Lending
o Corporate Items and Other
4
Segment activity in recent years reflects growth in our residential
loan servicing segment, continued investment in the development and marketing of
our technology solutions at OTX, an exit from the subprime loan origination
business, both in the US and the UK, our acquisition of OAC, the cessation of
loan acquisitions and origination activity and our continuing resolution or
disposition of those assets not associated with our loan servicing or technology
businesses. This activity reflects our ongoing transition in business strategy
from capital-intensive businesses to fee-based businesses.
Residential Loan Servicing
In connection with the securitization and sale of loans during 1999 and
prior years, we generally retained the rights to service such loans for
investors. More recently, we have purchased servicing rights directly from third
parties. Purchased servicing rights are initially recorded at cost.
During 1996, we 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 us provide for the payment to us of specified fees and in some cases may
include terms that allow us to participate in the profits resulting from the
successful resolution of the assets being serviced. We collect servicing fees,
generally expressed as a percent of the unpaid principal balance, from the
borrowers' payments. During any period in which the borrower is not making
payments, we are required under certain servicing agreements to advance our own
funds to meet contractual principal and interest remittance requirements for
certain investors, maintain property taxes and insurance, and process
foreclosures. We generally recover such advances from borrowers for reinstated
and performing loans and from investors for foreclosed loans.
The U.S. Department of Housing and Urban Development ("HUD"), Freddie
Mac and Fannie Mae have approved the Bank as a loan servicer. Standard & Poor's
has rated the Bank as "Strong" as a Residential Subprime Servicer, Residential
Special Servicer and Commercial Special Servicer. "Strong" represents Standard &
Poor's highest ratings category. Moody's Investors Service has rated the Bank as
"SQ1" as a Residential Subprime Servicer and as a Residential Special Servicer.
"SQ1" represents Moody's Investors Services highest ratings category. Fitch
Ratings has rated the Bank "RPS2" for Residential Subprime Servicing, "RSS2" for
Residential Special Servicing and "CSS2" for Commercial Special Servicing.
In 1997, we also developed the concept of residential special
servicing. In 1998, we began entering into special servicing arrangements
wherein we act as a special servicer for third parties, typically as part of a
securitization. We service loans that become greater than 90 days past due and
receive incentive fees to the extent that we achieve certain loss mitigation
parameters.
We continue to grow and develop our residential servicing business as
part of our change in strategic focus from capital intensive to fee-based
businesses. As a result, we have seen steady growth in the average unpaid
principal balance of residential loans we service for others from $8,802,444
during 1999 to $15,727,659 during 2001.
Our loan servicing operations are primarily conducted out of our
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, we announced a joint venture with an independent
Italian loan servicer, FBS SpA, to service mortgage loans in Italy. OCN holds a
50% ownership interest in a newly formed company, Ocwen.FBS SpA.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 15 to 17 and "Note 29: Business
Segment Reporting" on pages 110 to 112 of our 2001 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 our software and
internet products. OTX's principal products are REALTransSM, REALServicing(TM)
and REALSynergy(TM).
5
On January 20, 1998, we acquired DTS Communications, Inc. ("DTS"), a
real estate technology company located in San Diego, California. The acquisition
was accounted for as a purchase. DTS was merged into OTX in 2000. DTS developed
technology tools to automate real estate. Our acquisition of DTS and its product
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. REALTrans 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.
On November 6, 1997, we 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. AMOS is a wholly-owned subsidiary of OTX. Our acquisition of AMOS and
its products became the basis for the REALServicing software, a Microsoft(R)
Windows(R)-based, residential loan-servicing platform that manages the entire
servicing life cycle of single family loans. We developed the REALServicing
software through years of experience in the loan servicing industry.
REALServicing 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 REALServicing permits workflow customization by
users without requiring support from their information technology staffs. We
fully implemented REALServicing at the Bank on January 1, 2001. The Bank has
used REALServicing 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.
On June 2, 1999, we acquired the assets of Synergy Software, LLC
("Synergy"), a developer of commercial and multifamily mortgage servicing
systems and a wholly-owned subsidiary of OTX. The acquisition of Synergy's
product was the basis for the REALSynergy software, an advanced, Windows-based
full-service commercial and multi-family loan servicing platform. REALSynergy
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 our continuing efforts to
develop and market our suite of technology solutions.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 15 to 17 and "Note 29: Business
Segment Reporting" on pages 110 to 112 of our 2001 Annual Report to Shareholders
and is incorporated herein by reference.
Ocwen Realty Advisors
As part of our strategic focus on fee-based businesses, we established
Ocwen Realty Advisors ("ORA") in 1999 as a new division. ORA provides valuation
services to external customers in the wholesale lending community as well as due
diligence and research analysis for our 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 our customers.
ORA also monitors the state of the economy in 60 of the largest U.S
real estate markets. The resulting data enable ORA to assist customers in making
loan decisions in riskier markets and in timing loan and asset dispositions.
Ocwen Realty Advisors 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 15 to 17 and "Note 29: Business
Segment Reporting" on pages 110 to 112 of our 2001 Annual Report to Shareholders
and is incorporated herein by reference.
6
Unsecured Collections
In 1998, we began acquiring charged-off unsecured credit card
receivables at a discount. We account for collections of unsecured credit card
receivables under the cost recovery method, whereby revenue is recognized only
to the extent that collections have exceeded original cost. Our contractual
obligations to acquire these receivables expired in June 2000. We made no
purchases during 2001 or during the third and fourth quarters of 2000 and plan
no future purchases at this time. This business segment also provides collection
services for third party mortgage investors as well as for our own portfolio of
loans.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 15 to 17 and "Note 29: Business
Segment Reporting" on pages 110 to 112 of our 2001 Annual Report to Shareholders
and is incorporated herein by reference.
Residential Discount Loans
Prior to 2001, we acquired at a discount certain mortgage loans for
which the borrowers were not current as to principal and interest payments or
for which there was reason to believe borrowers would be unable to continue to
make their scheduled principal and interest payments. Discount loans generally
have collateral coverage that is sufficiently in excess of the purchase price of
the loan, such that successful resolutions can produce total returns that are in
excess of an equivalent investment in performing mortgage loans.
We began our discount loan operations in 1991 and initially focused on
the acquisition of single family residential loans. In 1994 we 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, our management had substantial loan resolution
experience through former subsidiaries that had been engaged in the business of
providing private mortgage insurance for residential loans. This experience
assisted us 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: a decline in the volume of nonperforming loans
available for purchase; and, more recently, our change in strategic direction
from capital intensive lines of business to fee-based businesses. We have not
acquired any discount loans since 2000.
Acquisition of Discount Loans. Historically, we generally acquired
discount real estate loans in pools, although we also acquired discount
commercial real estate loans individually. We generally acquired these pools at
auction or in other competitive bid circumstances. We obtained 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"), were potential sources of discount loans.
Prior to making an offer to purchase a portfolio of discount loans, we
conducted an investigation and evaluation of the loans in the portfolio. Our
employees, who specialize in the analysis of nonperforming loans, often with
further specialization based on geographic or collateral-specific factors, had
primary responsibility for conducting evaluations of potential discount loan
acquisitions. Our employees regularly used third parties, such as brokers, who
were 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, used
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.
We determined the purchase offer by using a proprietary modeling system
and loan information database that focused on the anticipated recovery amount
and the timing and cost of the resolution of the loans. The amount offered by us
generally was at a discount from both the stated value of the loan and the value
of the underlying collateral, which we estimated was sufficient to generate an
acceptable return on our investment.
Resolution of Discount Loans. We utilize our information technology
software systems, including OTX's residential loan servicing system
REALServicing(TM), to resolve discount loans as expeditiously as possible in
accordance with specified procedures. The various resolution alternatives
generally include the following:
7
o The borrower brings the loan current in accordance with original or
modified terms;
o The borrower repays the loan or a negotiated amount of the loan;
o The borrower agrees to deed the property to us in lieu of
foreclosure, in which case it is classified as real estate owned
and held for sale; or
o We foreclose on the loan and the property is acquired at the
foreclosure sale either by a third party or by us, in which case it
is classified as real estate owned and held by us for sale.
In appropriate cases, we work 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 discount loan, we believe that
it is advantageous because it:
o Generally results in a higher resolution value than foreclosure;
o Reduces the amount of real estate owned acquired by foreclosure or
by deed-in-lieu thereof and related risks, costs and expenses;
o Enhances our ability to sell the loan in the secondary market; and
o Permits the borrower to retain ownership of the home and, thus,
enhances relations with the borrower.
The general goal of our asset resolution process is to maximize, in a
timely manner, cash recovery on each loan in the discount loan portfolio. We
generally anticipate 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. We develop plans of action for each of these
assets to remedy the cause for delay, and the Credit Committee reviews these
plans.
Sale of Discount Loans. From time to time we have sold 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, we made a strategic decision to structure future
securitizations as financing transactions, which precludes the use of
gain-on-sale accounting. We executed no securitizations of loans during 2001,
2000 or the second half of 1999.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 15 to 17 and "Note 29: Business
Segment Reporting" on pages 110 to 112 of our 2001 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 follows regarding commercial loans that we originated.
Our investment in multi-family residential and commercial real estate
loans declined significantly during 1999, 2000 and 2001, reflecting our decision
in 1999 to cease the origination of such loans. Our lending activities
previously included the acquisition of loans secured by commercial real estate,
particularly loans secured by hotels and office buildings, which we began
originating in late 1994 and late 1995, respectively. We have also made
commercial real estate loans to finance the purchase and refinance of commercial
properties, the refurbishment of distressed properties and the construction of
hotels. Additionally, we have originated loans for the construction of
multi-family residences, as well as bridge loans to finance the acquisition and
rehabilitation of distressed multi-family residential properties.
Multi-family residential and commercial real estate loans are secured
by a first priority lien on the real property, all improvements thereon and, in
the case of hotel loans, all fixtures and equipment used in connection
therewith, as well as a first priority assignment of all revenue and gross
receipts generated in connection with the property. The liability of a borrower
on multi-family residential and commercial real estate loans generally is
limited to the borrower's interest in the property, except with respect to
certain specified circumstances.
8
In addition to stated interest, certain of the multi-family residential
and commercial real estate loans that we originated include provisions pursuant
to which the borrower agrees to pay us, 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. We have also obtained participating
interests in the form of additional fees that 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 that 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 us on the proceeds from the loan payoff to a level that is comparable
to the yield on the prepaid loan.
Construction loans generally have terms of three to four years and
interest rates that float on a monthly basis in accordance with designated
reference rates. Payments during the term of the loan may be made to us monthly
on an interest-only basis. The loan amount may include an interest reserve that
is maintained by us 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. We made construction
loans 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 we make them
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.
We generally have required the general contractor selected by the
borrower, which along with the general construction contract is subject to our
review and approval, to provide payment and performance bonds issued by a surety
approved by us 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, we generally conduct 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 15 to 17 and "Note 29: Business
Segment Reporting" on pages 110 to 112 of our 2001 Annual Report to Shareholders
and is incorporated herein by reference.
Affordable Housing
We have invested in affordable housing properties 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.
During 2000, we began reducing our investment in affordable housing
both as part of our change in strategic focus away from capital intensive lines
of business and because the volume of tax credits being generated was exceeding
our ability to utilize them effectively. As a result, we have sold or have
entered into agreements to sell the majority of the properties that represent
our investment in such interests. We will continue to develop those projects
that are currently under construction, which may also be sold in the future.
We made our investments in affordable housing indirectly through our
subsidiaries, which may be a general partner and/or a limited partner in the
partnership. Low-income housing tax credit partnerships in which we, through a
subsidiary, act as a general partner are presented in the financial statements
on a consolidated basis.
The affordable housing projects owned by the low-income housing tax
credit partnerships in which we have invested are located throughout the United
States.
The ownership of low-income housing tax credits produces two types of
tax benefits. The primary tax benefit flows from the low-income housing tax
credits under the Code that are generated by the ownership and operation of the
real property in the manner required to obtain such tax credits. These credits
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may be used to offset Federal income tax on a dollar for dollar basis but may
not offset the alternative minimum tax; tax credits thus may reduce the overall
Federal income tax to an effective rate of 20%. In addition, the operation of
the rental properties produces losses for financial statement and tax purposes
in the early years and sometimes throughout the anticipated ownership period.
These tax losses may be used to offset taxable income from other operations and
thereby reduce income tax which would otherwise be paid on such taxable income.
Tax credits may be claimed over a ten-year period on a straight-line
basis once the underlying multi-family residential properties are placed in
service. Tax credits claimed reduce the tax payments computed based upon taxable
income to not less than the alternative minimum tax computed for that year or
any year not more than three years before or 15 years after the year the tax
credit is earned. The Taxpayer Relief Act of 1997 changed the tax credit
carryback period from 3 years to 1 year and the carry forward period from 15
years to 20 years for credits that become available for use in years beginning
after December 31, 1997. Tax credits are realized even if units in the project
do not continue to be occupied once the units in the project have been initially
rented to qualifying tenants, and tax credits are not dependent on a project's
operating income or appreciation. Tax credits can be claimed over a ten-year
period and generally can be lost or recaptured only if non-qualifying tenants
are placed in units, ownership of the project is transferred or the project is
destroyed and not rebuilt during a 15-year compliance period for the project. We
have established specific investment criteria for investment in multi-family
residential projects that 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 our efforts, there can be no assurance that the
multi-family residential projects owned by the low-income housing tax credit
partnerships in which we have invested will satisfy applicable criteria during
the 15-year compliance period and that there will not be loss or recapture of
the tax credits associated therewith.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 15 to 17 and "Note 29: Business
Segment Reporting" on pages 110 to 112 of our 2001 Annual Report to Shareholders
and is incorporated herein by reference.
Commercial Real Estate
We entered the commercial real estate business largely as a result of
our 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. We 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, we were able to increase occupancy
rates while at the same time increasing average rents.
The enhanced cash flow and improved physical condition of the
properties increased the market values and marketability for most of the
properties. As a result, we have been able to successfully market and sell
several of the properties at gains. At December 31, 2001, only three properties
remain: two shopping centers and one office building.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 15 to 17 and "Note 29: Business
Segment Reporting" on pages 110 to 112 of our 2001 Annual Report to Shareholders
and is incorporated herein by reference.
Subprime Residential Lending
In August 1999, we closed our 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, our
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 that secure the loans.
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Through 1996, the Bank 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 us and promptly sold the loans to us on a
servicing-released basis. Through Ocwen Financial Services, Inc. ("OFS"), we
acquired substantially all of the assets of Admiral in a transaction that closed
on May 1, 1997. In connection with our acquisition of assets from Admiral, the
Bank transferred its retail and wholesale subprime single family residential
lending operations to OFS.
The terms of the loan products offered by us directly or through our
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.
Assets remaining in this segment at December 31, 2001 are primarily
comprised of subprime residual trading securities that we originally retained in
connection with our securitizations of loans during 1999 and prior years.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 15 to 17 and "Note 29: Business
Segment Reporting" on pages 110 to 112 of our 2001 Annual Report to Shareholders
and is incorporated herein by reference.
Corporate Items and Other
Corporate items and other consists primarily of amortization of the
excess of net assets acquired over purchase price, UK operations, extraordinary
gains on repurchases of debt, business activities that are individually
insignificant, amounts that we have not allocated to the operating segments,
distributions on our 10-7/8% Capital Trust Securities, transfer pricing
mismatches and other general corporate expenses.
Corporate items and other also includes the results of our
collateralized mortgage obligation ("CMO") securities portfolio. Residual and
subordinate securities have been included in the related business activity. On
July 27, 1998, we sold at book value our entire portfolio of AAA-rated agency
interest-only securities ("IOs"), the results of which had been included in this
segment. As a result of an increase in prepayment speeds due to declining
interest rates, we recorded significant impairment charges on the IOs in 1998
prior to the sale, which led to our decision to discontinue this investment
activity and write down the book value. Our investment policy, 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.
Additional financial information regarding this segment appears under
the captions "Segment Profitability" on pages 15 to 17 and "Note 29: Business
Segment Reporting" on pages 110 to 112 of our 2001 Annual Report to Shareholders
and is incorporated herein by reference.
SOURCES OF FUNDS
General. The principal sources of funds that support our business
activities are:
o Deposits o Maturities of and payments
o FHLB advances received on loans,
o Securities sold under agreements securities and advances
to repurchase o Proceeds from sales of
o Lines of credit assets
o Match funded debt o Servicing fees
We closely monitor rates and terms of competing sources of funds on a
regular basis and generally utilize the sources that are the most cost
effective.
Deposits. Historically, a significant source of deposits for us has
been brokered certificates of deposit obtained primarily through national
investment banking firms that, pursuant to agreements with us, solicit funds
from their customers for deposit with the Bank ("brokered deposits"). In
addition, during 1995, we commenced a program to obtain certificates of deposit
from customers of regional and local investment banking firms that were made
aware of our products by our direct solicitation and marketing efforts. We also
solicited certificates of deposit from institutional investors and high net
worth individuals. Our brokered deposits are reported net of unamortized
deferred fees, which have been paid to investment banking firms.
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Although we believe that brokered and other wholesale deposits are
advantageous in certain cost 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 our
financial condition. There are also various regulatory limitations on the
ability of insured financial institutions to obtain brokered deposits. See
"Regulation - The Bank - Brokered Deposits." During 2001, we did not issue any
new brokered certificates of deposit and do not intend to utilize such deposits
as a source of new funds in the foreseeable future.
In addition to brokered and other wholesale deposits, we obtain
deposits from our office located in New Jersey through advertising, walk-ins and
other traditional means. These deposits include non-interest bearing checking
accounts, NOW and money market checking accounts and savings accounts, but are
primarily comprised of certificates of deposit. At December 31, 2001, the
deposits that were allocated to this office comprised approximately 23% of our
total deposits.
Borrowings. Through the Bank, we can obtain advances from the FHLB of
New York upon the security of certain of our 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 our own interest rate, which may be fixed or
adjustable, and range of maturities.
We also obtain funds pursuant to securities sold under reverse
repurchase agreements. Under these agreements, we sell 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 our consolidated financial
statements and are held in safekeeping by broker-dealers.
Our borrowings also include lines of credit, notes, subordinated
debentures, bonds-match funded agreements and other interest-bearing
obligations. During 2001 we began utilizing lines of credit and match funded
debt as sources of funding for advances related to loans we service for others.
Under a match funding agreement that we entered into on December 20, 2001, we
are eligible to sell advances on loans serviced for others up to a maximum debt
balance of $200,000 at any one time. At December 31, 2001, we had $91,766 of
bonds-match funded agreements outstanding under this facility, which is expected
to mature in December 2003.
Other. Additional information on our sources of funds appears under the
captions "Liquidity, Commitments and Off-Balance Sheet Risks" on pages 59 to 60,
"Deposits" on pages 50 to 51, "Note 14: Deposits" on page 94, "Note 16: Bonds -
Match Funded Agreements" on page 95, "Note 17: Lines of Credit and Other
Short-Term Borrowings" on pages 95 to 96 and "Note 18: Notes, Debentures and
Other Interest-Bearing Obligations" on pages 96 to 97 of the 2001 Annual Report
to Shareholders and is incorporated herein by reference.
12
RISK FACTORS
Information related to risk factors which could directly or indirectly
affect our results of operations and financial condition is set forth in Exhibit
99.1 and 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 our significant subsidiaries is set forth in Exhibit 21.0 and
is incorporated herein by reference.
EMPLOYEES
At December 31, 2001 we had 1,663 full time employees, including 258 in
our Bangalore, India office. Our employees are not represented by a collective
bargaining agreement. We consider our employee relations to be satisfactory.
REGULATION
Financial institutions and their holding companies are extensively
regulated under federal and state laws. As a result, our business, financial
condition and prospects 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 us 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 that is
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 us and the Bank and all such
descriptions are qualified in their entirety by reference to applicable
statutes, regulations and other regulatory pronouncements.
The Holding Company
General. Ocwen Financial Corporation is a registered savings and loan
holding company under the Home Owners' Loan Act (the "HOLA"). As such, it is
subject to regulation, supervision and examination by the OTS.
Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company, such as OCN, 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:
o Payment of dividends by the savings institution;
o Transactions between the savings institution and its affiliates;
and
o 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.
13
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 we were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, OCN 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 OCN 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:
o Furnishing or performing management services for a subsidiary
savings institution;
o Conducting an insurance agency or escrow business;
o Holding, managing, or liquidating assets owned by or acquired from
a subsidiary savings institution;
o Holding or managing properties used or occupied by a subsidiary
savings institution;
o Acting as trustee under deeds of trust;
o Those activities authorized by regulation as of March 5, 1987 to be
engaged in by multiple savings and loan holding companies; or
o 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. These activities 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 acquirer 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 OCN
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, changes in control of the Bank as well as
subsidiaries established by the Bank.
Insurance of Accounts. Pursuant to legislation enacted in September
1996, a fee was required to be paid by all SAIF-insured institutions at the rate
of $0.657 per $100 of deposits held by such institutions at March 31, 1995. The
money collected recapitalized the
14
SAIF reserve to the level of 1.25% of insured deposits as required by law. The
recapitalization of the SAIF 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 the 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 that are based solely on the level of an
institution's capital - "well capitalized," "adequately capitalized" and
"undercapitalized" - and that 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. We are aware of no existing circumstances that 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 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) that 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
15
evaluated. The OTS has not yet established an effective date for the capital
deduction. We 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.
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.
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, we establish required reserves and charge-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.
On February 10, 1999, the Federal Financial Institutions Examination
Council ("FFIEC") issued the Uniform Retail Credit Classification and Account
Management Policy. As a result of this policy, we have classified all
residential loans as substandard if they are past due 90 days, or more, and the
ratio of book value to market value is 60%, or more. We classify as substandard
all residential loans that are in foreclosure or bankruptcy and have a ratio of
book value to market value of 85%, or more, and we classify as loss and charge
off the portion of the book value of such loans that exceeds 85% of market
value. In 2001, we modified our policies so that we now classify as substandard
all residential real estate owned held for less than three years and as doubtful
all held for three years or more. Our past experience indicates that classified
discount assets do not necessarily correlate to probability or severity of loss.
Excluding assets that have been classified loss and fully reserved, the
Bank's classified assets at December 31, 2001 under the above policy consisted
of $205,038 of assets classified as substandard and $497 of assets classified as
doubtful. In addition, at the same date, $96,225 of assets were designated as
special mention.
Substandard assets at December 31, 2001 under the above policy
consisted primarily of $45,993 of loans and real estate owned related to our
discount single family residential loans and $87,618 of loans and real estate
owned related to our discount commercial real estate loans. Special mention
assets at December 31, 2001 under the policy consisted primarily of $95,938 of
loans and real estate owned related to discount commercial real estate loans.
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,"
16
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Under regulations adopted by the Federal
banking regulators, an institution shall be deemed to be:
o "Well capitalized" if it has a total risk-based capital ratio of
10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or
more, has a Tier 1 leverage capital ratio of 5.0% or more and is
not subject to any written agreement, order or directive to meet
and maintain a specific capital level for any capital measure;
o "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";
o "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);
o "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;
o "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 our most recent exam. At December 31, 2001,
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:
o Prohibiting capital distributions;
o Prohibiting payment of management fees to controlling persons;
o Requiring the submission of a capital restoration plan;
o Placing limits on asset growth;
o Limiting acquisitions, branching or new lines of business;
o Requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired;
o Restricting transactions with affiliates;
o Restricting the interest rates that the institution may pay on
deposits;
o Ordering a new election of directors of the institution;
o Requiring that senior executive officers or directors be dismissed;
o Prohibiting the institution from accepting deposits from
correspondent banks;
o Requiring the institution to divest certain subsidiaries;
o Prohibiting the payment of principal or interest on subordinated
debt; and, ultimately,
o 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 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:
o 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;
o The branching powers of the association shall be restricted to
those of a national bank; and
o 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 2001, and our qualified thrift investments comprised 75.29%
of our portfolio assets at December 31, 2001.
17
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 our notice if the OTS
determines that (a) the Bank will be "undercapitalized," "significantly
undercapitalized" or "critically under capitalized," as defined in the OTS
capital regulations, following the capital distribution, (b) the proposed
capital distribution raises safety and soundness concerns or (c) the proposed
capital distribution violates a prohibition contained in any statute, regulation
or agreement between the Bank and the OTS or a condition imposed on the Bank in
an application or notice approved by the OTS.
Loan-To-One Borrower. Under applicable laws and regulations, the amount
of loans and extensions of credit that may be extended by a savings institution
such as the Bank to any one borrower, including related entities, generally may
not exceed 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, 2001, the Bank's unimpaired capital and surplus
amounted to $239,305, resulting in a general loan-to-one borrower limitation of
$35,896 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) that 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 our 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 our normal market area or (b) 120%
(130% for 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. See "Sources of Funds - Deposits."
Liquidity Requirements. All savings associations were previously
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 their average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. The liquidity requirement
varied 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, effective July 18, 2001, the OTS issued a Final Rule that
eliminated the 4% liquidity requirement. The Final Rule requires savings
associations to maintain sufficient liquidity to ensure their safe and sound
operation.
18
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, Ocwen Financial Corporation,
OAC, OTX and their 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. 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 was 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 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.
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
19
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 that became effective January 31, 2001
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 was required to 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 filed an application with the OTS to be designated a Wholesale
Bank for CRA purposes beginning in May 2001. The bank was designated as a
Wholesale Bank as of June 15, 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 their community development loans,
investments and services.
FEDERAL TAXATION
General. OCN 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, we acquire Real Estate Mortgage
Investment Conduit ("REMIC") residuals or retain residual securities in REMICs
which were formed by us in connection with the securitization and sale of loans.
Although a tax residual may have little or no future economic cash flows from
the REMIC from which it has been issued, the tax residual does bear the income
tax liability or benefit resulting from the difference between the interest rate
paid on the securities by the REMIC and the interest rate received on the
mortgage loans held by the REMIC. This generally results in taxable income for
us in the first several years of the REMIC and equal amounts of tax deductions
thereafter. We receive cash payments in connection with the acquisition of tax
residuals to compensate us 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. We defer all fees received and
recognize such fees in interest income on a level yield basis over the expected
life of the deferred tax asset related to tax residuals. We also adjust 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, 2001, our gross deferred tax assets included
$3,176, which was attributable to our tax residuals and related deferred income.
20
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-Affordable Housing Properties."
Examinations. The most recent examination by the IRS of our Federal
income tax return was of the tax return filed for 1996. The statute of
limitations has run with respect to 1997 and all prior tax years. Thus, the
Federal income tax returns for the years 1998 through 2000 are open for
examination. We do not anticipate any material adjustments as a result of any
examination, although there can be no assurances in this regard.
STATE TAXATION
OCN'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 its taxable
income in these states is determined based on certain apportionment factors. We
are taxed in New Jersey on income, net of expenses, earned in New Jersey at a
statutory rate of 3.0%. No state return of ours has been examined, and no
notification has been received by us that any state intends to examine any of
our tax returns.
21
ITEM 2. PROPERTIES
The following table sets forth information relating to our facilities
at December 31, 2001:
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 $ 3,135
Bank main office:
2400 Lemoine Ave
Fort Lee, NJ........................................... Leased $ 11
Servicing center:
12650 Ingenuity Drive
Orlando, FL............................................ Owned $ 22,239
Software development and servicing operations center:
Information Technology Park
Bangalore, India....................................... Leased $ 184
OTX offices:
California office:
5050 Avenida Encinas, Suite 200
Carlsbad, CA........................................... Leased $ 128
Amos, Inc.:
10 Research Parkway
Wallingford, CT........................................ Leased $ 51
Synergy Software, LLC:
Two Creekside Crossing
10 Cadillac Drive, Suite 350 Leased
Brentwood, TN.......................................... $ 131
OTX's main offices are located in facilities provided by OCN. OAC does
not maintain an office, but rather relies on the facilities provided by OCN.
ITEM 3. LEGAL PROCEEDINGS
We are 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 us. See "Note 30:
Commitments and Contingencies" on page 112 of our 2001 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 117 of our 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 12 of our 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 13 to 60 of our 2001 Annual Report to Shareholders and is
incorporated herein by reference. In addition, please also note the information
below, which is not discussed in our 2001 Annual Report to Shareholders.
Recent Developments
On March 27, 2002, OCN announced the formation of Global Servicing
Solutions, LLC, a joint venture with Merrill Lynch. The joint venture will be
responsible for establishing, licensing and operating distressed asset
management servicing companies in countries around the world to service Merrill
Lynch assets as well as assets owned by third parties.
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 71 to 77 and "Note 21: Derivative Financial
Instruments" on pages 99 to 101 of our 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 63 to 116 in our
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 our definitive Proxy Statement with
respect to our Annual Meeting of Shareholders to be held on May 16, 2002, and as
filed with the Commission on or about March 29, 2002 (the "2002 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 our 2002 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 our 2002 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
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 & 2 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
63 to 116 of our Annual Report to Shareholders:
Report of Independent Certified Public Accountants
Consolidated Statements of Financial Condition at December 31,
2001 and 2000
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2001
Consolidated Statements of Changes in Shareholders' Equity for
each of the three years in the period ended December 31, 2001
Consolidated Statements of Comprehensive Income for each of
the three years in the period ended December 31, 2001
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2001
Notes to Consolidated Financial Statements
Financial statement schedules have been omitted because they
are not applicable or the required information is shown in the
Consolidated Financial Statements or notes thereto.
(a) 3 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)
24
3.2 Amended and Restated Bylaws (3)
4.0 Form of Certificate of Common Stock (2)
4.1 Form of Indenture between OCN 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 OCN (4)
4.7 Form of 10.875% Junior Subordinated Debentures due
2027 of OCN (included in Exhibit 4.6) (4)
4.8 Form of Guarantee of OCN relating to the Capital
Securities of Ocwen Capital Trust I (4)
4.9 Form of Indenture between Ocwen Federal Bank FSB 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 (14)
10.10 Form of Employment Agreement, dated as of April 1,
2001, by and between Ocwen Financial Corporation and
Arthur D. Ringwald (filed herewith)
10.11 Form of Employment Agreement, dated August 1, 2001,
by and between Ocwen Technology Xchange and Jack
Timpe (filed herewith)
11.1 Computation of earnings per share (15)
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, 2001 (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.
(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.
25
(4) Incorporated by reference from the similarly
described exhibit filed in connection with our
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 our definitive Proxy Statement
with respect to our 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 the similarly
described exhibit included with the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 2000.
(15) Incorporated by reference from "Note 20: Basic and
Diluted Earnings per Share" on page 99 of our Annual
Report to Shareholders.
(b) Reports on Form 8-K Filed During the Quarter Ended December
31, 2001
(1) A Form 8-K was filed by OCN on November 8, 2001 which
contained a news release announcing our 2001 third
quarter results and certain other information.
26
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 our 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 29, 2002
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 29, 2002
- ---------------------------------------------
William C. Erbey, Chairman of the
Board and Chief Executive Officer
(principal executive officer)
/s/ BARRY N. WISH Date: March 29, 2002
- ---------------------------------------------
Barry N. Wish, Director
/s/ W. C. MARTIN Date: March 29, 2002
- ---------------------------------------------
W.C. Martin, Director
/s/ HON. THOMAS F. LEWIS Date: March 29, 2002
- ---------------------------------------------
Hon. Thomas F. Lewis, Director
/s/ Mark S. Zeidman Date: March 29, 2002
- ---------------------------------------------
Mark S. Zeidman, Senior Vice President and
Chief Financial Officer
(principal financial officer)
/s/ ROBERT J. LEIST, JR. Date: March 29, 2002
- ---------------------------------------------
Robert J. Leist, Jr., Vice President and
Chief Accounting Officer
(principal accounting officer)
27