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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, 2003
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 [X] No [ ]
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 10, 2004: $384,071,251
(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 10,
2004: 67,960,607 shares
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to
Shareholders for fiscal year ended December 31, 2003 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 18, 2004, are incorporated by reference into Part III, Items
10-12 and 14.
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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
Business Process Outsourcing................................ 7
International Operations.................................... 7
Residential Discount Loans.................................. 7
Commercial Finance.......................................... 8
Affordable Housing.......................................... 8
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...................................................... 16
Item 3. Legal Proceedings............................................... 17
Item 4. Submission of Matters to a Vote of Security Holders............. 17
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................. 17
Item 6. Selected Consolidated Financial Data............................ 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...... 18
Item 8. Financial Statements and Supplementary Data..................... 18
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............................................ 18
Item 9A Controls and procedures......................................... 18
PART III
Item 10. Directors and Executive Officers of Registrant.................. 18
Item 11. Executive Compensation.......................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ................................ 19
Item 13. Certain Relationships and Related Transactions.................. 19
Item 14. Principal Accounting Fees and Services.......................... 19
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K........................................................ 19
Signatures.................................................................. 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 business
process 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 its 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.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports are made available free
of charge through our website (http://www.ocwen.com) as soon as practicable
after such material is electronically filed with or furnished to the Securities
and Exchange Commission. Also posted on our website, and available in print upon
request, are the charters for our Audit Committee, Compensation Committee and
Governance Committee, our Governance Guidelines, Code of Ethics and Code of
Ethics for Senior Financial Officers. Within the time period required by the SEC
and the New York Stock Exchange, we will post on our website any amendment to or
waiver of the Code of Ethics for Senior Financial Officers, as well as any
amendment to the Code of Ethics or waiver thereto applicable to any executive
officer or director. The information provided on our website is not part of this
report, and is therefore not incorporated herein by reference.
SEGMENTS
In early 2000, we began the execution of our 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 to do so.
However, we continue 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, 2003, our core and
non-core businesses were as follows:
Core Businesses Non-Core Businesses
Residential Loan Servicing Commercial Finance
Ocwen Technology Xchange ("OTX") Affordable Housing
Ocwen Realty Advisors ("ORA") Subprime Finance
Unsecured Collections
Business Process Outsourcing
International Operations
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
that had access to large amounts of capital were entering the market.
4
PART I (Continued)
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, either as 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 reflect growth in our residential loan
servicing segment, continued investment in the development and marketing of our
technology products, cessation of loan acquisition and origination activities
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. Business Process Outsourcing, which began offering business process
outsourcing services late in 2002, was profitable for 2003. International
Operations were not profitable in 2003, reflecting start-up costs associated
with expanding our asset servicing business to various other countries.
Additional information regarding profitability of our business segments appears
under the caption "Segment Profitability" on pages 19 to 25 and in "Note 25:
Business Segment Reporting" on pages 109 to 111 of our 2003 Annual Report to
Shareholders.
A more detailed description of each of our business segments follows.
Residential Loan Servicing
We acquire the servicing rights to performing, sub-performing and
non-performing mortgage loans. At December 31, 2003, subprime mortgages
represented approximately 93% 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.
5
PART I (Continued)
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, 2003, we serviced loans under approximately 420
servicing agreements for 22 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
"SQ2" as a Residential Subprime Servicer and as a Residential Special Servicer.
"SQ2" represents Moody's Investors Services above average rating 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 $33,589,509 during 2003.
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 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, a modest market share
would enable us 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. 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.
6
PART I (Continued)
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.
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 our 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.
Business Process Outsourcing
This business segment began operations in December 2002. The results for
2003 primarily reflect the initiation of new outsourcing contracts in the third
quarter. Business Process Outsourcing provides outsourcing services to third
parties and leverages the operational capacity of our facilities in India.
International Operations
This segment is being reported as a core business segment for the first
time in 2003 and primarily represents the results of operations of Global
Servicing Solutions, LLC ("GSS"). GSS is a joint servicing venture we formed
with Merrill Lynch in March 2002 for the servicing of assets in various
countries. We own 70% of GSS with the remaining 30% owned by Merrill Lynch. GSS
offices in Tokyo, Japan and Taipei, Taiwan became fully operational during 2003.
We are also in the process of establishing operations in London, England and
Beijing, China, and are exploring additional international opportunities in
Germany. Results for 2002 primarily reflect a one-time consulting project for
the government of Jamaica as well as other precedent ventures, now concluded.
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 selling or securitizing the loans for a
profit, by structuring a settlement with the borrower or by 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, the remaining assets of this business and any
related income or loss arising from their resolution have been included in the
Corporate Items and Other segment beginning January 1, 2003.
7
PART I (Continued)
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, 2003, we had $126,401 of non-core
assets, which consisted of nine loan and real estate assets and one unrated
subordinate security. Of the nine loans and real estate assets remaining in this
segment at December 31, 2003, the three 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 2004, it is probable that some of the larger
properties will not be sold until 2005 or later. 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, 2003, only two properties
remain: one shopping center and one office building. The office building, which
had a carrying value of $37,533 at December 31, 2003, was sold in January 2004
for proceeds that approximated carrying value. We also issued a loan in the
amount of $15,248 to the buyer to facilitate this sale.
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.
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. At that time, we also began
the process of marketing each of these properties for sale. At December 31,
2003, we had $7,410 of investments in affordable housing properties remaining,
plus an additional $6,545 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 2004 and that new
sources of financing will be established to repay the remaining loan balances.
We regularly assess the carrying value of our remaining assets and
provide additional loss reserves as appropriate. At December 31, 2003, we had
recorded reserves equal to approximately 55% 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 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.
Corporate Items and Other
In this segment we report business activities that are individually
insignificant, interest income on short term investments in cash and the related
costs of financing these investments, certain technology and other corporate
expenses, gains and losses from the early retirement of debt and the
amortization of negative goodwill recorded in connection with our acquisition of
OAC.
8
PART I (Continued)
Additional financial information and related discussion regarding each
of our segments appears under the captions "Segment Profitability" on pages 19
to 25 and "Note 25: Business Segment Reporting" on pages 109 to 111 of our 2003
Annual Report to Shareholders.
SOURCES OF FUNDS
General. The principal sources of funds that support our business
activities are:
o Deposits o Payments received on
o Lines of credit and other secured loans and securities
borrowings o Proceeds from sales of
o Match funded debt assets
o Securities sold under agreements to o Servicing fees
repurchase
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 2004, 2005 and
thereafter amount to $272,305, $112,830 and $36,522, respectively.
o Maturity of existing collateralized lines of credit and other secured
borrowings totaling $127,149 at various dates through 2004.
o Potential extension of resolution and sale timelines for non-core
assets.
o Ongoing cash requirements to fund operations of our holding company.
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 other types of ancillary income and impose
various obligations on the servicer. Among these are the obligation to advance
our own funds to meet contractual principal and interest payments for certain
investors and to pay taxes, insurance and various other items that are required
to preserve the assets being serviced.
Our ability to continue to expand our servicing business depends in part
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, credit facilities and seller
financing. Our credit facilities provide financing to us at amounts that are
less than the full value of the related servicing assets that serve as
collateral for the credit facilities. If we cannot replace or renew these
sources as they mature or obtain additional sources of financing, we may unable
to acquire new servicing rights and make the associated advances.
Deposits. Historically, a significant source of deposits for us had 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, which
amounted to $84,328 at December 31, 2003, are reported net of unamortized
deferred fees that have been paid to investment banking firms. We have not
issued any new brokered certificates of deposit since 2000.
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 2003 and 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 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, 2003, the deposits that were originated from to this
office amounted to $150,903 and comprised approximately 34% of our total
deposits.
9
PART I (Continued)
Lines of Credit and Other Secured Borrowings. In October 2003, we
executed a revolving credit facility under which we have the right to borrow up
to $100,000 secured by a pledge of servicing advances as collateral. At December
31, 2003, we had $9,386 outstanding under this facility, which matures in
October 2004. Under a similar revolving credit facility executed in April 2001,
we also had the right to pledge servicing advances as collateral for a loan up
to $100,000. This facility was repaid subsequent to December 31, 2003 and will
not be renewed upon maturity in March 2004. The outstanding balance as of
December 31, 2003 was $68,548.
During 2003, we also entered into a number of other borrowings secured
by real estate, trading securities and loan servicing assets. Additionally, we
entered into an agreement for seller financing of purchased mortgage servicing
rights. These actions are consistent with our commitment to reduce our reliance
on brokered deposits and long-term debt as sources of financing for our
operations.
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,
2003, we had $94,967 of bonds-match funded agreements outstanding under this
facility, which originally matured in December 2003, but was extended with a
maturity date of January 2006. The sales of advances do 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.
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, 2003.
Other. Our long-term debt at December 31, 2003 consisted of 10.875%
Capital Securities due in 2027 with an outstanding balance of $56,249. On
September 30, 2003 we exercised our redemption option and called the remaining
$33,065 of 12% Subordinated Debentures. Our remaining $43,475 balance of 11.875%
notes matured on October 1, 2003 and was repaid. Additional information on our
sources of funds appears under the captions "Liquidity, Commitments and
Off-Balance Sheet Risks" on pages 62 to 64, "Deposits" on pages 53 to 54, "Note
11: Deposits" on page 95 to 96, "Note 13: Bonds - Match Funded Agreements" on
pages 96 to 97, "Note 14: Lines of Credit and Other Secured Borrowings" on pages
97 to 98, "Risks Related to Financing" on page 16 and "Note 15: Notes and
Debentures" on pages 98 to 99 of the 2003 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 14 to 18
of our 2003 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 page 16 and pages 16 to 17, respectively,
of our 2003 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, 2003, we had a total of 2,472 employees, of which
1,043 were in our United States facilities and 1,429 were in our India
operations centers. We have developed our India operations centers over the past
three years in order to benefit from the cost savings opportunities and quality
workforce available in that country.
10
PART I (Continued)
In the United States, our operations are concentrated in our
headquarters in West Palm Beach, which had 413 employees as of December 31,
2003, and our operations center in Orlando, which had 614 staff members as of
the same date. Our Orlando facility has the capacity to house 950 employees on a
single shift. In addition, we had 8 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 2004.
In India, our operations are located in the cities of Bangalore and
Mumbai. Of the 1,429 members of the staff in India as of December 31, 2003, 699
were in Bangalore and 730 were in Mumbai. Our India workforce can be summarized
by business as follows:
o 57% are engaged in activities for our Residential Loan Servicing
business,
o 14% support Business Process Outsourcing,
o 10% 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.
We project additional growth in our India staff during 2004. The extent
of this growth is dependent upon the growth of several of our new business
initiatives, primarily Business Process Outsourcing.
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 the OTS makes a determination
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, to engage in transactions with us or our
subsidiaries or affiliates and to 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.
11
PART I (Continued)
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, disallowed servicing assets and disallowed deferred
tax assets.
Risk-Based Capital Requirement. A savings bank 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 bank's core
capital. Supplementary capital consists of certain capital instruments that do
not qualify as core capital, including subordinated debt 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. Deductions from risk-based capital include real estate acquired
in satisfaction of a debt and held in excess of five years.
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, 2003, 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.
12
PART I (Continued)
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 the Bank's 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.
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
13
PART I (Continued)
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. The most recent review of the Bank's CRA
performance resulted in a "satisfactory" rating from the OTS in 2002.
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.
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
14
PART I (Continued)
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 and 1999 (due to a waiver of the
statute of limitations) and 2000 through 2002 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.
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 9.0%. Currently no state return of ours is being examined, and
we have received no notification from any 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.
15
PART I (Continued)
ITEM 2. PROPERTIES (Dollars in thousands)
The following table sets forth information relating to our facilities at
December 31, 2003:
Net Book Value of
Property or Leasehold
Location Owned/Leased Improvements
- ------------------------------------------------------------ -------------- -----------------------
Executive offices:
1675 Palm Beach Lakes Boulevard
West Palm Beach, FL.................................... Leased $ 1,107
Bank main office:
2400 Lemoine Ave
Fort Lee, NJ........................................... Leased $ 6
Servicing center:
12650 Ingenuity Drive
Orlando, FL............................................ Owned $ 21,589
Software development and servicing operations center:
Solarpuria Arena
24 Hosur Luskar Road
Bangalore, India....................................... Leased $ 967
Spectrum Towers
Mind Space Business District
Link Road, Malad West
Mumbai, India.......................................... Leased $ 262
OTX offices (1):
REALTrans office:
5050 Avenida Encinas, Suite 200
Carlsbad, CA........................................... Leased $ 66
GSS offices:
Taiwan office:
Taipei World Trade Center
333 Keelung Road
Taipei, Taiwan......................................... Leased $ 74
Japan office:
SK Building
3F 2-7-4 Nishi -Shinbashi
Tokyo, Japan........................................... Leased $ 28
China office
China World Tower 1
No. 1 Jian Guo Men Wai Avenue
Beijing, Peoples' Republic of China.................... Leased $ --
(1) OTX's main office is located in facilities provided by OCN.
16
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 OCN 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 complete
settlement off all claims for damages and attorney's fees and costs. On
September 29, 2003, the Court approved the settlement and entered final
judgment, thus bringing the litigation to a conclusion. This matter did not have
any material impact on our financial statements.
OCN and certain of its affiliates, including the Bank, have been named
as defendants in a number of purported class action lawsuits challenging the
Bank's mortgage servicing practices. The lawsuits allege that the defendants
violated federal and state statutes, including the federal Real Estate
Settlement Procedures Act, Fair Debt Collection Practices Act and state
deceptive trade practices statutes, and assert common law claims. The lawsuits
seek actual and punitive damages, and injunctive and other relief. These
lawsuits are at an early stage of proceedings, and no court has yet considered a
motion for class certification. A petition to consolidate the lawsuits is
currently pending before the United States Judicial Panel on Multi-District
Litigation, under caption styled: In re Ocwen Federal Bank FSB Mortgage
Servicing Litigation, MDL Docket No. 1604. We are defending and intend to
continue to defend the lawsuits vigorously. While the outcome of litigation is
always uncertain, we believe that we have meritorious defenses to these
lawsuits.
OCN and the Bank are also subject to various other pending legal
proceedings. In our opinion, the resolution of these proceedings will not have a
material effect on our financial condition, results of operations or cash flows.
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, 2003.
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 116 of our 2003 Annual Report to Shareholders and is
incorporated herein by reference.
17
PART II - (Continued)
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information required by this Item appears under the caption "Selected
Consolidated Financial Information" on pages 10 to 13 of our 2003 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 14 to 65 of our 2003 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 57 to 61, "Note 1: Summary of Significant
Accounting Policies" on pages 74 to 83 and "Note 17: Derivative Financial
Instruments" on pages 100 to 102 of our 2003 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 67 to 115 in our 2003
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer
and chief financial officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) under the Securities
Exchange Act) as of December 31, 2003. Based on this evaluation, our chief
executive officer and chief financial officer concluded that, as of December 31,
2003 our disclosure controls and procedures were (1) designed to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to our chief executive officer and chief financial
officer by others within those entities, particularly during the period in which
this report was being prepared and (2) effective, in that they provide
reasonable assurance that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
fiscal quarter ended December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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 18, 2004 and as filed
with the Commission on or about March 15, 2004 (the "2004 Proxy Statement")
under the captions "Election of Directors - Nominees for Director," "Executive
Officers Who Are Not Directors," "Board of Directors and Corporate Governance -
Committees of the Board of Directors - Audit Committee," "Security Ownership of
Certain Beneficial Owners - Section 16(a) Beneficial Ownership Reporting
Compliance" and "Board of Directors and Corporate Governance - Code of Ethics"
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in our 2004 Proxy Statement under the captions
"Executive Compensation," "Board of Directors Compensation" and "Comparison of
Cumulative Total Return" is incorporated herein by reference.
18
PART II - (Continued)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained in our 2004 Proxy Statement under the captions
"Security Ownership of Certain Beneficial Owners and Related Stockholder Matters
- - Beneficial Ownership of Common Stock" and "Security Ownership of Certain
Beneficial Owners and Related Stockholder Matters - Equity Compensation Plan
Information" are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCONTING FEES AND SERVICES
The information required by this item is included in our 2004 Proxy
Statement under the caption "Ratification of Appointment of Independent Auditor"
and is incorporated herein by reference.
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,
2003 and 2002
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2003
Consolidated Statements of Changes in Shareholders' Equity for
each of the three years in the period ended December 31, 2003
Consolidated Statements of Comprehensive Income for each of the
three years in the period ended December 31, 2003
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2003
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.
19
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 Certificate of Trust of Ocwen Capital Trust I (4)
4.2 Amended and Restated Declaration of Trust of Ocwen
Capital Trust I (4)
4.3 Form of Capital Security of Ocwen Capital Trust I
(included in Exhibit 4.4) (4)
4.4 Form of Indenture relating to 10.875% Junior
Subordinated Debentures due 2027 of OCN (4)
4.5 Form of 10.875% Junior Subordinated Debentures due 2027
of OCN (included in Exhibit 4.6) (4)
4.6 Form of Guarantee of OCN relating to the Capital
Securities of Ocwen Capital Trust I (4)
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, 2003 (filed herewith)
21.0 Subsidiaries (filed herewith)
23.0 Consent of PricewaterhouseCoopers LLP (filed herewith)
31.1 Certification of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
31.2 Certification of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
32.1 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)
32.2 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.
20
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 16: Basic and
Diluted Earnings per Share" on page 100 of our 2003
Annual Report to Shareholders.
(b) Reports on Form 8-K Filed during the Quarter Ended December 31,
2003
(1) A Form 8-K was filed by OCN on November 6, 2003 which
contained a news release announcing our 2003 third
quarter results and certain other information.
21
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 15, 2004
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 15, 2004
- ----------------------------------------------
William C. Erbey, Chairman of the
Board and Chief Executive Officer
(principal executive officer)
/s/ RONALD M. FARIS Date: March 15, 2004
- ---------------------------------------------
Ronald M. Faris, President and Director
/s/ RONALD J. KORN Date: March 15, 2004
- ---------------------------------------------
Ronald J. Korn, Director
/s/ WILLIAM H. LACY Date: March 15, 2004
- ---------------------------------------------
Hon. William H. Lacy, Director
/s/ W. MICHAEL LINN Date: March 15, 2004
- ---------------------------------------------
W. Michael Linn, Director
/s/ W. C. MARTIN Date: March 15, 2004
- ---------------------------------------------
W.C. Martin, Director
/s/ HERBERT B. TASKER Date: March 15, 2004
- ---------------------------------------------
Herbert B. Tasker, Director
/s/ BARRY N. WISH Date: March 15, 2004
- ---------------------------------------------
Barry N. Wish, Director
/s/ MARK S. ZEIDMAN Date: March 15, 2004
- ---------------------------------------------
Mark S. Zeidman, Senior Vice President and
Chief Financial Officer
(principal financial officer)
/s/ ROBERT J. LEIST, JR. Date: March 15, 2004
- ---------------------------------------------
Robert J. Leist, Jr., Vice President and
Chief Accounting Officer
(principal accounting officer)
22