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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, 2002
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. 1-13219
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No[X]
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 14, 2003: $112,625,597
(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 14,
2003: 67,339,773 shares
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to
Shareholders for fiscal year ended December 31, 2002 are incorporated by
reference into Part I, Item 1 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 15, 2003, and as filed with the Commission on or about March 28,
2003, are incorporated by reference into Part III, Items 10-13.
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OCWEN FINANCIAL CORPORATION
2002 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
Segments................................................... 4
Residential Loan Servicing............................... 5
Ocwen Technology Xchange................................. 6
Ocwen Realty Advisors.................................... 6
Unsecured Collections.................................... 7
Residential Discount Loans............................... 7
Commercial Finance....................................... 7
Affordable Housing....................................... 7
Subprime Finance......................................... 8
Corporate Items and Other................................ 8
Sources of Funds........................................... 9
Risk Factors............................................... 10
Competition................................................ 10
Subsidiaries............................................... 10
Employees.................................................. 10
Regulation................................................. 11
The Holding Company...................................... 11
The Bank................................................. 11
Federal Taxation........................................... 14
State Taxation............................................. 15
Item 2. Properties................................................... 15
Item 3. Legal Proceedings............................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.......... 16
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 16
Item 6. Selected Consolidated Financial Data......................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk... 17
Item 8. Financial Statements and Supplementary Data.................. 17
1
OCWEN FINANCIAL CORPORATION
2002 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.......................... 17
PART III
Item 10. Directors and Executive Officers of Registrant............... 17
Item 11. Executive Compensation....................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................... 17
Item 13. Certain Relationships and Related Transactions............... 17
Item 14. Controls and Procedures...................................... 18
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 18
Signatures............................................................... 21
Certifications........................................................... 22
2
FORWARD-LOOKING STATEMENTS
This Annual Report contains 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, including, but not limited to the
following:
o estimates regarding the benefits of cost saving opportunities and quality
workforce in India,
o projections for staff reduction in the United States and growth in our
India workforce,
o predictions as to the potential business opportunities in global
outsourcing,
o predictions regarding sales of our commercial and affordable housing assets
and
o intentions related to the issuance of brokered deposits and other sources
of financing.
Forward-looking statements are not guarantees of future performance and involve
a number of assumptions, risks and uncertainties that could cause actual results
to differ materially. Important factors that could cause actual results to
differ materially from those suggested by the forward-looking statements
include, but are not limited to, the following:
o general economic and market conditions,
o prevailing interest or currency exchange rates,
o availability of servicing rights for purchase,
o governmental regulations and policies,
o international political and economic uncertainty,
o availability of adequate and timely sources of liquidity,
o uncertainty related to dispute resolution and litigation and
o real estate market conditions and trends.
Further information on the risks specific to our business are detailed within
this report and our other reports and filings with the Securities and Exchange
Commission, including our periodic reports on Form 10-K, Form 10-Q and Form 8-K.
The forward-looking statements speak only as of the date they are made and
should not be relied upon. OCN undertakes no obligation to update or revise the
forward-looking statements.
3
PART I
ITEM 1 BUSINESS (Dollars in thousands)
GENERAL
Ocwen Financial Corporation ("OCN" or "the Company") is a financial
services company headquartered in West Palm Beach, Florida. 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 ("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, 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.
SEGMENTS
In early 2000, we began the execution of our overall strategic plan to
shift our business activities away from capital-intensive businesses involving
the purchase or origination of loans, real estate and related assets toward less
capital-intensive businesses that generate fee-based revenues. As a result, we
generally ceased to originate or invest in assets in certain of our business
segments ("non-core businesses") unless contractually committed. However, we
continued to actively manage and resolve the remaining assets in these segments.
Our primary fee-based business activity is servicing subprime residential
mortgage loans for others. As of December 31, 2002, our core and non-core
businesses were as follows:
Core Businesses Non-Core Businesses
Residential Loan Servicing Residential Discount Loans
Ocwen Technology Xchange ("OTX") Commercial Finance
Ocwen Realty Advisors ("ORA") Subprime Finance
Unsecured Collections Affordable Housing
In addition to our core and non-core business segments, we report other
items of revenue and expense in our Corporate Items and Other segment as
discussed later in this section.
Our decision to change our strategy and to focus on fee-based earnings
was driven by changes in the economy and in the markets we serve and in our
perception of how to maximize the long-term value of the Company. The non-core
residential discount loan business and commercial finance business involved the
acquisition of non-performing loans at a discount to par value. The objective
was to resolve the loan and return it to performing status in order to increase
its value. Once the loan was reperforming, the exit strategy was to sell or
securitize the loan for a profit. As the economy continued to expand throughout
the late 1990's, however, the supply of non-performing loans decreased. As a
result, the prices asked for non-performing loans increased, and consequently
the profit margins on the business decreased. Additionally, the earnings
patterns of the businesses could be erratic as they typically depended on the
consummation of a few large sales transactions. Simultaneously, new competitors
were entering the market that had access to large amounts of capital.
In the late 1990's we also began to originate subprime residential
mortgage loans. However, the business attracted a substantial amount of new
capital and competition increased. The competition from larger,
better-capitalized companies put pressure on pricing relative to the rates and
terms offered to subprime borrowers in general, and, as a result, profit margins
declined. Simultaneously, interest rates began to decrease and the assumptions
concerning prepayment speeds that had been used to price new loans turned out to
be overly optimistic as mortgages prepaid more quickly than expected, adding
additional risk to investments in this business line.
Consequently, we determined that our best course of action was to
compete where we were strongest, that is, by using the technology and expertise
we had developed over the years in managing our own portfolio of non performing
residential and commercial loans and in servicing our own subprime loans and
offering it to other institutions on a fee for service basis, as either a
mortgage servicer or as a technology provider. We believe that these activities
offer a more consistent earnings stream with a more attractive risk profile.
Accordingly, in late 1999 and early 2000 we embarked on our current business
strategy.
Segment results in recent years reflects growth in our residential loan
servicing segment, continued investment in the development and marketing of our
technology products at OTX, our exit from the subprime loan origination business
(both in the US and the UK), our acquisition of Ocwen Asset Investment Corp.
4
PART I (Continued)
ITEM 1 BUSINESS (Dollars in thousands)
("OAC") in 1999, cessation of loan acquisitions and origination activity and our
continuing resolution or disposition of those assets not associated with our
core businesses. To date, the Residential Loan Servicing business has been
profitable. Our Unsecured Collections business and ORA are profitable but
smaller contributors to the bottom line. Both earn fee income for performing
services for third parties. OTX markets several products to the real estate and
mortgage industries. However, although we earn some fee income from sales of
these products, they have not yet been sufficient for this business line to earn
a profit.
A description of each of our businesses and the segments through which
they are conducted follows.
Residential Loan Servicing
We acquire the servicing rights to performing, sub-performing and
non-performing mortgage loans. At December 31, 2002, subprime mortgages
represented approximately 86% of the total unpaid principal balance of the loans
we serviced. We are entitled to service the mortgages because we purchased the
servicing rights from the owners of the mortgages. These rights are typically
specified in an agreement between the various parties to a mortgage
securitization transaction, along with the obligations that we are required to
perform as the mortgage servicer. Our largest source of revenue is the servicing
fees we earn pursuant to the servicing agreements. Servicing fees are usually
earned as a percentage of the unpaid principal amount of the mortgages that are
being serviced. Typically, this fee is approximately 0.50% per year. The
servicing fees are supplemented by related income, including late fees earned
from borrowers who are delinquent in remitting their monthly mortgage payments.
As servicer, we also have a variety of obligations that are also specified in
the servicing agreement, including the obligation to service the mortgages
according to accepted standards and to make advances to the securitization trust
in the event that the borrowers are delinquent on their monthly remittances. The
costs incurred in connection with performing these obligations includes the cost
of servicing the loans and the interest expense incurred to finance the
servicing rights and servicing advances incurred in connection with conducting
the business, among others.
The servicing rights may be obtained by purchasing the mortgage
servicing rights or entering into contracts to sub-service mortgage loans. The
contracts may provide for a single bulk transfer of a servicing portfolio or the
ongoing transfer of loans as they are originated or purchased by counterparties
to the servicing contract. While the loans are transferred to us for servicing,
the client retains ownership of the loans. The acquisition of servicing rights
is generally structured as a two part bid process. A preliminary bid is provided
to each potential client following a preliminary due diligence review of the
loan portfolio, the seller's financial status, the strategic fit of the
portfolio with our servicing capabilities and the portfolio's historical
performance characteristics.
Once the preliminary bid is accepted by the potential client, we
initiate a further evaluation of the portfolio through a formal due diligence
process, which includes a more detailed analysis of historical prepayment and
delinquency experience. This formal process determines the present value of a
projected stream of cash inflows and outflows from the portfolio. Based upon the
findings of this formal process, a final bid is prepared for approval by our
Credit Committee and submitted to the client for consideration. Upon the
client's acceptance, we enter into a Servicing Rights Purchase Agreement.
The Servicing Rights Purchase Agreement provides us with the legal
right to service the designated mortgage loans. This agreement specifies the
rights and obligations of both parties including, but not limited to, the use of
custodial bank accounts, maintenance of hazard insurance and tax escrow funds
and fund distribution processes, as well as the servicing fees and other terms
of the servicing arrangement.
As of December 31, 2002, we serviced loans under approximately 275
servicing agreements for 21 clients.
The U.S. Department of Housing and Urban Development, 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.
These represent Fitch's second highest categories, respectively.
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 $26,533,826 during 2002.
5
PART I (Continued)
ITEM 1 BUSINESS (Dollars in thousands)
Ocwen Technology Xchange (OTX)
The OTX segment consists of the following three product lines:
REALTransSM, REALServicingTM and REALSynergyTM. Each of these product lines
serves a different market need, and each is at a different stage of maturity and
commercial use.
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 transactions. Our acquisition of DTS
and its product served as the basis for the REALTrans system. Our REALTrans
product is a web-based vendor management platform that facilitates the
electronic fulfillment of real estate products and services necessary to
process, approve and close residential mortgage loans, as well as to service
them. We market this product to residential lenders and servicers and their
associated vendors. By connecting these two parties with the REALTrans platform,
we allow them to conduct business more effectively and efficiently. We earn
transaction fee revenues from the vendors based on the products and services
they provide to their lenders through this platform. We also earn revenues
through annual membership fees. The transaction fees are recognized as revenue
as incurred. The membership fees are deferred and recognized as revenue over the
twelve-month membership period.
Among our customer base on the REALTrans platform are several of the
top 35 residential mortgage lenders and over 4,000 vendors. These lenders
account for a significant portion of the mortgage origination market. While we
estimate that the eventual market opportunity for the REALTrans platform is
between $500,000 and $1,000,000, the market is currently in an early stage of
adopting this technology. Our primary competitor to this product line is a
division of a company that offers proprietary vendor management products.
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. Our REALServicing
product is a comprehensive enterprise level residential mortgage loan servicing
platform, which has been used by the Bank since January 2001. The REALServicing
product suite also includes REALResolutionTM, a default management platform that
provides end-to-end mortgage default processing support. The target market for
this platform includes both prime and sub-prime residential mortgage loan
servicers. We believe the market opportunity for our REALServicing and
REALResolution products is between $500,000 and $1,000,000. While a single firm
currently possesses nearly a 60% share of this market, we only require a modest
market share to achieve profitability and sustain growth. Our policy is to
recognize licensing fees related to our REALServicing product as revenue ratably
over the life of the related licensing agreement.
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. Our REALSynergy product is a
comprehensive enterprise level commercial mortgage loan servicing platform. The
target market for this platform includes domestic and international commercial
mortgage loan servicers. The market in which REALSynergy competes is served by a
limited number of companies. Our primary competitor is a division of a large,
diversified public company. The REALSynergy product suite includes REALSAMMTM,
the REALSynergy Asset Management Module, a web-enabled platform for the asset
and default management of performing and non-performing commercial loans and
real estate. REALSAMM is being introduced to selected international markets
through a joint venture with Merrill Lynch. We recognize licensing fees related
to our REALSynergy product as revenue ratably over the life of the related
licensing agreements.
The losses incurred by OTX to date reflect our continuing efforts to
develop and market our suite of technology solutions.
Ocwen Realty Advisors (ORA)
As part of our strategic focus on fee-based businesses, we established
ORA in 1999 as a new division. ORA provides valuation services to external
customers in the wholesale lending community as well as for our own residential
real estate transactions.
An important part of the process of acquiring and managing mortgage
loan 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 valuation models
and other alternative valuation products that can more precisely meet the
specific risk management needs of our customers.
6
PART I (Continued)
ITEM 1 BUSINESS (Dollars in thousands)
Unsecured Collections
This segment conducts collection activities for third party owners of
unsecured receivables and for a portfolio of unsecured credit card receivables
that we acquired at a discount in 1999 and 2000.
On collections for third party owners, we generally earn a fee based
upon a percentage of the dollars collected. The percentage fee generally ranges
from 17% to 50%. We intend to continue to grow our third party collections
activity.
We accounted for collections of unsecured credit card receivables under
the cost recovery method through 2001 when we had reduced the net book value of
these receivables to zero as a result of collections and reserves. Our
contractual obligations to acquire these receivables expired in June 2000. We
have made no purchases since that time and plan no future purchases at this
time.
Residential Discount Loans
This segment consisted of operations to acquire at a discount and
subsequently resolve sub-performing and non-performing residential mortgage
loans.
We began our discount loan operations in 1991. Our strategy was to
acquire at a discount certain mortgage loans for which the borrowers were not
current as to principal and interest payments. We would work to resolve the
loans by bringing them current and then sell or securitize the loans for a
profit, structuring a settlement with the borrower, or foreclosing on the loan
and liquidating the collateral.
The last acquisition of residential discount loans was made in 2000.
Based on the relative insignificance of the non-core assets remaining in this
business at December 31, 2002 ($4,633), the remaining assets of this business
and any related income or loss arising from their resolution will be included in
the Corporate Items and Other segment beginning January 1, 2003.
Commercial Finance
Effective January 1, 2002, we combined our Commercial Loan and
Commercial Real Estate segments, because the assets in each had fundamentally
similar attributes and had been assigned to a single management team. Commercial
finance activities include both discount loans and originated loans as well as
our investment in commercial real estate.
No new commercial assets have been purchased since 2000. Since then,
this business has consisted of the management, repositioning and resolution of
the remaining non-core assets. At December 31, 2002, we had $190,602 of non-core
assets, which consisted of 18 loan and real estate assets, and one unrated
subordinate security. Of the 18 loans and real estate assets remaining in this
segment at December 31, 2002, the five largest amounted to 74% of the total.
Because of the concentration of value in these assets, it is difficult to
project with certainty when final sales or resolutions will be completed or
whether further losses may be incurred upon resolution. While we believe that
additional sales will occur during 2003, it is probable that some of the larger
properties will not be sold until 2004. We regularly assess the value of our
remaining assets and provide additional loss reserves or impairment charges as
appropriate.
We entered the commercial real estate business largely as a result of
our acquisition of OAC in 1999. At December 31, 2002, only two properties
remain: one shopping center and one office building.
Affordable Housing
Historically, we 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.
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 and meet
certain conditions. A specified portion of the apartment units in a qualifying
project may be rented only to qualified tenants for a period of fifteen years.
If not, a portion of any previously claimed tax credits will be subject to
recapture, including previously claimed tax credits associated with projects we
have sold, as discussed below.
Beginning in 2000 we ceased making investments in these properties,
except to complete those projects in which an investment had already been made.
This reflects our change in strategic focus away from capital intensive lines of
business and the fact that the volume of tax credits being generated was
exceeding our ability to utilize them effectively. Since that time, we also
began the process of marketing each of these properties for sale. At December
31, 2002, we had $15,319 of investments in affordable housing properties
remaining, plus an additional $6,229 of loans outstanding to limited
partnerships in which we have invested but which are not consolidated into our
financial statements. While we cannot project sales with certainty, we believe
that it is possible that the remaining properties will be sold before the end of
2003 and that new sources of financing will be established to repay the
remaining loan balances.
7
PART I (Continued)
ITEM 1 BUSINESS (Dollars in thousands)
We regularly assess the carrying value of our remaining assets and
provide additional loss reserves as appropriate. At December 31, 2002, we had
recorded reserves equal to approximately 48% of the gross book value of the
assets.
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 fifteen years after the year the
tax credit is earned. 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 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. There can be no assurance that the
multi-family residential projects owned by the low-income housing tax credit
partnerships in which we have currently or previously invested will satisfy
applicable criteria during the 15-year compliance period and that there will not
be loss or recapture of a portion of the associated tax credits.
Subprime Finance
We were engaged in subprime residential loan origination prior to
ceasing originations in August of 1999; however, we have continued to manage and
resolve the remaining non-core assets. Effective January 2002, the remaining
business was renamed Subprime Finance from Subprime Residential Lending to
better depict the current nature of the business activity. The remaining assets
of this segment consist primarily of subprime residual securities. These
securities are presently generating income and return of principal through cash
flows.
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.
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.
Corporate Items and Other
In this segment we report business activities that are individually
insignificant, interest income on cash and cash equivalents, interest expense on
corporate assets, gains and losses from debt repurchases, trading gains or
losses associated with our collateralized mortgage obligation trading portfolio
and general corporate expenses.
Additional financial information and related discussion regarding each
of our segments appears under the captions "Segment Profitability" on pages 22
to 27 and "Note 27: Business Segment Reporting" on pages 113 to 115 of our 2002
Annual Report to Shareholders.
8
PART I (Continued)
ITEM 1 BUSINESS (Dollars in thousands)
SOURCES OF FUNDS
General. The principal sources of funds that support our business
activities are:
o Deposits Lines of credit o Payments received on loans
o Match funded debt and securities
o Securities sold under o Proceeds from sales of assets
agreements to repurchase o Servicing fees
We closely monitor our liquidity position and ongoing funding
requirements. Among the risks and challenges associated with our funding
activities are the following:
o Scheduled maturities of all certificates of deposit for 2003, 2004 and
thereafter amount to $269,315, $78,467 and $54,498, respectively.
o Expiration of existing collateralized line of credit in April 2003.
o Maturity of our match funded servicing advance funding facility in
December 2003.
o Maturity of a note and loan totaling $47,710 in September and October
2003.
o Potential extension of resolution and sale timelines for non-core
assets in the current weak economic environment.
o Ongoing cash requirements to fund operations of our holding company and
OTX.
o Cash requirements to fund our acquisition of additional servicing
rights and related advances, as discussed immediately below.
In the last several years, our Residential Loan Servicing business has
grown through the purchase of servicing rights. Servicing rights entitle the
owner to earn servicing fees and various other types of ancillary income for
performing functions that require staffing and significant cash advances and
expenditures. In connection with these servicing rights, the servicer must make
cash advances for delinquent principal and interest, taxes, insurance and
various other items that are required to preserve the assets being serviced. Our
ability to continue to grow our servicing business significantly depends on our
ability to obtain additional financing to purchase new servicing rights and to
fund servicing advances. We currently use a variety of sources of debt to
finance these assets, including deposits and credit facilities with advance
rates less than 100% of the underlying collateral. If we cannot replace or renew
these sources as they mature or obtain additional sources of financing, we may
be unable to acquire new servicing rights and make the associated advances. 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 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"). Our brokered deposits
are reported net of unamortized deferred fees, which have been paid to
investment banking firms, and amounted to $198,248 at December 31, 2002.
We plan to retain non-brokered deposits as a source of financing our
operations while at the same time reducing our reliance on brokered deposits. We
plan to reduce this reliance by using proceeds from the sale of non-core assets
to pay off maturing brokered deposits and by diversifying our funding sources
through obtaining credit facilities for servicing rights and advances. Our
ability to continue to attract new non-brokered deposits and rollover existing
non-brokered deposits depends largely on our ability to compete with interest
rates offered by other banks in the northern New Jersey area. In 2002, we were
able to increase the amount of non-brokered deposits outstanding. If we are
unable to maintain the amount of non-brokered deposits outstanding and replace
them with alternative sources of funds, it is likely that we would have to incur
higher interest costs to fund our assets. We have not issued any new brokered
certificates of deposit since 2000.
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 non-brokered certificates of
deposit. At December 31, 2002, the deposits that were allocated to this office
amounted to $153,688 and comprised approximately 36% of our total deposits.
Lines of Credit. Under a revolving credit facility executed in April
2001 we have the right to pledge servicing advances as collateral for a loan up
to $100,000. The outstanding balance as of December 31, 2002 was $78,511. The
facility, if not renewed, will mature in April 2003.
9
PART I (Continued)
ITEM 1 BUSINESS (Dollars in thousands)
Match Funded Debt. 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,
2002, we had $106,797 of bonds-match funded agreements outstanding under this
facility, which, if not renewed, will mature in December 2003. This would
preclude our ability to finance further advances through this facility. The
sales of advances did not qualify as sales for accounting purposes since we
retained effective control of the advances. Therefore, we report them as secured
borrowings with pledges of collateral. We have accounted for additional sales
under this facility in the same manner.
Securities Sold Under Agreements to Repurchase. 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. We had no securities sold under agreements to repurchase at
December 31, 2002.
Other. Our borrowings also include notes, subordinated debentures and
other interest-bearing obligations. Additional information on our sources of
funds appears under the captions "Liquidity, Commitments and Off-Balance Sheet
Risks" on pages 65 to 67, "Deposits" on page 57, "Note 12: Deposits" on pages 98
to 99, "Note 14: Bonds - Match Funded Agreements" on page 99, "Note 15: Lines of
Credit and Other Short-Term Borrowings" on page 100, "Risks Related to
Financing" on page 18 and "Note 16: Notes, Debentures and Other Interest-Bearing
Obligations" on pages 101 to 102 of the 2002 Annual Report to Shareholders and
is incorporated herein by reference.
RISK FACTORS
There are a number of risk factors that relate to our business and that
may directly or indirectly affect our results of operations and financial
condition. A discussion of our principal risk factors appears under the caption
"Overview of Risks and Related Critical Accounting Policies" on pages 16 to 20
of our 2002 Annual Report to Shareholders and is incorporated herein.
COMPETITION
A discussion of competition as it relates to our primary core
businesses appears under the captions "Risk Related to Mortgage Servicing
Rights" and "Risks Associated With Technology" on pages 18 and 19 of our 2002
Annual Report to Shareholders and is incorporated herein by reference.
SUBSIDIARIES
A list of our significant subsidiaries is set forth in Exhibit 21.0.
EMPLOYEES
As of December 31, 2002, we had a total of 1,871 employees, of which
1,028 were in our United States facilities and 843 were in our India operations
centers. We have developed our India operations centers over the past two years
in order to benefit from the cost savings opportunities and quality workforce
available in that country.
In the United States, our operations are concentrated in our
headquarters in West Palm Beach, which had 474 employees as of December 31,
2002, and our operations center in Orlando, which had 534 staff members as of
December 31, 2002. Our Orlando facility has the capacity to house 950 employees
on a single shift. In addition, we had 20 employees at various other locations
in the United States. At this time, we estimate that we will experience a modest
reduction of our staff in the United States during 2003.
In India, our operations are located in the cities of Bangalore and
Mumbai. Of the 843 members of the staff in India as of December 31, 2002, 566
were in Bangalore and 277 were in Mumbai. Our India workforce can be summarized
by business as follows:
o 72% are engaged in activities for our Residential Loan Servicing
business,
o 9% support OTX and Technology Services,
o 13% work in various other business units and
o 6% represent various support functions, including Human Resources and
Corporate Services, Accounting and Risk Management.
10
PART I (Continued)
ITEM 1 BUSINESS (Dollars in thousands)
We project additional growth in our India staff during 2003. The extent
of this growth is dependent upon the growth of several of our new business
initiatives, primarily Global Outsourcing. Global Outsourcing is a developing
new business focused on providing business process outsourcing services to third
parties.
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. The Bank is regulated and examined
primarily by the Office of Thrift Supervision, which has substantial enforcement
authority over the Bank. Because the Bank accepts deposits that are insured by
the Federal Deposit Insurance Corporation, the FDIC serves as a secondary
federal banking regulator of the Bank. As such, it also has substantial
enforcement authority over the Bank. These Federal banking regulators have the
ability to assess civil monetary penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions for violations of laws and regulations
and unsafe or unsound practices. As a result, our business can be materially
affected by changes in our regulatory environment.
The Holding Company
Savings and Loan Holding Company. We are a registered savings and loan
holding company under the Home Owners' Loan Act ("HOLA"). As such, we have
registered with the OTS and are subject to regulation, supervision and
examination by the OTS. We are required to file periodic reports with the OTS on
our business and activities. The OTS has the authority to review our activities
and determine if any activity constitutes a serious risk to the financial
soundness, safety, or stability of the Bank. If a determination is made by the
OTS that these risks exist, the OTS may place restrictions on our activities or
the activities of our subsidiaries or affiliates. These restrictions may impact
the ability of the Bank to pay dividends, engage in transactions with us or our
subsidiaries or affiliates and engage in other banking activities.
Restrictions on Acquisitions. Savings and loan holding companies and
their affiliates are prohibited from acquiring more than 5% of the voting
shares, or from acquiring control, of any other savings association or savings
and loan holding company, without prior approval of the OTS.
The Bank
General. The Bank is a federal savings bank organized under the HOLA.
The Bank is subject to regulation, supervision and examination by the OTS and by
the FDIC. The business and activities of the Bank are reported in periodic
filings with the OTS. Regulations apply to, among other things, insurance of
deposit accounts, capital requirements, payment of dividends, the nature and
amount of the investments that the Bank may make, transactions with affiliates,
community reinvestment, lending, internal policies and controls and changes in
control of the Bank as well as subsidiaries established by the Bank.
FDIC. The FDIC may terminate the deposit insurance of the Bank if the
Bank engages in unsafe or unsound practices, is in an unsafe or unsound
condition or has violated any applicable law, regulation, rule, order or
condition imposed by the OTS or the FDIC. 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. Federal savings banks are subject to
minimum capital requirements set forth by the OTS. The three capital
requirements applicable to the Bank are discussed below.
Tangible Capital Requirement. Tangible capital is core capital less all
intangibles other than qualifying mortgage servicing rights. Federal savings
banks are required to maintain tangible capital of at least 1.5% of their
adjusted total assets.
Core Capital Requirement. 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
non-withdrawable accounts and pledged deposits. Deductions from core capital
include certain intangibles, servicing assets and credit-enhancing interest-only
strips.
Risk-Based Capital Requirement. A savings bank is allowed to include
both core capital and supplementary capital in the calculation of its total
11
PART I (Continued)
ITEM 1 BUSINESS (Dollars in thousands)
capital for purposes of the risk-based capital requirements, provided that the
amount of supplementary capital included does not exceed the savings bank'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 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, as well as residual interests
(including certain off-balance sheet items that are converted to on-balance
sheet credit equivalents using a conversion factor of 0% to 100%), 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 200%, depending on the type of asset.
Following an examination by the OTS in late 1996 and early 1997, the
Bank committed to the OTS to maintain a core capital ratio and a total
risk-based capital ratio of at least 9% and 13%, respectively. The Bank
continues to be in compliance with this commitment.
Prompt Corrective Action. Federal banking regulators have the authority
to take "prompt corrective action" to resolve the problems of undercapitalized
institutions. The regulations establish five categories with varying degrees of
regulators' powers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." At December 31, 2002, the Bank was a "well capitalized"
institution under the prompt corrective action regulations of the OTS; however,
this classification is for limited purposes and may not be indicative of the
Bank's financial condition. The regulations also permit the appropriate Federal
banking regulator to downgrade an institution to the next lower category under
certain circumstances. Depending upon the capital category of an institution,
the regulators' corrective powers may affect capital and stock distributions,
limits on asset growth, acquisitions and new lines of business, transactions
with affiliates, the ability to accept brokered deposits and changes in officers
and directors, among other things.
Qualified Thrift Lender Test. The Bank is required to meet the
qualified thrift lender ("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, which generally include loans, securities and other investments
that are related to housing, small business and credit card lending. A savings
bank that does not meet the QTL test 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.
The Bank is currently and expects to remain in compliance with QTL
standards.
Restrictions on Capital Distributions. The Bank is required to file a
notice with the OTS at least 30 days prior to paying a dividend, or making any
payment to repurchase, redeem, retire or otherwise acquire debt instruments
included in total risk-based capital (each a "capital distribution") if (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 capital
distribution or (d) the proposed capital 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. 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. The Bank is and intends to remain
in compliance with these restrictions.
Loan-To-One Borrower. The amount of loans and extensions of credit that
may be extended by 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 may be made to a borrower if the loans are fully
secured by readily marketable collateral, which does not include real estate
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.
The Bank is currently and expects to remain in compliance with the
loan-to-one borrower limitation.
12
PART I (Continued)
ITEM 1 BUSINESS (Dollars in thousands)
Affiliate Transactions and Tying. Transactions between the Bank and
Ocwen Financial Corporation, OAC, OTX and their non-bank subsidiaries are
subject to quantitative and qualitative restrictions. Such transactions with any
one affiliate may not exceed 10% of the Bank's capital and surplus and with all
affiliates in the aggregate may not exceed 20% of the Bank's capital and
surplus. Certain such transactions (e.g., loans and guarantees) must meet
collateralization requirements. A transaction between the Bank and its affiliate
must be on terms and conditions at least as favorable to the Bank as those
prevailing at the time for comparable transactions with non-affiliated
companies. Savings banks are required to make and retain detailed records of
transactions with affiliates. Additionally, the Bank 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. The Bank is also prohibited from purchasing or
investing in securities issued by an affiliate, other than shares of a
subsidiary.
Also, subject to certain exceptions, savings banks are prohibited from
conditioning the availability or pricing of their products or services on the
requirement that a customer obtain another product or service from the savings
bank or an affiliate, provide another product or service to the savings bank or
an affiliate or refrain from obtaining another product or service from a
competitor of the savings bank or an affiliate.
Insider Loans. Savings banks 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.
Gramm-Leach-Bliley Act. Title V of the Gramm-Leach-Bliley Act imposes
consumer financial privacy restrictions on savings banks. These restrictions
require a savings bank to safeguard non-public personal information of
consumers; provide notices to consumers about an institution's privacy policies
and practices and the about the right of consumers to opt-out of certain
information sharing by savings banks. Also, these laws provide consumers a right
to prevent a savings bank from disclosing non-public personal information about
the consumer to non-affiliated third parties, with exceptions.
Federal Reserve Regulation. Under Federal Reserve Board regulations,
the Bank is required to maintain a reserve against its transaction accounts,
which increases the Bank's cost of funds. The Bank 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 Federal Housing Finance Board is an
agency of the federal government and is generally responsible for regulating the
FHLB System. FHLBs are federally chartered but privately owned institutions
created by Congress. 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. 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. As an FHLB member, we are required to own FHLB
capital stock based upon the aggregate outstanding advances from the FHLB. In
addition, there are risk-based and leverage capital requirements that must be
met by FHLB members, which are similar to those currently in place for
depository institutions.
Community Reinvestment Act. The Community Reinvestment Act ("CRA")
requires financial institutions regulated by the federal banking 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: outstanding,
satisfactory, needs to improve and substantial noncompliance. 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. In 2002, the Bank received a "satisfactory"
CRA rating from the OTS.
USA PATRIOT Act. Among other requirements, the USA PATRIOT Act requires
savings banks to establish an anti-money laundering program and imposes
limitations and due diligence requirements on private banking accounts and
correspondent accounts with certain foreign nationals and foreign institutions.
Also, the USA PATRIOT Act requires the federal banking agencies to adopt
regulations that would require depository institutions, such as the Bank, to
adopt customer identification programs. The federal banking agencies have not
yet promulgated final customer identification program regulations.
13
PART I (Continued)
ITEM 1 BUSINESS (Dollars in thousands)
Sarbanes-Oxley Act of 2002. In response to the recent series of
regulatory enactments in furtherance of the provisions of the Sarbanes-Oxley
Act, we have taken actions including, but not limited to:
o Review of the responsibilities and reporting practices of our auditors,
o Development of questionnaires to identify potential conflicts of
interest,
o Establishment of Disclosure Review and Nomination/Governance
Committees,
o Review of our procedures and policies with regard to independence of
our board members serving on the Audit Committee and Audit Committee
responsibilities consistent with Section 301 of the Act,
o Establishment of a Whistleblower Policy,
o Development of CEO and CFO certifications to accompany audit reports,
o Review of procedures in place to avoid any improper influence on
conduct of audits,
o Update disclosures in periodic reports to conform with Section 401 of
the Act,
o Establishment of ethics policies identifying prohibited activities
under the Act,
o Expedite insider reporting of transactions,
o Review of internal controls by management,
o Development of practices for real time disclosure of material events
and
o Establishment of procedures for document retention and control.
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 acquired Real Estate Mortgage
Investment Conduit ("REMIC") residuals or retained residual securities in REMICs
that 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, although the amount and timing with which we must report taxable
income or deductions may vary based on the particular experience of the mortgage
collateral supporting each REMIC. The tax residuals may also generate excess
inclusion income that could create a tax liability for us if we have not
otherwise earned taxable Income in a particular year.
Investments in Affordable Housing Properties. For a discussion of the
tax effects of investments in affordable housing properties, see
"Segments-Affordable Housing."
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 (due to a waiver of the statute of
limitations) and 1999 through 2001 are open for examination. The Internal
Revenue Service currently is completing an examination of the Company's Federal
income tax returns for the years 1998 and 1999 and reviewing the tax years 1995
through 1997 as result of carryback claims filed. We do not anticipate any
material adjustments as a result of any examination, although there can be no
assurances in this regard.
14
PART I (Continued)
ITEM 1 BUSINESS (Dollars in thousands)
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%. The State of Florida currently is completing an
examination of the Company's State income tax return for the years 1999 through
2001. No other state return of ours has been examined, and we have received no
notification from any other state that intends to examine any of our tax
returns. We do not anticipate any material adjustments as a result of any
examination, although there can be no assurances in this regard.
ITEM 2. PROPERTIES (Dollars in thousands)
The following table sets forth information relating to our facilities
at December 31, 2002:
Net Book Value of
Property or Leasehold
Location Owned/Leased Improvements
----------------------------------------------------------- ---------------- -----------------------
Executive offices:
1675 Palm Beach Lakes Boulevard
West Palm Beach, FL................................... Leased $ 2,249
Bank main office:
2400 Lemoine Ave
Fort Lee, NJ.......................................... Leased $ 8
Servicing center:
12650 Ingenuity Drive
Orlando, FL........................................... Owned $ 21,925
Software development and servicing operations center:
International Technology Park
Bangalore, India...................................... Leased $ 90
Spectrum Towers
Mumbai, India......................................... Leased $ 180
OTX offices (1):
REALTrans office:
5050 Avenida Encinas, Suite 200
Carlsbad, CA.......................................... Leased $ 95
REALServicing office:
10 Research Parkway
Wallingford, CT....................................... Leased $ 21
REALSynergy office:
Two Creekside Crossing
10 Cadillac Drive, Suite 350
Brentwood, TN......................................... Leased $ 74
(1) OTX's main office is located in facilities provided by OCN.
15
PART I (Continued)
ITEM 3. LEGAL PROCEEDINGS (Dollars in thousands)
A description of material pending or recently settled legal proceedings
to which OCN or its subsidiaries are a party follows:
On April 20, 1999, a complaint was filed on behalf of a putative class
of public shareholders of the Company in the Circuit Court of the Fifteenth
Judicial Circuit, Palm Beach County, Florida against OCN and OAC. On April 23,
1999, a complaint was filed on behalf of a putative class of public shareholders
of OAC in the Circuit Court of the Fifteenth Judicial Circuit, Palm Beach
County, Florida, against OAC and certain directors of OAC. The plaintiffs in
both complaints sought to enjoin consummation of the acquisition of OAC by OCN.
The cases were consolidated, and on September 13, 1999 a consolidated amended
complaint was filed. The injunction was denied, and on October 14, 1999 OCN was
dismissed as a party. Plaintiffs' remaining claims were for damages for alleged
breaches of common law fiduciary duties. In October 2001, the parties reached an
agreement in principle, which provides for a payment to plaintiffs in the amount
of $475 in complete settlement off all claims for damages and attorney's fees
and costs. The agreement in principle also requires us to pay a share of certain
additional administrative costs attendant to the settlement, in an amount not
yet determined. The agreement in principle is subject to the approval of the
Court. This matter is not expected to have a material impact on our financial
statements.
On June 3, 1999, Walton Street Capital, L.L.C. ("Walton") filed suit
against OAC and Ocwen Partnership, L.P. in the Circuit Court of Cook County,
Illinois. Walton has alleged that OAC committed an anticipatory breach of
contract with respect to the proposed sale by OAC of all of its interest in its
commercial mortgage-backed securities portfolio to Walton. Walton has claimed
damages in an amount in excess of $27,000 including prejudgment interest. As of
October 20, 2000, both Walton and OAC filed motions for Summary Judgement. On
December 21, 2000, the Circuit Court granted Walton's Limited Motion for Summary
Judgement concerning liability. On February 20, 2001, Ocwen filed a motion for
reconsideration requesting the Circuit Court vacate its order granting summary
judgment to Walton. On January 29, 2002, after oral argument, the Circuit Court
reversed its earlier ruling by vacating the order granting summary judgment. On
October 25, 2002, the Circuit Court denied Walton's motion for summary
judgement. The trial was scheduled to begin March 4, 2003. On March 3, 2003, the
Parties entered into a settlement agreement under which defendants admitted no
liability, and the case was dismissed with prejudice. The amount of the
settlement was $2,250, which is included in the financial results of 2002 based
on the applicable accounting rules.
The former owners of Admiral Home Loan ("Claimants") filed a Demand for
Arbitration against OCN and William C. Erbey claiming damages in the amount of
$21,250 arising out of a 1997 acquisition agreement pursuant to which a
subsidiary of OCN acquired all the assets of Admiral Home Loan. The Claimants
amended their Demand to include a claim for Civil Theft under Florida statutes
for which treble damages are sought. An evidentiary hearing on the matter was
concluded before a three-person arbitration panel on February 24, 2003. On March
11, 2003, the Parties submitted post-hearing findings of fact and conclusions of
law to the arbitration panel, which has taken the matter under advisement.
Although litigation is always uncertain, we believe the claims asserted in the
Admiral Home Loan matter are without merit, and we have defended them
vigorously.
We are also subject to various other ordinary routine pending
litigation incidental to our business. Management is of the opinion that the
resolution of these claims will not have a material adverse effect on the
results of our operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the
quarter ended December 31, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information required by this Item appears under the caption
"Shareholder Information" on page 120 of our 2002 Annual Report to Shareholders
and is incorporated herein by reference.
16
PART II - (Continued)
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information required by this Item appears under the caption "Selected
Consolidated Financial Information" on pages 12 to 15 of our 2002 Annual Report
to Shareholders and is incorporated herein by reference. See Item 8 below and
Part IV, Item 15 regarding our consolidated financial statements and notes.
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 16 to 67 of our 2002 Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item appears under the captions "Asset and
Liability Management" on pages 59 to 64, "Note 1: Summary of Significant
Accounting Policies" on pages 18 to 87 and "Note 19: Derivative Financial
Instruments" on pages 104 to 105 of our 2002 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 70 to 119 in our
2002 Annual Report to Shareholders and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in our definitive Proxy Statement with
respect to our Annual Meeting of Shareholders to be held on May 15, 2003 and as
filed with the Commission on or about March 28, 2003 (the "2003 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 2003 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 AND
RELATED STOCKHOLDER MATTERS
The information contained in our 2003 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.
17
PART III - (Continued)
ITEM 14. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that material information required to be disclosed in our reports under
the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission and that such information is
accumulated and communicated to the management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Within 90 days prior to the date of filing of this Annual Report on
Form 10-K and pursuant to Exchange Act Rule 13a - 15, we conducted an
evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-14(c). Based upon the evaluation,
the Chief Executive Officer along with the Chief Financial Officer concluded
that our disclosure controls and procedures are effective, in all material
respects, in timely alerting them to material information required to be
included in our Exchange Act reports. Additionally, there have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date we conducted the
evaluation.
PART IV
ITEM 15. 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 70 to 119 of our Annual Report to Shareholders:
Report of Independent Certified Public Accountants
Consolidated Statements of Financial Condition at December 31,
2002 and 2001
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 2002
Consolidated Statements of Changes in Shareholders' Equity for
each of the three years in the period ended December 31, 2002
Consolidated Statements of Comprehensive Income for each of the
three years in the period ended December 31, 2002
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2002
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.
18
PART IV - (Continued)
(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)
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)
10.1 Ocwen Financial Corporation 1996 Stock Plan for Directors,
as amended (6)
10.2 Ocwen Financial Corporation 1998 Annual Incentive Plan (7)
10.3 Compensation and Indemnification Agreement, dated as of
May 6, 1999, between OAC and the independent committee of
the Board of Directors (8)
10.4 Indemnity agreement, dated August 24, 1999, among OCN and
OAC's directors (9)
10.5 Amended Ocwen Financial Corporation 1991 Non-Qualified
Stock Option Plan, dated October 26, 1999 (9)
10.6 First Amendment to Agreement, dated March 30, 2000 between
HCT Investments, Inc. and OAIC Partnership I, L.P. (9)
10.7 Form of Employment Agreement, dated as of April 1, 2001,
by and between Ocwen Financial Corporation and Arthur D.
Ringwald (10)
11.1 Computation of earnings per share (11)
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, 2002 (filed herewith)
21.0 Subsidiaries (filed herewith)
23.0 Consent of PricewaterhouseCoopers LLP (filed herewith)
24.0 Power of Attorney (filed herewith)
99.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (filed herewith)
99.2 Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (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.
(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.
19
PART IV - (Continued)
(6) 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.
(7) 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.
(8) Incorporated by reference from OAC's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1999.
(9) 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.
(10) 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, 2001.
(11) Incorporated by reference from "Note 18: Basic and Diluted
Earnings per Share" on page 103 of our 2002 Annual Report to
Shareholders.
(b) Reports on Form 8-K Filed during the Quarter Ended December 31, 2002
(1) A Form 8-K was filed by OCN on November 12, 2002 which
contained a news release announcing our 2002 third quarter
results and certain other information.
20
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 28, 2003
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 28, 2003
- -----------------------------------------
William C. Erbey, Chairman of the
Board and Chief Executive Officer
(principal executive officer)
/s/ BARRY N. WISH Date: March 28, 2003
- -----------------------------------------
Barry N. Wish, Director
/s/ W. C. MARTIN Date: March 28, 2003
- -----------------------------------------
W.C. Martin, Director
/s/ HON. THOMAS F. LEWIS Date: March 28, 2003
- -----------------------------------------
Hon. Thomas F. Lewis, Director
/s/ W. MICHAEL LINN Date: March 28, 2003
- -----------------------------------------
W. Michael Linn, Director
/s/ HERBERT B. TASKER Date: March 28, 2002
- -----------------------------------------
Herbert B. Tasker, Director
/s/ WILLIAM H. LACY Date: March 28, 2003
- -----------------------------------------
Hon. William H. Lacy, Director
/s/ MARK S. ZEIDMAN Date: March 28, 2003
- -----------------------------------------
Mark S. Zeidman, Senior Vice President and
Chief Financial Officer
(principal financial officer)
/s/ ROBERT J. LEIST, JR. Date: March 28, 2003
- -----------------------------------------
Robert J. Leist, Jr., Vice President and
Chief Accounting Officer
(principal accounting officer)
21
CERTIFICATIONS
I, William C. Erbey, certify that:
1. I have reviewed this annual report on Form 10-K of Ocwen Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/ WILLIAM C ERBEY
-------------------------------
William C. Erbey
Chief Executive Officer
22
I, Mark S. Zeidman, certify that:
1. I have reviewed this annual report on Form 10-K of Ocwen Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date:
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/ MARK S. ZEIDMAN
-------------------------------
Mark S. Zeidman
Chief Financial Officer
23