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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
Exhibit 12.1
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Earnings:
(Loss) income from continuing operations before
income taxes and effect of change in accounting
principle............................................ $ 5,028 $ (82,057) $ (41,782) $ 21,139 $ 23,293
Less:
(Losses) and undistributed income of equity investees.. -- -- -- (5,280) (9,154)
Add:
Interest expensed and capitalized, except interest on
deposits, and amortization of capitalized debt
expenses............................................. 24,650 35,681 42,738 84,897 72,765
Interest on deposits................................... 17,546 27,455 59,967 98,224 98,370
Interest component of rental expense................... 1,169 1,108 1,176 1,124 2,032
----------- ----------- ----------- ----------- -----------
Total fixed charges (1)................................ 43,365 64,244 103,881 184,245 173,167
----------- ----------- ----------- ----------- -----------
Earnings for computation purposes........................ $ 48,393 $ (17,813) $ 62,099 $ 210,664 $ 205,614
=========== ============ =========== =========== ===========
Ratio of earnings to fixed charges:
Including interest on deposits (2)..................... 1.12 (3) (3) 1.14 1.19
Excluding interest on deposits (2)..................... 1.19 (3) (3) 1.31 1.43
(1) Fixed charges represent total interest expensed and capitalized,
including and excluding interest on deposits, amortization of
capitalized debt expenses, as well as the interest component of rental
expense.
(2) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes and effect of
change in accounting principal, adjusted for losses and undistributed
income of equity investees plus fixed charges by (y) fixed charges.
(3) Due to our losses in 2002 and 2001, the ratio of earnings to fixed
charges was less than 1:1. We would have had to generate additional
earnings of $82,057 and $41,782, respectively, to achieve coverage of
1:1.
EXHIBIT 13.1
FINANCIAL TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL INFORMATION................................ 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 14
REPORT OF MANAGEMENT....................................................... 66
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......................... 67
CONSOLIDATED FINANCIAL STATEMENTS.......................................... 68
SHAREHOLDER INFORMATION.................................................... 116
9
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following tables present selected consolidated financial
information of Ocwen Financial Corporation and its subsidiaries at the dates and
for the years indicated. Our historical operations and balance sheet data at and
for the years ended December 31, 2003, 2002, 2001, 2000, and 1999 have been
derived from our audited financial statements. We have reclassified certain
amounts included in the 2002, 2001, 2000, and 1999 selected consolidated
financial information to conform to the 2003 presentation. The selected
consolidated financial information should be read in conjunction with, and is
qualified in its entirety by reference to, the information we have provided in
our Consolidated Financial Statements and the Notes to Consolidated Financial
Statements on pages 67 to 115.
For the Years Ended December 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999 (1)
----------- ----------- ----------- ----------- -----------
Balance Sheet Data
- ------------------
Total assets ............................................... $ 1,240,118 $ 1,222,242 $ 1,711,150 $ 2,249,420 $ 3,281,674
Trading securities, at fair value (2) (3) ............... $ 49,520 $ 58,895 $ 226,249 $ 390,242 $ --
Securities available for sale, at fair value (3) ........ $ -- $ -- $ -- $ -- $ 587,518
Real estate (2) (6) ..................................... $ 103,943 $ 120,715 $ 240,779 $ 291,850 $ 555,366
Affordable housing properties (2) ....................... $ 7,410 $ 15,319 $ 102,069 $ 640,052 $ 150,989
Loans, net (2) .......................................... $ 28,098 $ 76,857 $ 185,293 $ 631,634 $ 1,115,850
Match funded assets, net (4) ............................ $ 130,087 $ 167,744 $ 174,351 $ 116,987 $ 157,794
Advances on loans and loans serviced for others (2) .... $ 374,769 $ 266,356 $ 283,183 $ 277,055 $ 162,548
Mortgage servicing rights (2) ........................... $ 166,495 $ 171,611 $ 101,107 $ 51,426 $ 11,683
Total liabilities .......................................... $ 921,574 $ 853,497 $ 1,270,885 $ 1,666,464 $ 2,662,232
Deposits and escrows (7) ................................ $ 562,832 $ 510,956 $ 730,443 $ 1,258,360 $ 1,814,647
Bonds-match funded agreements (8) ....................... $ 115,394 $ 147,071 $ 156,908 $ 107,050 $ 141,515
Notes, debentures, lines of credit and other secured
borrowings (9) (10) ................................... $ 206,633 $ 159,721 $ 244,609 $ 206,263 $ 505,439
Capital securities (10) .................................... $ -- $ 56,249 $ 61,159 $ 79,530 $ 110,000
Stockholders' equity (11) .................................. $ 317,258 $ 310,718 $ 379,106 $ 503,426 $ 509,442
Other Data
- ----------
Average assets ............................................. $ 1,300,491 $ 1,435,105 $ 1,983,656 $ 3,108,367 $ 3,187,683
Average equity ............................................. $ 308,940 $ 346,918 $ 448,752 $ 495,354 $ 462,216
Return on average assets:
Income (loss) before effect of change in accounting
principle ............................................. 0.37% (5.92)% (6.29)% 0.07% 0.62%
Net income (loss) ....................................... 0.37% (4.79)% (6.29)% 0.07% 0.62%
Return on average equity:
Income (loss) before effect of change in accounting
principle ............................................. 1.54% (24.48)% (27.81)% 0.44% 2.78%
Net income (loss) ....................................... 1.54% (19.82)% (27.81)% 0.44% 4.29%
Average equity to average assets ........................... 23.76% 24.19% 22.62% 15.94% 14.50%
Net interest spread ........................................ 2.78% 0.99% 1.36% 2.13% 4.57%
Net interest margin ........................................ (4.69)% (3.62)% (1.03)% 0.82% 4.39%
Efficiency ratio (12) ...................................... 96.71% 153.59% 111.61% 78.09% 81.90%
Bank regulatory capital ratios at end of period:
Tangible ................................................ 14.93% 15.28% 13.43% 13.83% 10.67%
Core (Leverage) ......................................... 15.09% 15.51% 13.64% 13.83% 10.67%
Risk-based .............................................. 14.95% 21.71% 23.33% 21.83% 19.12%
10
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
For the Years Ending December 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999 (1)
---------- ---------- ---------- ---------- ----------
Operations Data
- ---------------
Net income (loss) ............................................... $ 4,772 $ (68,775) $ (124,782) $ 2,192 $ 19,832
Net interest income (expense) (10) (13) ......................... $ (14,594) $ (18,527) $ (9,958) $ 15,726 $ 97,682
Provision for loan losses ....................................... $ (2,684) $ 13,629 $ 15,666 $ 15,177 $ 6,710
Total non-interest income (16) .................................. $ 177,497 $ 134,012 $ 174,288 $ 201,973 $ 140,500
Servicing and other fees (2) (14) ............................. $ 158,548 $ 141,991 $ 134,597 $ 97,080 $ 76,018
Gain (loss) on interest-earning assets, net (15) .............. $ 28 $ (3,485) $ (3,949) $ 17,625 $ 44,298
Gain (loss) on trading and match funded securities, net (3) ... $ 3,344 $ 7,012 $ 16,330 $ (3,971) $ --
Impairment charges on securities available for sale (3) ...... $ $ -- $ -- $ (11,597) $ (58,777)
Valuation gains (losses) on real estate (17) .................. $ (7,430) $ (35,002) $ (22,282) $ (27,378) $ (30,825)
Gain (loss) on sale of real estate ............................ $ 466 $ 4,098 $ 14,156 $ 45,464 $ 38,018
Operating income (loss) from real estate (18) ................. $ 5,128 $ 7,864 $ 4,495 $ 17,538 $ (8,577)
Amortization of excess of net assets acquired over
purchase price (21) ......................................... $ -- $ -- $ 18,333 $ 14,112 $ 3,201
Gain (loss) on repurchase of debt (9) ......................... $ (445) $ (1,461) $ 3,774 $ 29,703 $ 8,474
Equity in income (losses) of investments in unconsolidated
entities (5) ................................................ $ 38 $ 215 $ 304 $ (5,249) $ (12,616)
Total non-interest expense (19) ................................. $ 157,501 $ 177,626 $ 183,315 $ 170,001 $ 195,068
Income tax expense (benefit) (20) ............................... $ 748 $ 2,983 $ 83,000 $ 18,947 $ 4,099
Effect of change in accounting principle (21) ................... $ -- $ 16,166 $ -- $ -- $ --
Earnings (loss) per share
- -------------------------
Basic and Diluted:
Net income (loss) before effect of accounting change ........ $ 0.07 $ (1.26) $ (1.86) $ 0.03 $ 0.31
Effect of change in accounting principle, net of tax ........ -- 0.24 -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) ........................................ $ 0.07 $ (1.02) $ (1.86) $ 0.03 $ 0.31
========== ========== ========== ========== ==========
Weighted average common shares outstanding:
Basic ....................................................... 67,166,888 67,321,299 67,227,058 67,427,662 63,051,015
Diluted ..................................................... 68,063,873 67,321,299 67,227,058 67,464,043 63,090,282
11
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Notes to Selected Consolidated Financial Information
(1) Financial data we have presented for 1999 included our wholly-owned UK
subsidiary, Ocwen UK Limited, formerly known as Ocwen UK plc ("Ocwen
UK"). Ocwen UK was engaged in the subprime mortgage loan origination
and servicing business, began operations on April 24, 1998 and was sold
on September 30, 1999. The financial data presented also included Ocwen
Asset Investment Corp. ("OAC"), which was acquired in October 1999.
Previously, we accounted for our investment in OAC and its operating
partnership subsidiary, Ocwen Partnership L.P. ("OPLP"), under the
equity method.
(2) Beginning in late 1999 and early 2000, we ceased conducting the
origination and acquisition of loans, real estate owned, investments in
real estate, residual and subordinate trading securities and affordable
housing properties. Since then, our results reflect the ongoing
management and resolution of these assets. At the same time we shifted
our focus toward growing fee-based businesses, primarily residential
loan servicing and Ocwen Technology Xchange ("OTX"), our technology
solutions business. As a result, our investment in mortgage servicing
rights and servicing advances has grown, as well as the related
residential servicing fees. Additionally, we have incurred losses in
the development and marketing of OTX products. Those losses (pre-tax)
amounted to $(11,520), $(24,144), $(36,392) and $(33,951) during 2003,
2002, 2001 and 2000, respectively. See "Overview of Risks and Related
Critical Accounting Policies" and "Results of Operations - Segment
Profitability".
(3) On September 30, 2000 we began to account for securities available for
sale and match-funded securities as trading. For these securities,
changes in fair value are reported in income in the period of change.
Previously, we accounted for our securities as available for sale, and
the unrealized gains and losses for these securities were reported as a
separate component of accumulated other comprehensive income in
stockholders' equity.
(4) Match funded assets at December 31, 1999 and 2000 were comprised solely
of securitized loans and securities. Match funded assets at December
31, 2003, 2002 and 2001 also included $105,788, $121,702 and $101,963,
respectively, of loan servicing advances which were sold but did not
qualify as a sale for accounting purposes. We have accounted for these
transactions as secured borrowings with pledges of collateral. We
acquired the match-funded loans as a result of our acquisition of OAC.
See "Changes in Financial Condition - Match Funded Assets".
(5) Losses we incurred for 2000 related primarily to our investment in
Kensington Group PLC (Kensington) in 1999. Losses for 1999 related
primarily to our investment in Kensington and our equity investments in
OAC and OPLP, before their acquisition in October 1999.
(6) Balances at December 31, 2003, 2002, 2001, 2000 and 1999 included
$48,210, $51,588, $78,544, $75,080 and $252,604, respectively, of
properties that we acquired as a result of our acquisition of OAC.
Balances also include properties we acquired by foreclosures on loans
we owned, which have declined as a result of sales and our exit from
the loan origination and acquisition businesses. See "Changes in
Financial Condition - Real Estate".
(7) Since 2000, we have been reducing our reliance on brokered certificates
of deposit as a source of funding. The amount of such deposits
outstanding amounted to $84,328, $198,248, $484,698 and $968,432 at
December 31, 2003, 2002, 2001 and 2000, respectively. We continue to
rely on non-brokered deposits as a source of funding. See "Banking
Operations" and "Liquidity, Commitments and Off-balance Sheet Risks".
(8) Balances included bonds-match funded agreements we assumed as a result
of our acquisition of OAC in 1999. At December 31, 2003, 2002 and 2001
the balance also included $94,967, $106,797 and $91,766, respectively,
collateralized by loan servicing advances. See "Changes in Financial
Condition - Bonds-Match Funded Agreements".
(9) Balance at December 31, 1999 included $159,170 of lines of credit we
acquired in connection with our acquisition of OAC. During 2000 we paid
down these lines significantly as a result of real estate sales. See
"Changes in Financial Condition - Lines of Credit and Other Secured
Borrowings". Balance at December 31, 1999, also included $140,487 of
11.5% Notes we acquired in connection with our acquisition of OAC and
repurchased during 2000. During 2003, 2002, 2001, 2000 and 1999 we
repurchased a total of $33,500, $77,095, $13,025, $146,755 and $54,150,
respectively, of fixed rate debt with high interest rates. Balance at
December 31, 2003 includes the $56,249 outstanding balance of our
Capital Securities. See (10) below and "Changes in Financial Condition
- Notes and Debentures".
(10) Effective with our adoption of Statement of Financial Accounting
Standard (`SFAS") No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", on
July 1, 2003, we reclassified the $56,249 outstanding balance of our
Capital Securities to Notes and Debentures. Beginning with the third
quarter of 2003, distributions are reported as interest expense. See
Note 1 to the Consolidated Financial Statements.
(11) Stockholders' equity includes our issuance of 12,371,750 shares of
common stock in the amount of $96,809 in connection with our
acquisition of OAC in 1999. We repurchased 500,000 shares for $2,262,
1,388,300 shares for $8,996 and 4,611,700 shares for $30,691 during
2003, 2000 and 1999, respectively.
12
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
(12) The efficiency ratio represents non-interest expense divided by the sum
of net interest income before provision for loan losses and
non-interest income.
(13) Net interest income for 1999 included $21,827 earned by Ocwen UK prior
to its sale.
(14) Servicing and other fees earned during 1999 included $9,691 attributed
to Ocwen UK prior to its sale.
(15) We recognized $36,804 of net gains in connection with the
securitization of loans during 1999. During the third quarter of 1999,
we decided to structure future securitizations as financing
transactions, thereby precluding our use of gain-on-sale accounting.
The gains we earned from loan sales during 1999 included $8,940 from
Ocwen UK prior to its sale.
(16) Non-interest income for 1999 included a $50,371 gain from the sale of
Ocwen UK and 2000 included a gain of $20,025 from the sale of our
unconsolidated investment in Kensington on November 22, 2000.
Kensington was engaged in the subprime mortgage loan origination
business in the UK.
(17) Valuation losses included impairment charges on real estate properties
acquired in connection with our acquisition of OAC of $7,526, $14,549,
$1,471 and $704 for 2003, 2002, 2001 and 2002, respectively. Gains on
sales of real estate for 2000 included $20,806 from the sale of four
office buildings we had acquired in connection with our acquisition of
OAC. See "Results of Operations - Valuation Gains (Losses) on Real
Estate" and "Gain (Loss) on Sales of Real Estate".
(18) Results for 2003, 2002, 2001 and 2000, and to a lesser extent 1999,
included operating income from real estate properties acquired as a
result of our acquisition of OAC. Only two properties remain at
December 31, 2003, of which one was sold in January 2004 for proceeds
that approximated carrying value. Results for 2003, 2002, 2001 and 2000
also included equity in earnings related to certain loans acquired
during the first quarter of 2000 which we accounted for as investments
in real estate under the equity method. These loans had been fully
repaid as of December 31, 2003. See "Results of Operations -Operating
Income (Loss) from Real Estate".
(19) Non-interest expenses for 1999 included $36,114 attributed to Ocwen UK
prior to its sale.
(20) Income tax expense we recorded for 2001, 2000 and 1999 included
$83,000, $17,500 and $2,500, respectively, of net provisions to
increase the valuation allowance on prior years' deferred tax assets.
No such provision was required for 2003 or 2002. See "Results of
Operations - Income Tax Expense (Benefit)".
(21) Upon adoption of SFAS No. 142 effective January 1, 2002 we reversed the
unamortized balance of the excess of net assets acquired over purchase
price (negative goodwill) of $18,333 and recorded $3,333 of impairment
charges on goodwill and intangible assets. These amounts have been
reported as the effect of a change in accounting principle, net of an
income tax benefit of $1,166. See Note 1 to our Consolidated Financial
Statements.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following discussion of our results of operations, consolidated
financial condition and capital resources and liquidity should be read in
conjunction with our Selected Consolidated Financial Information, Consolidated
Financial Statements and the related notes, all included elsewhere herein.
Overview of Risks and Related Critical Accounting Policies
For the past several years, we have been undergoing a fundamental
transition in the nature of our business. In late 1999 and 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 continued to actively
manage and resolve the remaining assets in these segments. 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
Additionally, we account for certain items of revenue and expense that
are not directly related to a business unit in our Corporate Items and Other
segment. Included in our Corporate Items and Other segment is interest income on
short-term investments of cash and the related costs of financing these
investments, certain technology and other corporate expenses, gains and losses
on the early retirement of debt and amortization of negative goodwill recorded
from the acquisition of OAC.
Principal Risk Factors. The following is a discussion of the principal
risk factors that relate to our businesses and that may affect future results.
Potential for Inconsistent Earnings. Our corporate strategy focuses on
growing our servicing of assets owned by others, growing our activities to
provide business process outsourcing to others and the development of exportable
loan servicing technology for the mortgage and real estate industries. Our past
financial performance may not be considered a reliable indicator of future
performance, and historical trends may not be reliable indicators of anticipated
results or trends in future periods. In addition, there can be no assurance that
we will be able to accomplish our strategic objectives as a result of changes in
the nature of our operations over time or that such changes will not have a
material adverse effect from time to time or generally on our business,
financial condition or results of operations.
In addition to inconsistency in results caused by our entry into or
exit from businesses in recent years, the consistency of our operating results
has been and may continue to be significantly affected by inter-period
variations in our current operations, including:
o The amount of servicing rights acquired, and the changes in realizable
value of those assets due to increases or decreases in prepayment
speeds;
o Gains or losses realized from the disposition of our remaining non-core
assets;
o Growth in the earnings of our other core business segments.
In addition, our operating results have been significantly affected by
certain non-recurring items. Items reported by us in prior periods may not be
repeated in future periods, and we may experience substantial inter-period
variations in our operating results.
Investment Risks. A component of our previous business strategy in the
Residential Discount Loan and Subprime Finance non-core business lines was the
acquisition, origination and securitization of residential mortgage loans. We
had historically retained subordinate and residual interests in connection with
the securitization of our loans and had acquired other residual interests in
connection with our acquisition of OAC. The performance of these securities in
prior years was negatively impacted by higher than expected prepayment speeds
and credit losses experienced on the mortgage loans collateralizing the
securities. We have reduced our exposure to
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
loss on these investments by selling most of the portfolio. However, we remain
subject to the risk of loss on our remaining securities primarily to the extent
that future credit losses exceed expected credit losses.
We continue to own loans and match funded loans relating to our
non-core businesses. We believe that we have established adequate allowances for
losses for each of our loans and match funded loans in accordance with generally
accepted accounting principles. Future additions to these allowances, in the
form of provisions for losses on loans and match funded loans, may be necessary,
however, due to changes in economic conditions and the performance of these
portfolios. There can be no assurance that we will not determine to further
increase our allowances for losses on loans. Increases in our provisions for
losses on loans would adversely affect our results of operations.
International Operations. We conduct business in the United States, and
we have established two software development and servicing operations centers in
India. Through Global Servicing Solutions, LLC ("GSS"), a joint venture formed
with Merill Lynch to service assets in other countries, we now have two fully
operational offices located in Tokyo, Japan and Taipei, Taiwan. We are also in
the process of establishing operations in London, England and Beijing, China,
and are exploring additional international opportunities in Germany. Our foreign
operations are subject to risks beyond those associated with our United States
operations, including the following:
o Unexpected changes in local regulatory requirements,
o Unfavorable changes in trade protection laws,
o Difficulties in managing and staffing international operations,
o Potentially adverse tax consequences,
o Adaptability problems,
o Increased accounting and control expenses,
o The burden of complying with foreign laws,
o Adverse social, political, labor or economic conditions,
o Changes in foreign currency exchange rates, and
o Our limited international experience.
Although we implement hedging strategies to limit the effects of
currency exchange rate fluctuations on our results of operations, there is no
assurance that our strategies will achieve their intended purpose. Further, we
may be unable to effectively manage the risks listed above in order to realize
the benefits of international operations.
Retained Risk of Loans Sold. Historically, we purchased and originated
loans that were subsequently pooled and securitized or sold outright. While we
no longer purchase, originate or securitize loans, on substantially all loans
sold we made representations or warranties at the time the loans were sold. We
may be required to repurchase loans at a price equal to the then outstanding
principal balance of the loan and any accrued and unpaid interest thereon, if
there were a breach of those representations or warranties. Additionally, we may
be required to advance funds to the securitization trusts or to indemnify the
trustee or the underwriters of a securitization under specific circumstances.
Importance of the Chief Executive Officer. William C. Erbey, our
Chairman and Chief Executive Officer, has had and will continue to have a
significant role in the development and management of our business. The loss of
his services could have an adverse effect on us. We do not have an employment
agreement with Mr. Erbey, and we currently do not maintain key man life
insurance relating to Mr. Erbey or any of our other officers.
Control by Shareholders. As of March 10, 2004, our directors and
executive officers and their affiliates collectively owned or controlled 40.46%
of our outstanding common stock. This includes 27.35% owned or controlled by our
Chairman and Chief Executive Officer, William C. Erbey, and 12.82% owned or
controlled by our director and former Chairman, Barry N. Wish. As a result,
these shareholders could influence or control virtually all matters requiring
shareholder approval, including amendment of our Articles of Incorporation, the
approval of mergers or similar transactions and the election of all directors.
Dependence on Proprietary Information. Our success is in part dependent
upon our proprietary information and technology. We rely on a combination of
copyright, trade secret and contract protection to establish and protect our
proprietary rights in our products and technology. In general we enter into
intellectual property agreements with all employees (including our management
and technical staff) and consultants as well as limit access to and distribution
of our proprietary information. We cannot be sure that we have taken adequate
steps to deter misappropriation of our proprietary rights or information.
Independent third parties may develop products and technology
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
substantially similar to ours. Although we believe that our products and
technology do not infringe any proprietary rights of others, we could be subject
to claims of infringement in the future.
Risks Related to Mortgage Servicing Rights. The primary risk associated
with mortgage servicing rights is that they will lose a portion of their value
as a result of higher than anticipated prepayments occasioned by declining
interest rates or because of higher than anticipated delinquency rates
occasioned by deteriorating credit conditions. Interest rates, prepayment speeds
and the payment performance of the underlying loans significantly affect both
our initial and ongoing valuations and the rate of amortization of mortgage
servicing rights. In general, the value of mortgage servicing assets is affected
by increased mortgage refinance activity that is influenced by changes in
borrowers' credit ratings, shifts in value in the housing market and interest
rates. While such assets tend to decrease in value as interest rates decrease,
they tend to increase in value as interest rates increase. During 2003,
increases in prepayment speeds resulted in a substantial increase in the
amortization expense of our mortgage servicing rights. As of December 31, 2003,
we held $166,495 of mortgage servicing rights.
We acquire servicing rights principally from mortgage origination
companies and investment banks. Servicing rights are typically acquired based
upon a competitive bidding process. A number of our competitors have access to
greater capital resources, which may provide them with a competitive advantage
if they seek to increase their market share. Although the market for the
acquisition of servicing rights to subprime mortgage loans has grown in recent
years, we may be unable to acquire the desired amount and type of servicing
rights in future periods. In addition, the volume of servicing rights acquired
by us may vary over time resulting in significant inter-period variations in our
results of operations.
In determining the purchase price for servicing rights, management
makes assumptions regarding the following, among other things:
o The rates of prepayment and repayment within the pools,
o Projected rates of delinquencies and defaults,
o Our cost to service the loans,
o Amounts of future servicing advances,
o Ancillary fee income,
o Our ability to service and resolve loans successfully, and
o Future interest rates.
If these assumptions are inaccurate or the bases for the assumptions
change, the price we pay for servicing rights may be too high. This could result
in reduced revenue or a loss to us. Therefore, our success is highly dependent
upon accuracy in our pricing of servicing rights, as well as general economic
conditions in the geographic areas in which we service loans.
Risks Related to Financing. Our financing strategy includes the use of
leverage. Accordingly, our ability to remain in business and finance our
operations rests in part on our ability to borrow money. Our ability to borrow
money depends on a variety of factors, including:
o Our ability to meet our current debt service obligations on our
existing debt,
o Our corporate credit rating as evaluated from time to time by
rating agencies and the occasion of any changes to their published
ratings,
o Our financial performance and the perception that existing and
potential lenders have of our financial strength,
o Our ability to compete with other banks for deposits,
o Limitations imposed on us by regulatory agencies and/or existing
lending agreements that limit our ability to raise additional
debt, and
o General economic conditions and the impact they have on the
availability of credit.
An event of default, a negative ratings action by a rating agency, the
perception of financial weakness resulting from continuing operating losses, a
material increase in the cost of competing for deposits, an action by a
regulatory authority or a restriction imposed on us as a function of a debt
covenant that serves to limit our ability to borrow money, or a general
deterioration in the economy that constricts the availability of credit may
increase our cost of funds and make it difficult for us to renew existing credit
facilities and obtain new lines of credit.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Risks Associated with Technology. Rapid change and uncertainty due to
new and emerging technologies characterize the software industry. Our ability to
grow our technology revenue is dependent upon our ability to develop and
introduce new products and enhance existing products to satisfy consumer demand
for new technologies. Because the pace of change continues to accelerate and new
opportunities for competitors arise, our business planning is subject to
substantial uncertainty. If we do not successfully identify new product
opportunities and develop and bring new products to market in a timely and
efficient manner, our business will suffer. New platforms and products may gain
popularity with customers, vendors and loan originators, reducing or eliminating
the potential for future revenue.
There is fierce competition in the software industry; however, our
products compete in a limited market. While we believe REALServicing, REALTrans
and REALSynergy each present greater functionality and a better value than
competing products in the market, our products may not realize any competitive
advantage. Competitors may arrive at a technology that creates a new market
altogether and renders our product offerings obsolete. We may not be successful
in introducing the products to the market on a commercial basis or in
translating the products' business, marketing and pricing models into revenue
sufficient to produce net income.
The software industry is inherently complex. New products and product
enhancements can require long development and testing periods. While we believe
our products are attractive to the mortgage and real estate industries, the
computer software industry is subject to rapid technological change, changing
customer requirements, frequent new product introductions and evolving industry
standards that may render existing products and services obsolete. We may
experience future difficulties that could delay or prevent the successful
development, introduction or marketing of its products. Further, our products
and product enhancements may not meet the requirements of the marketplace and
achieve market acceptance. If we are unable to develop and introduce products of
acceptable quality in a timely manner in response to changing market conditions
or customer requirements, our business could be adversely affected.
Critical Accounting Policies. Our strategies to exit non-core
businesses and grow core businesses are affected by risks in the marketplace.
Further, our ability to measure and report our operating results and financial
position is heavily influenced by the need to estimate the impact or outcome of
these risks or other future events. Our critical accounting policies are those
that relate to the estimation and measurement of these risks; an understanding
of these policies is fundamental to understanding Management's Discussion and
Analysis of Results of Operations and Financial Condition. Our significant
accounting policies are discussed in detail in Note 1 of our Consolidated
Financial Statements (which are incorporated herein by reference). The following
is a summary of our more subjective and complex accounting policies, as they
relate to our overall business strategy.
Our exit from our capital intensive Commercial Finance, Affordable
Housing and Subprime Finance businesses is largely focused on the orderly
disposition or resolution of the assets associated with these lines of business.
The critical accounting policies that affect the measurement of these businesses
are those that determine the valuation of real estate and affordable housing
assets as well as the determination of the allowance for loan losses.
Our remaining non-core assets are subject to ongoing impairment tests
using various impairment methodologies. In general, none of our non-core assets
have readily determinable fair values based on quoted market prices. In certain
cases, we utilize appraisals or other market value estimates, in conjunction
with estimates of completion costs or costs of disposition, to determine asset
values. In other cases, we value these assets based on analyses of future cash
flows. These cash flow analyses involve assumptions such as discount rates,
anticipated rents received, etc. that are highly subject to management judgment
and estimation. Our task of estimation is even more challenging given the
current risks in the economic environment, which can result in material and
sometimes rapid changes in valuation estimates.
The allowance for loan losses is established and maintained at levels
we deem adequate to cover losses resulting from the inability of borrowers to
make contractually required loan payments. Estimates for loan losses are
developed by analyzing historical loan losses, current trends in delinquencies
and charge-offs, plans for problem loan administration and resolution, the views
of our regulators, changes in the size and composition of the loan portfolio,
and peer group information. Where there is a question as to the impairment of
specific loans, we obtain valuations of the property or other collateral
securing the loan, and, if applicable, the borrower's current financial
information. We also include in our estimates of inherent probable loan losses
the impact of economic events, the outcome of which are uncertain. These events
may include, but are not limited to, deterioration in general economic
conditions, increases or decreases in overall lending rates, political
conditions, legislation that directly and indirectly affects the banking
industry, and regional economic conditions affecting specific geographical areas
in which we conduct business.
Our most significant business in recent years has been our residential
loan servicing business, which has achieved increased transaction volumes during
the past three years. Inherent in our growth of this business has been an
increase in purchased mortgage servicing rights, an intangible asset
representing the present value of the right to service loans in a portfolio.
Therefore, the most critical
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
accounting policy for this business line is the methodology we use to determine
the value of mortgage servicing rights. Application of this methodology requires
the development of a number of estimates, including anticipated amortization and
periodic revaluation. Interest rates, prepayment speeds and the payment
performance of the underlying loans significantly affect both our initial and
ongoing valuations and the rate of amortization of mortgage servicing rights. In
general, during periods of declining interest rates, the value of mortgage
servicing assets declines due to increasing prepayments attributable to
increased mortgage refinance activity. We amortize mortgage servicing rights
over the period of estimated net servicing income based on our projections of
the amount and timing of future cash flows. The amount and timing of servicing
asset amortization is adjusted periodically based on actual results and updated
projections. During the past year, the prepayment speeds in our servicing
portfolio have increased, resulting in a substantial increase in the
amortization of servicing rights.
Another accounting policy that requires the use of estimates and the
application of judgment is the determination of our overall tax provision and
the evaluation of the realizability of our gross deferred tax assets in the near
term. As of December 31, 2003 we had gross deferred tax assets of $208,991, and
a corresponding valuation allowance of $201,445 resulting in a net deferred tax
asset of $7,546. Our valuation allowance was primarily established in 2001, when
we recorded an $83,000 provision to increase the valuation allowance on our
prior years' deferred tax assets. During 2003 and 2002, we provided an
additional valuation allowance equal to the amount of any deferred tax assets
recorded during the year. The evaluation of the need to maintain our valuation
allowance takes into consideration our recent earnings history, current tax
position and estimates of taxable income in the near term. The tax character
(ordinary versus capital) and the carry forward periods of certain tax
attributes (e.g., capital losses and tax credits) must also be considered.
Significant judgment is required in considering the relative impact of negative
and positive evidence related to realizability of the deferred tax assets. The
determination of the amount of the aggregate valuation allowance is based on
scenario analyses of the projected results of operations by line of business
resulting in a range of potential valuation allowances, within which a final
amount is determined. Reversal of all or a portion of the valuation allowance
may be required in the future based on the results or our operations.
Banking Operations
Ocwen Federal Bank FSB ("the Bank"), a wholly owned subsidiary, is a
federally chartered savings bank. As such, it is subject to regulation,
examination and supervision by the Office of Thrift Supervision ("OTS") and the
Federal Deposit Insurance Corporation ("FDIC").
We operate one bank branch in Fort Lee, New Jersey. This location,
which provides most of our retail banking services, is primarily focused on the
issuance of retail certificates of deposit that serve as a supplementary source
of financing for us. We do not conduct loan origination activities in the Fort
Lee branch. In prior years, we had also issued brokered certificates of deposit
from our offices in West Palm Beach, Florida. However, we ceased the issuance of
brokered deposits in the summer of 2000 and have since paid off our maturing
brokered deposits as they have come due.
We currently operate several of our core businesses primarily in the
Bank: Residential Loan Servicing, ORA and portions of Unsecured Collections. In
addition, our non-core Affordable Housing business operates in the Bank, as does
a portion of our non-core Commercial Finance business. Despite the reduction in
our reliance on brokered certificates of deposit as a funding source, the retail
deposits issued by our banking operation continue to provide an important source
of financing for these business activities. See "Liquidity, Commitments and
Off-Balance Sheet Risks" for additional discussion of brokered and non-brokered
deposits as a source of funding.
We have an active ongoing dialogue with the OTS regarding our various
businesses and business plans, and we continue to be subject to a number of
restrictions with respect to our future operations.
Since 1997, the Bank has committed to the OTS to maintain a core
capital (leverage) ratio and a total risk-based capital ratio of at least 9.00%
and 13.00%, respectively. The Bank continues to be in compliance with this
commitment as well as with the regulatory capital requirements of general
applicability. In addition, we have committed to maintain our investment in
mortgage servicing rights at approximately 60% of core capital (before any
deduction thereto for mortgage servicing rights) at the Bank and 50% of
stockholders' equity on a consolidated basis. We regularly review actual
results, which currently exceed these committed levels of investment in mortgage
servicing rights, with the OTS.
Following the completion of the annual safety and soundness examination
of the OTS in 2000, we submitted a written business plan and budget to the OTS
regarding our plans for the business, primarily that of the Bank, over the next
several years. The OTS approved the initial plan in February 2001 and approved
the revised plan submitted April of 2002. The plan included as its primary focus
the reduction of risk through the sale or resolution of our non-core assets and
the reduction of our reliance on brokered certificates of deposit as a source of
funding. The plan was formally concluded on December 31, 2003.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
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Workforce and Operational Capacity
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.
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
December 31, 2003. 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. Business Process
Outsourcing is a developing business focused on providing business process
outsourcing services to third parties.
Results of Operations
General. We recorded net income of $4,772 for 2003, as compared to net
losses of $(68,775) and ($124,782) for 2002 and 2001, respectively. Our net
income per share was $0.07 for 2003, as compared to a loss per share of $(1.02)
and $(1.86) for 2002 and 2001, respectively. As discussed in "Overview of Risks
and Related Critical Accounting Policies", during 2003 we continued our
transition in business strategy from non-core businesses to core businesses. Our
operating results for the past three years reflect transaction volume growth in
our residential loan servicing businesses, continued investment in the
development of our technology products, cessation of loan origination and
acquisition activities and continuing sales of those assets not associated with
our core business segments.
The improvement in net earnings for 2003 as compared to 2002 and 2001
reflects in large part an improvement in both core and non-core operating
results. Additionally, the 2001 net loss of $(124,782) included an income tax
provision of $83,000 to provide for an increase in our valuation allowance on
prior years' deferred tax assets. Our core businesses recorded combined pre-tax
income of $29,202 for 2003, as compared to $13,529 for 2002 and a pre-tax loss
of $(6,797) for 2001. The improvement in combined pre-tax income from our core
business segments in 2003 is largely due to a decline in OTX losses. To a lesser
degree, ORA, Unsecured Collections and Business Process Outsourcing also
contributed to the improvement in pre-tax income from core businesses in 2003,
offset in part by an increase in start-up losses from International Operations.
Our non-core business segments incurred a pre-tax loss of $(11,357) in 2003 as
compared to $(68,169) and $(41,778) in 2002 and 2001, respectively. The
reduction in losses from our non-core segments in 2003 is primarily the result
of a reduction in loss provisions and impairment charges on Commercial and
Affordable Housing assets, offset in part by the $10,000 charge to Subprime
Finance in 2003 resulting from the Admiral Home Loan arbitration settlement.
Results of our Corporate Items and Other segment have also improved over 2002 as
losses have continued to decline in 2003 largely due to reduced interest
expense, resulting from reductions in corporate debt and brokered deposits, and
reduced technology expenses. We discuss segment results in detail in our review
of segment profitability, which follows.
Segment Profitability. In general, we have ceased conducting any new
business activities related to our non-core businesses, although we are actively
engaged in the sale or other resolution of the remaining non-core assets. These
assets are comprised of loans, real estate, securities held in our residual and
subordinate trading portfolio and affordable housing properties. As of December
31, 2003, we held $182,292 of non-core assets, compared to $250,230 and $593,199
of non-core assets at December 31, 2002 and 2001, respectively. As discussed in
detail below, the combined pre-tax results of our core business segments,
non-core segments and Corporate Items segment all improved significantly during
2003.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following tables present the pre-tax income (loss) and total assets
for each of our reportable segments at and for the dates indicated:
Pre-Tax Income (Loss)
For the Years Ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Core businesses:
Residential Loan Servicing....... $ 31,043 $ 31,974 $ 34,591
OTX.............................. (11,520) (24,144) (36,392)
Ocwen Realty Advisors............ 5,432 2,597 944
Unsecured Collections............ 5,300 4,006 (5,020)
Business Process Outsourcing..... 1,893 118 --
International Operations......... (2,946) (1,022) (920)
---------- ---------- ----------
29,202 13,529 (6,797)
---------- ---------- ----------
Non-core businesses:
Residential Discount Loans....... -- 763 (4,002)
Commercial Finance............... (10,657) (51,947) (21,014)
Affordable Housing............... (4,888) (31,521) (29,917)
Subprime Finance................. 4,188 14,536 13,155
---------- ---------- ----------
(11,357) (68,169) (41,778)
---------- ---------- ----------
Corporate Items and Other............ (12,817) (27,417) 6,793
---------- ---------- ----------
$ 5,028 $ (82,057) $ (41,782)
========== ========== ==========
Total Assets
December 31,
-------------------------
2003 2002
----------- -----------
Core businesses:
Residential Loan Servicing................... $ 672,779 $ 579,114
OTX.......................................... 5,292 6,173
Ocwen Realty Advisors........................ 1,056 532
Unsecured Collections........................ 323 296
Business Process Outsourcing................. 1,010 6
International Operations..................... 5,212 5,366
----------- -----------
685,672 591,487
----------- -----------
Non-Core businesses:
Residential Discount Loans................... -- 44,831
Commercial Finance........................... 133,044 196,270
Affordable Housing........................... 48,974 62,092
Subprime Finance............................. 39,162 41,950
----------- -----------
221,180 345,143
----------- -----------
Corporate Items and Other........................ 333,266 285,612
----------- -----------
$ 1,240,118 $ 1,222,242
=========== ===========
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table summarizes our remaining investment in non-core
assets, which are included in the total asset amounts presented above:
Non-Core Assets
December 31,
------------------------
2003 2002
--------- ---------
Non-Core Businesses:
Residential Discount Loans................... $ -- $ 4,633
Commercial Finance........................... 126,401 190,602
Affordable Housing........................... 13,955 21,548
Subprime Finance............................. 38,973 33,447
Corporate Items and Other.................... 2,963 --
--------- ---------
$ 182,292 $ 250,230
========= =========
The following is a discussion of the pre-tax income (loss) for each of
our reportable business segments.
Residential Loan Servicing. Through this core business we provide for a
fee loan servicing, including asset management and resolution services, to third
party owners of subprime residential mortgage and "high loan to value" loans. We
acquire the rights to service loans by purchasing them outright or by entering
into sub-servicing contracts. Results for the past three years reflect
significant growth in the volume of mortgage loans serviced, as shown in the
table below, continuing earnings pressure from current low interest rates and
rising prepayments in our servicing portfolio.
2003 2002 2001
------------ ------------ ------------
Number of loans at December 31................................ 359,592 336,033 301,344
Unpaid principal balance at December 31....................... $ 37,697,358 $ 30,733,677 $ 21,943,417
Average unpaid principal balance.............................. $ 33,589,509 $ 26,533,826 $ 15,727,659
For the Years Ended December 31,
------------------------------------------
Selected information 2003 2002 2001
- -------------------- ------------ ------------ ------------
Pre-tax income (loss)......................................... $ 31,043 $ 31,974 $ 34,591
Net interest expense.......................................... 20,892 18,304 16,529
Servicing and other fees, net................................. 118,319 118,251 117,585
Non-interest expense.......................................... 69,196 69,746 68,370
o Although we have experienced significant growth in the volume of
mortgage loans serviced, net servicing and other fees increased only
slightly in 2003 and 2002. Increases in compensating interest expense
on prepayments and amortization of servicing rights offset the increase
in servicing fees that resulted from the volume growth. Additionally,
we continue to experience low earnings on float balances reported as a
component of fee income due to low short-term interest rates. The yield
we earned on float balances averaged 1.01% during 2003 as compared to
1.56% and 2.83% during 2002 and 2001, respectively. The rate of
amortization on servicing rights has increased in response to increased
projected prepayment volumes. In spite of the fact that we purchased
$88,829 of servicing rights during 2003, the balance of our mortgage
servicing rights has declined due to the increased speed of
amortization. We anticipate that prepayment speeds will remain at
current levels for the near future. See "Non-Interest Income -
Servicing and Other Fees" for details of the principal components of
servicing and other fees.
o The trend of increasing net interest expense during the past three
years reflects the funding costs associated with increased average
balances of advances and mortgage servicing rights, which do not earn
interest. See "Net interest Income (Expense)" for additional
information regarding average balances.
o Non-interest expense declined slightly in 2003 as compared to 2002.
This decline in non-interest expense occurred in spite of the fact that
the number of assets we serviced actually increased during 2003 and was
largely the result of cost reduction efforts. Although non-interest
expense declined in 2003 as compared to 2002, these costs actually
increased during the fourth quarter of 2003 as compared to the third
quarter of 2003. This increase is the result of reassuming certain
collection activities previously performed by a third party vendor.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
o Non-interest expense for 2002 included a $1,000 charge related to the
settlement of a class action litigation claim and increased by only
$1,363 or 2% as compared to 2001 despite an increase in the number of
assets we serviced. Increases in compensation & employee benefits and
occupancy & equipment costs were offset in large part by a decline in
technology & communication costs.
OTX. Through this core segment we provide technology solutions for the
mortgage and real estate industries. OTX products include a residential loan
servicing system (REALServicing), a commercial loan servicing system
(REALSynergy) and an internet-based mortgage loan processing application and
vendor management system (REALTrans). The losses incurred by this segment, which
began its operations in 1998, are a result of our continuing investment in the
development and marketing of these technology products. The decline in the loss
incurred for 2003 and 2002 is largely the result of ongoing cost reduction
initiatives and an increase in software revenues.
For the Years Ended December 31,
--------------------------------------
Selected information 2003 2002 2001
- -------------------- ---------- ---------- ----------
Pre-tax income (loss)......................................... $ (11,520) $ (24,144) $ (36,392)
Non-interest income........................................... 9,933 6,522 2,149
Non-interest expense.......................................... 21,453 30,667 38,542
o The increase in non-interest income is primarily due to an increase in
transaction fees resulting from an increase in REALTrans transaction
volumes.
o The decline in non-interest expenses in 2003 and 2002 primarily
reflects a decline in compensation and employee benefits, and
technology and communication costs as a result of cost reduction
efforts. Technology and communication costs for 2002 and 2001 included
payments of $1,068 and $3,185, respectively, related to the acquisition
of a subsidiary in 1997. The payments in 2002 were the final
compensatory payments related to this acquisition.
o Non-interest expenses for 2002 and 2001 also included goodwill
amortization/writeoffs of $2,231 and $3,112, respectively. With the
adoption of SFAS No. 142 effective January 1, 2002, we no longer
amortize goodwill. We are, however, required to test goodwill for
impairment at least annually. As a result of our annual impairment test
in 2002, we wrote-off the remaining $2,231 balance of goodwill
associated with our REALServicing product.
Ocwen Realty Advisors. Through ORA we provide residential property
valuation services.
For the Years Ended December 31,
--------------------------------------
Selected information 2003 2002 2001
- -------------------- ---------- ---------- ----------
Pre-tax income (loss)......................................... $ 5,432 $ 2,597 $ 944
Non-interest income........................................... 18,804 14,080 11,913
Non-interest expense.......................................... 13,351 11,484 10,968
o Our improved profitability in this segment reflects an improved gross
margin as valuation expenses declined from 71% of revenues in 2001 to
67% in 2002 and 57% in 2003.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Unsecured Collections. This core business 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. We accounted for our collections of our unsecured credit card receivables
portfolio under the cost recovery method through the end of 2001, when we
reduced the net book value of our unsecured receivables to zero as a result of
collections and additional reserves. Beginning in 2002, income is recognized as
cash is collected.
For the Years Ended December 31,
--------------------------------------
Selected information 2003 2002 2001
- -------------------- ---------- ---------- ----------
Pre-tax income (loss)......................................... $ 5,300 $ 4,006 $ (5,020)
Provision for loan losses..................................... -- (278) 1,176
Non-interest income: 12,140 10,652 3,058
Third-party collection fees................................. 9,151 6,461 2,500
Recoveries of unsecured credit card receivables owned....... 2,737 4,191 --
Other....................................................... 252 -- 558
Non-interest expense.......................................... 6,840 6,925 7,042
Business Process Outsourcing. This business segment began operations in
December 2002 and recorded pre-tax income of $1,893 for 2003. These results
primarily reflect the initiation of new outsourcing contracts in the third
quarter. Business Process Outsourcing provides business process outsourcing
services to third parties and leverages the operational capacity of our
facilities in India.
International Operations. This segment, which is being reported as a
core business segment for the first time in 2003, recorded a pre-tax loss of
$(2,946) for 2003. In 2002, International Operations reported a pre-tax loss of
$(1,022). In 2003, this segment primarily represents the results of operations
of GSS, our new joint servicing venture with Merrill Lynch for the servicing of
assets in various countries. GSS offices in Tokyo, Japan and Taipei, Taiwan are
now fully operational. 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. Based on the relative insignificance of the
non-core assets remaining in this segment, 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. This segment
consisted of operations to acquire at a discount and subsequently resolve
sub-performing and non-performing residential mortgage loans. We completed our
last acquisition of residential discount loans in 2000. See "Changes in
Financial Condition - Loans, Net."
For the Years Ended December 31,
--------------------------------------
Selected information 2003 2002 2001
- -------------------- -------- ---------- ----------
Pre-tax income (loss)......................................... $ -- $ 763 $ (4,002)
Net interest income after provisions for loan losses.......... -- 8,367 9,065
Non-interest income........................................... -- (2,354) (4,733)
Non-interest expense.......................................... -- 5,250 8,333
Commercial Finance. Results for this non-core segment reflect our
continuing exit from our loan and real estate businesses. We have not purchased
any commercial assets since 2000. With the exception of loans made to facilitate
the sale of our own assets, we have also not originated any loans since 2000.
See "Changes in Financial Condition - Loans, Net." Since then, this business has
consisted of the management, repositioning, and resolution of the remaining
non-core assets. At December 31, 2003, the $126,401 of non-core assets remaining
in this business consisted of nine loan and real estate assets and an unrated
subordinate security with a fair value of $2,577. These nine assets consisted of
three loans totaling $20,763 and six real estate assets totaling $103,061. Of
the nine remaining assets, the three largest amount to $91,670, or 74%, of the
total. In January 2004, we sold the office building, which had a carrying value
of $37,553 at December 31, 2003, for proceeds that approximated carrying value.
We also issued a loan to the buyer in the amount of $15,248 in order to
facilitate this sale. While we believe that additional sales will occur during
2004, it is probable that some 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. During 2003, we
recorded a total of $4,089 of impairment charges and loss provisions as compared
to $46,127 and $19,583 in 2002 and 2001, respectively.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------------
Selected information 2003 2002 2001
- -------------------- ---------- ---------- ----------
Pre-tax income (loss)........................................ $ (10,657) $ (51,947) $ (21,014)
Net interest expense......................................... 7,217 7,627 3,220
Provision for loan losses.................................... (3,095) 12,814 7,223
Non-interest income
Gain (loss) on interest earning assets, net................ 27 (981) (3,487)
Valuation gains (losses) on real estate.................... (7,184) (33,313) (12,360)
Gain (loss) on sales of real estate........................ 97 1,055 3,439
Operating income (loss) from real estate................... 4,969 9,107 12,489
Servicing fees............................................. 2,636 2,841 2,816
Other...................................................... 773 1,422 473
Non-interest expense......................................... 7,852 11,637 13,941
o Net interest expense reflects a declining balance of loans and a
growing proportion of assets in this segment that do not earn interest.
Our investment in loans has declined as a result of sales, repayments
and resolutions. See "Changes in Financial Condition-Loans".
o The negative provision for loan losses for 2003 primarily resulted from
the recovery of excess reserves on loan sales during 2003. The
provision for loan losses increased in 2002, reflecting an increase in
reserves. Reserve levels on our remaining commercial loans were 15% at
December 31, 2003 as compared to 19% at December 31, 2002 and 4% at
December 31, 2001.
o Valuation losses for 2002 reflect a significant increase in reserves on
real estate owned. See "Non-Interest Income - Valuation Gains (Losses)
on Real Estate".
o The decline in operating income in 2003 and 2002 reflects the decline
in the number of real estate assets remaining as a result of sales.
See "Non-Interest Income - Operating Income (Loss) from Real Estate".
o Non-interest expense for 2002 included a provision of $2,250 to provide
for the settlement of a lawsuit.
Affordable Housing. Historically, we invested in affordable housing
properties primarily through a series of limited partnerships. Except to
complete those projects in which an investment had already been made, we ceased
making investments in properties in 2000 as part of our shift in strategy to
fee-based businesses and because the volume of tax credits being generated was
exceeding our ability to utilize them effectively. Since that time, we have been
marketing these properties for sale. Primarily as a result of sales, our
investment in affordable housing properties had been reduced to $7,410 at
December 31, 2003 from $15,319 at December 31, 2002. In addition, this segment
has $6,545 of loans outstanding to limited partnership properties that we do not
consolidate in our financial statements. While we cannot project sales with
certainty, we believe that it is possible that we will sell the remaining
properties 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. During 2003, we recorded $583 of loss provisions as compared to
$24,686 in 2002 and $16,855 in 2001. At December 31, 2003, our combined reserves
associated with affordable housing properties and loans amounted to 55% of the
remaining book value of such assets as compared to 48% at December 31, 2002 and
16% at December 31, 2001.
For the Years Ended December 31,
--------------------------------------
Selected earnings information 2003 2002 2001
- ----------------------------- ---------- ---------- ----------
Pre-tax income (loss)........................................... $ (4,888) $ (31,521) $ (29,917)
Net interest expense............................................ 2,767 4,449 7,917
Provision for loan losses....................................... 151 3,392 1,207
(Gain) loss on investments in affordable housing properties..... 285 21,915 17,535
o Net interest expense has declined primarily because of a decline in the
assets of this segment, most of which do not earn interest.
o The provision for loan losses increased in 2002 in connection with the
increases to our loss reserves during the year. Reserve levels on loans
increased from 7% at December 31, 2001 to 42% at December 31, 2002 and
were 41% at December 31, 2003.
o Net losses include charges in the amount of $432, $17,350 and $15,587
we recorded during 2003, 2002 and 2001, respectively, for estimated
losses on the sale of the properties. The reserves associated with our
remaining properties amounted to 62% at
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
December 31, 2003 as compared to 50% at December 31, 2002 and 17% at
December 31, 2001. The loss for 2002 also included a $3,944 charge to
record a discount arising from the long-term sale of seven properties.
We are accreting this discount to income over the term of the related
receivable balance, which extends through September 2014. See "Changes
in Financial Condition - Affordable Housing Properties."
Subprime Finance. We were engaged in domestic subprime residential
lending prior to ceasing originations in August of 1999; however, we have
continued to manage and resolve the remaining non-core assets. At December 31,
2003, the non-core assets remaining in this business consisted primarily of
trading securities with a fair value of $38,883. These securities are presently
generating income and return of principal through cash flows. See "Changes in
Financial Condition - Trading Securities".
For the Years Ended December 31,
--------------------------------------
Selected information 2003 2002 2001
- -------------------- ---------- ---------- ----------
Pre-tax income (loss)......................................... $ 4,188 $ 14,536 $ 13,155
Interest income............................................... 16,717 14,661 9,143
Interest expense.............................................. 1,507 2,874 6,486
Gain (loss) on trading and match funded securities, net....... 2,932 7,287 14,247
Non-interest expense.......................................... 13,936 4,646 3,243
o The increase in interest income during 2003 and 2002 is primarily the
result of an increase in cash flow distributions received on single
family subprime residual securities.
o The $9,290 increase in non-interest expense in 2003 as compared to 2002
is primarily due to the $10,000 charge recorded in the first quarter
related to the conclusion of the Admiral Home Loan arbitration.
Corporate Items and Other. Pre-tax results for this segment include
business activities that are individually insignificant, interest income on cash
and cash equivalents, interest expense on corporate assets, gains and losses
from debt repurchases and general corporate expenses. The table below presents
the more significant amounts included in each of the periods indicated.
For the Years Ended December 31,
--------------------------------------
Selected information 2003 2002 2001
- -------------------- ---------- ---------- ----------
Pre-tax income (loss)......................................... $ (12,817) $ (27,417) $ 6,793
Net interest expense.......................................... 6,119 14,850 13,399
Amortization of negative goodwill............................. -- -- 18,333
Gain (loss) on debt repurchases............................... (445) (1,461) 3,774
Technology and corporate expenses............................. 7,243 11,047 2,251
o Net interest expense declined in 2003 and 2002 primarily as a result of
debt repurchases and maturities, as well as the ongoing reduction in
brokered deposits. See "Changes in Financial Condition - Notes and
Debentures" and "Deposits".
o Effective with our adoption of SFAS No. 150 effective July 1, 2003,
distributions on our Capital Securities are reported in the
consolidated statement of operations as interest expense beginning in
the third quarter of 2003. For purposes of this analysis, net interest
expense includes distributions on Capital Securities for all periods.
Distributions on Capital Securities were $6,118, $6,287 and $7,131 for
2003, 2002 and 2001, respectively.
o Technology and corporate expenses declined in 2003 as compared to 2002
largely as a result of cost savings initiatives that we completed in
the fourth quarter of 2002. Technology and corporate expenses for 2002
included technology and communication expenses incurred in connection
with the capacity expansion and migration of our corporate data
centers.
See Note 25 to our Consolidated Financial Statements for additional
information related to our operating segments.
Net Interest Income: 2003 versus 2002 and 2002 versus 2001. Net
interest income (expense) is the difference between the interest income earned
from our interest-earning assets and interest expense incurred on our
interest-bearing liabilities. Net interest income (expense) is determined by net
interest spread (i.e., the difference between the yield earned on our
interest-earning assets and the rates incurred on our interest-bearing
liabilities), the relative amount of interest-earning assets and
interest-bearing liabilities and the degree of mismatch in the maturity and
repricing characteristics of our interest-earning assets and interest-bearing
liabilities.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
In addition to interest income reported in this caption, we also earn
interest on the balance of custodial accounts we hold in connection with our
Residential Loan Servicing business. These amounts are reported as servicing
fees and are not included in the following information.
Our net interest income and net interest margin began declining in
2000. This trend reflects a decline in the ratio of interest-earning assets to
interest-bearing liabilities, which has fallen from 98% in 1999 to 40% in 2003.
Both our acquisition of OAC in 1999 and our change in strategic direction from
capital-intensive businesses to fee-based sources of income have contributed to
an increase in the relative amount of non-interest-earning assets (such as real
estate, advances on loans serviced for others and mortgage servicing rights)
that are funded by interest-bearing liabilities. We expect this trend to
continue as we dispose of our remaining non-core assets, a portion of which are
interest-bearing, and increase non-interest-earning assets of our core
businesses. While it has no impact on consolidated net income, the
reclassification of our 10.875% Capital Securities to interest-bearing
liabilities (notes and debentures) on July 1, 2003 as a result of our adoption
of SFAS No. 150 does have a negative impact on net interest income, margin and
spread. Our net interest income, spread and margin will, however, be positively
impacted by our redemption of the remaining $33,065 balance of 12% subordinated
debentures on September 30, 2003, the repayment of the remaining $43,475 of
11.875% notes on October 1, 2003 (the maturity date) and the continuing
reduction in brokered certificates of deposit. See "Gain (Loss) on Repurchase of
Debt" and "Changes in Financial Condition - Notes and Debentures".
The following table sets forth, for the years indicated, information
regarding the total amount of income from our interest-earning assets and the
resultant average yields, the interest expense associated with our
interest-bearing liabilities, expressed in dollars and rates, and the net
interest spread and net interest margin. Information is based on average daily
balances during the indicated years:
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- --------------------------- ------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------- -------- ------ ----------- ------- ------ ----------- ------- -------
Average Assets
Interest earning cash and other ......... $ 30,705 $ 358 1.17% $ 13,693 $ 284 2.07 $ 10,159 $ 743 7.31%
Federal funds sold and repurchase
agreements ........................... 125,732 1,403 1.12 152,588 2,629 1.72 200,329 7,328 3.66
Trading securities:
U.S. government and sponsored
enterprise securities and CMOs...... 10,054 (71) (0.71) 88,565 2,058 2.32 126,284 7,464 5.91
Subordinates and residuals ........... 38,679 17,416 45.03 44,251 14,522 32.82 97,051 11,401 11.75
Loans (1) ............................... 68,613 1,614 2.35 146,671 11,279 7.69 433,830 46,090 10.62
Match funded loans and securities ....... 37,513 3,402 9.07 66,233 6,463 9.76 103,320 10,345 10.01
----------- -------- ----------- -------- ----------- -------
Total interest earning assets ........ 311,296 24,122 7.75 512,001 37,235 7.27 970,973 83,371 8.59
-------- -------- -------
Non interest-earning cash ............... 90,901 65,813 68,139
Affordable housing properties ........... 12,434 57,692 123,747
Real estate ............................. 112,595 171,795 264,710
Advances on loans and loans
serviced for others .................. 324,834 267,572 303,382
Mortgage servicing rights ............... 177,171 137,323 76,145
Match funded advances on loans
serviced for others .................. 117,219 101,863 274
Receivables ............................. 82,816 65,145 48,995
Other assets ............................ 71,225 55,901 127,291
----------- ----------- -----------
Total assets ......................... $ 1,300,491 $ 1,435,105 $ 1,983,656
=========== =========== ===========
Average Liabilities and Stockholders'
Equity
Interest-bearing demand deposits ........ $ 16,525 195 1.18% $ 14,749 245 1.66 $ 10,377 398 3.84%
Savings deposits ........................ 1,554 12 0.77 1,605 17 1.06 1,388 28 2.02
Certificates of deposit ................. 408,941 17,339 4.24 473,793 27,193 5.74 920,668 59,541 6.47
----------- -------- ----------- -------- ----------- -------
Total interest-bearing deposits ...... 427,020 17,546 4.11 490,147 27,455 5.60 932,433 59,967 6.43
Securities sold under agreements to
repurchase ........................... 250 3 1.20 12,774 236 1.85 19,500 529 2.71
Bonds-match funded agreements ........... 129,438 5,414 4.18 147,139 6,573 4.47 86,171 7,315 8.49
Lines of credit and other secured
borrowings ........................... 130,886 5,824 4.45 94,169 4,152 4.41 90,485 6,004 6.64
Notes and debentures (2) ................ 91,549 9,929 10.85 144,044 17,346 12.04 161,931 19,514 12.05
----------- -------- ----------- -------- ----------- -------
Total interest-bearing liabilities ... 779,143 38,716 4.97 888,273 55,762 6.28 1,290,520 93,329 7.23
-------- -------- -------
Non interest-bearing deposits ........... 4,844 6,187 12,900
Escrow deposits ......................... 107,888 90,612 73,326
Excess of net assets acquired over
purchase price ....................... -- 1,478 28,866
Other liabilities ....................... 70,049 43,255 64,316
----------- ----------- -----------
Total liabilities .................... 961,924 1,029,805 1,469,928
Capital securities (2) .................. 28,124 57,812 64,976
Minority interest ....................... 1,503 570 --
Stockholders' equity .................... 308,940 346,918 448,752
----------- ----------- -----------
Total liabilities and stockholders'
equity ............................. $ 1,300,491 $ 1,435,105 $ 1,983,656
=========== =========== ===========
Net interest income (expense) ........... $(14,594) $ (18,527) $(9,958)
======== ========= =======
Net interest spread ..................... 2.78% 0.99% 1.36%
Net interest margin ..................... (4.69)% (3.62)% (1.03)%
Ratio of interest-earning assets to
interest-bearing liabilities ......... 40% 58% 75%
(1) The average balances include non-performing loans, interest on which we
recognize on a cash basis.
(2) Effective with our adoption of SFAS No. 150 on July 1, 2003, Capital
Securities are classified as an interest bearing liability with notes
and debentures. Distributions are reported as interest expense
beginning in the third quarter of 2003 and totaled $3,059 for the last
six months of 2003.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table describes the extent to which changes in interest
rates and changes in volume of our interest-earning assets and interest-bearing
liabilities have affected our interest income and expense during the periods
indicated. For each category of our interest-earning assets and interest-bearing
liabilities, we have provided information on changes attributable to (i) changes
in volume (change in volume multiplied by prior rate), (ii) changes in rate
(change in rate multiplied by prior volume) and (iii) total change in rate and
volume. We have allocated changes attributable to both volume and rate
proportionately to the change due to volume and the change due to rate.
Years Ended December 31,
-------------------------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
------------------------------------- -------------------------------------
Favorable (unfavorable) variance Favorable (unfavorable) variance
------------------------------------- -------------------------------------
Rate Volume Total Rate Volume Total
--------- --------- --------- --------- --------- ---------
Interest-Earning Assets
Interest-earning cash and other........ $ (165) $ 239 $ 74 $ (657) $ 198 $ (459)
Federal funds sold and repurchase
agreements.......................... (818) (408) (1,226) (3,240) (1,459) (4,699)
Trading securities:
U.S. government and sponsored
enterprise securities and CMOs
(AAA-rated)....................... (1,267) (862) (2,129) (3,623) (1,783) (5,406)
Subordinates and residuals.......... 4,895 (2,001) 2,894 11,913 (8,792) 3,121
Loans ................................ (5,471) (4,194) (9,665) (10,248) (24,563) (34,811)
Match funded loans and securities...... (429) (2,632) (3,061) (257) (3,625) (3,882)
--------- --------- --------- --------- --------- ---------
Total interest-earning assets....... (3,255) (9,858) (13,113) (6,112) (40,024) (46,136)
--------- --------- --------- --------- --------- ---------
Interest-Bearing Liabilities
Interest-bearing demand deposits....... 77 (27) 50 280 (127) 153
Savings deposits....................... 4 1 5 15 (4) 11
Certificates of deposit................ 6,466 3,388 9,854 6,088 26,260 32,348
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits..... 6,547 3,362 9,909 6,383 26,129 32,512
Securities sold under agreements to
repurchase.......................... 61 172 233 141 152 293
Bonds-match funded agreements.......... 401 758 1,159 4,449 (3,707) 742
Lines of credit and other secured
borrowings.......................... (39) (1,633) (1,672) 2,088 (236) 1,852
Notes and debentures................... 1,589 5,828 7,417 14 2,154 2,168
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 8,559 8,487 17,046 13,075 24,492 37,567
--------- --------- --------- --------- --------- ---------
Favorable (unfavorable) variance....... $ 5,304 $ (1,371) $ 3,933 $ 6,963 $ (15,532) $ (8,569)
========= ========= ========= ========= ========= =========
2003 versus 2002. We incurred net interest expense before provision for
loan losses of $(14,594) for the year ended December 31, 2003 as compared to
$(18,527) for the year ended December 31, 2002, a favorable variance of $3,933
or 21%. This variance was due to an increase in the net interest spread and a
decrease in the average balance of our interest-bearing liabilities, offset by a
decrease in the average balance of our interest-earning assets and a decrease in
the net interest margin. The net interest spread increased 179 basis points as a
result of a 48 basis-point increase in the weighted average yield on our
interest-earning assets, and a 131 basis-point decrease in the weighted average
rate on our interest-bearing liabilities. The net impact of these rate changes
resulted in a $5,304 favorable variance. The average balance of our
interest-earning assets decreased by $200,705 or 39% during 2003 and reduced
interest income by $9,858. The average balance of our interest-bearing
liabilities decreased by $109,130 or 12% during 2003 and decreased interest
expense by $8,487. The net impact of these volume changes resulted in a $1,371
unfavorable variance.
As previously discussed in this section, the decline in the net
interest margin is largely due to the decline in the ratio of interest -earning
assets to interest-bearing liabilities. This trend is likely to persist as we
continue our transition to fee-based businesses and dispose of interest-bearing
non-core assets. Certain assets associated with our fee-based businesses, such
as mortgage servicing rights and servicing advances, do not earn interest but
are financed by interest-bearing debt.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Interest income we earned on our loans decreased by $9,665 or 86%
during 2003 as compared to 2002 as a result of a $78,058 or 53% decline in the
average balance of our investment and a 534 basis-point decrease in the average
yield. Sales, foreclosures, resolutions and the absence of acquisitions and
originations have resulted in the declines in the average balance of loans
during 2003. The yield on our loans is likely to fluctuate from period to period
as a result of the timing of resolutions and the mix of the overall portfolio
between performing and non-performing loans. Gains on the resolution of loans,
which we report as interest income, declined to $57 in 2003 as compared to
$3,347 in 2002. This decline results from declines in loans during 2002 and 2003
as a result of sales and resolutions. See "Changes in Financial Condition -
Loans, Net."
Interest income we earned from our trading securities on a combined
basis increased from $16,580 in 2002 to $17,345 in 2003, a $765 or 5% increase.
Interest income subordinates and residuals increased $2,894 as a result of a
1,221 basis-point increase in the average yield earned, offset in part by a
$5,572 or 13% decrease in the average balance. The increase in the average yield
on subordinate and residual securities in 2003 is largely the result of sales of
low-yielding unrated subprime residuals during 2002 and an increase in interest
on unrated single family subprime residuals. The decline in our average
investment in subordinates and residuals during 2003 is primarily the result of
sales, principal repayments and amortization, offset in part by the transfer in
the second quarter of securities previously reported as match funded. The $2,894
increase in interest income on subordinates and residuals in 2003 was offset in
part by a $2,129 decline in interest income on CMOs and U.S. government and
sponsored enterprise securities, which resulted from an 89% decline in the
average balance and a 303 basis-point decline in the average yield. The declines
in our average investment in CMOs and U.S. government and sponsored enterprise
securities during 2003 is primarily the result of principal maturities,
principal repayments and amortization of premium related to CMOs. This trend
reflects the fact that we no longer need to hold these securities to meet the
Qualified Thrift Lender requirements of the Bank. The decline in the average
yield on CMOs and U.S. government and sponsored enterprise securities is
primarily the result of declining interest rates and increased prepayments of
the underlying mortgages that back the CMO bonds. When prepayments occur faster
than anticipated, the amortization of premiums paid when the CMO bonds were
purchased is accelerated resulting in a lower or negative yield. See "Changes in
Financial Condition - Trading Securities".
Interest income we earned on match funded loans and securities
decreased $3,061 or 47% in 2003 as compared to 2002. This decrease is primarily
due to a $28,720 or 43% decline in the average balances primarily as a result of
principal repayments received on both the loans and securities and the transfer
of match funded securities to residual trading securities during the second
quarter of 2003. See "Changes in Financial Condition - Match Funded Assets".
Interest expense we incurred on our interest-bearing deposits decreased
$9,909 or 36% during 2003 as compared to 2002 due to a $63,127 or 13% decrease
in the average balance and 149 basis-point decline in the average rate. The
decline in the average balance of deposits during 2003 resulted primarily from
maturing brokered certificates of deposit, offset in part by an increase in
non-brokered certificates of deposit. We have not issued any new brokered
certificates of deposit since 2000 and, at this time, do not intend to issue any
such deposits in the foreseeable future. We do, however, plan to retain
non-brokered deposits as a source of financing. The declines in the average
rates in 2003 reflects the replacement of maturing brokered certificates of
deposit with non-brokered certificates of deposit which have a lower rate of
interest. See "Changes in Financial Condition - Deposits."
Interest expense we incurred on notes and debentures decreased $7,417
or 43% during 2003 as compared to 2002 due to a $52,495 or 36% decrease in the
average balance and a 119 basis-point decrease in the average rate. The decrease
in the average balance is primarily due to repurchases of debt and maturities
during 2003 and 2002. We repurchased $33,500 of our 12% subordinated notes and
debentures on September 30, 2003. In addition, $43,475 of our 11.875% notes
matured on October 1, 2003. During 2002, we repurchased $77,095 of our notes and
debentures. Offsetting these redemptions and maturities was the transfer to
notes and debentures of our $56,249 of 10.875% Capital Securities on July 1,
2003, in accordance with the provisions of SFAS No. 150. See "Gain (Loss) on
Repurchases of Debt" and "Changes in Financial Condition - Notes and
Debentures."
2002 versus 2001. We incurred net interest expense before provision for
loan losses of $(18,527) for the year ended December 31, 2002 as compared to net
interest expense of $(9,958) for the year ended December 31, 2001, an
unfavorable variance of $8,569 or 86%. This variance was due to a decrease in
the average balance of our interest-earning assets and a decrease in the net
interest spread and margin, offset by a decrease in the average balance of our
interest-bearing liabilities. The average balance of our interest-earning assets
decreased by $458,972 or 47% during 2002 and reduced interest income by
$(40,024). The average balance of our interest-bearing liabilities decreased by
$402,247 or 31% during 2002 and decreased interest expense by $24,492. The net
impact of these volume changes resulted in a $(15,532) unfavorable variance. The
net interest spread decreased 37 basis points as a result of a 132 basis-point
decrease in the weighted average yield on our interest-earning assets, offset by
a 95 basis-point decrease in the weighted average rate on our interest-bearing
liabilities. The net impact of these rate changes resulted in a $6,963 favorable
variance.
Interest income we earned on our loans decreased by $34,811 or 76%
during 2002 as compared to 2001 as a result of a $287,159 or 66% decline in the
average balance of our investment and a 293 basis-point decrease in the average
yield. Sales, foreclosures, resolutions and the absence of acquisitions and
originations have resulted in a decline in the average balance of loans during
2002. The yield on our loans is likely to fluctuate from period to period as a
result of the timing of resolutions and the mix of the overall portfolio between
performing and non-performing loans. Gains on the resolution of loans, which we
report as interest income, declined to $3,347 in 2002 as compared to $10,657 in
2001. This decline primarily relates to single family loans, the balance of
which declined significantly during 2001 and 2002 as a result of sales and
resolutions. See "Changes in Financial Condition - Loans, Net."
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Interest income we earned from our trading securities on a combined
basis declined from $18,865 in 2001 to $16,580 in 2002, a $2,285 or 12% decline.
The decline in interest income is primarily due to a $37,719 or 30% decline in
our average investment in U.S. government and sponsored enterprise securities
and CMOs and a $52,800 or 54% decline in our average investment in subordinates
and residuals. The decline in the average balance of our U.S. government and
sponsored enterprise securities and CMOs during 2002 as compared to 2001
reflects a reduced need to hold these securities to meet the Qualified Thrift
Lender requirements. The decline in the average balance of our subordinates and
residuals during 2002 was primarily due to sales of subprime residuals and
amortization. These declines were significantly offset by a 2,107 basis point
increase in the yield on subordinates and residuals. This increase in yield was
a result of sales of certain low-yielding unrated subprime residuals and an
increase in interest payments received on our remaining subprime residual
securities. Because CMOs have less cash flow variability, their average lives
and yields to maturity are more stable, and therefore, CMOs are priced to yield
less than subordinates and residuals that are less stable. The decline in the
average yield on CMOs during 2002 is primarily the result of declining interest
rates and increased prepayments of the underlying mortgages that back the bonds.
Interest income we earned on match funded assets decreased $3,882 or
38% in 2002 as compared to 2001. This decrease is primarily due to a $37,087 or
36% decline in the average balances primarily as a result of principal
repayments received on both the loans and securities. See "Changes in Financial
Condition - Match Funded Assets".
Interest expense we incurred on our interest-bearing deposits decreased
$32,512 or 54% during 2002 as compared to 2001 due to a $442,286 or 47% decrease
in the average balance and, to a lesser degree, an 83 basis point decline in the
rate. The decline in the average balance resulted primarily from maturing
brokered certificates of deposit. We did not issue any new brokered certificates
of deposit during 2002 or 2001 and, at this time, do not intend to issue any
such deposits in the foreseeable future. We continue to rely on non-brokered
deposits as a source of financing. See "Changes in Financial Condition -
Deposits."
Interest expense we incurred on notes and debentures decreased $2,168
or 11% during 2002 as compared to 2001 primarily due to a $17,887 or 11%
decrease in the average balance. The decrease in the average balance is
primarily due to debt repurchases that we made during 2002 and 2001. We
repurchased $77,095 of our notes and debentures during 2002, including $73,545
we redeemed at a premium in November. During 2001, we repurchased $13,025 of our
notes. See "Gain (Loss) on Repurchases of Debt" and "Changes in Financial
Condition - Notes and Debentures".
Interest expense we incurred on our lines of credit and other secured
borrowings decreased $1,852 or 31% during 2002 as compared to 2001 due to a 223
basis-point decline in the average rate, offset in part by a $3,684 or 4%
increase in the average outstanding balance. Interest rates on our lines of
credit are adjusted periodically based on changes in LIBOR. The decline in the
average rate is primarily due to declines in LIBOR. During 2001 and part of
2002, we used lines of credit to fund real estate investments and commercial
construction loans. These lines expired and were repaid in May 2002. Beginning
in April 2001, we entered into lines of credit to fund servicing advances we
purchased in connection with the acquisition of loans serviced for others.
Average balances outstanding under our lines of credit increased during 2002
primarily because of increases in our funding of residential loan servicing
advances under a new line offset in part by the expiration and repayment of the
lines collateralized by real estate and commercial loans. See "Changes in
Financial Condition -Lines of Credit and Other Secured Borrowings".
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Provisions for Loan Losses. As of December 31, 2003, our total net loan
balance was $28,098 or 2.3% of total assets, as compared to $76,857 or 6.3% of
total assets as of December 31, 2002. Of the balance remaining at December 31,
2003, $20,763 represents three non-residential loans held in our Commercial
Finance segment and $6,545 represents three multi-family loans held in our
Affordable Housing segment. Because of the small number of remaining loans, we
are able to perform a specific risk assessment on each Commercial Finance and
Affordable Housing loan. Our risk assessment of Commercial Finance loans
includes a review of the underlying loan collateral, general and local economic
conditions, property type risk, borrower's capacity and willingness to pay, and
projections of prospective cash flows based on property-specific events. For
loans held in our Affordable Housing business, we project the amounts to be
realized from the disposition of the property to determine the appropriate
allowance for loan losses. We also analyze the historical trends in the gains or
losses on disposition and resolution of loans as compared to the allowance for
loan losses at the time of disposition and resolution. The results of this
analysis are also taken into consideration in evaluating the allowance for loan
losses on the remaining loans. The allowance for loan losses is management's
best estimate of probable inherent loan losses incurred as of December 31, 2003.
The following table presents the provisions for loan losses for the
years indicated:
2003 2002 2001
----------- ----------- -----------
Loans:
- ------
Unsecured Collections.................................. $ -- $ (278) $ 1,176
Residential Discount Loans............................. -- (2,273) 5,872
Commercial Finance..................................... (3,095) 12,814 7,223
Affordable Housing..................................... 151 3,392 1,207
Corporate Items and Other.............................. 311 -- --
----------- ----------- -----------
(2,633) 13,655 15,478
Match funded loans:
- -------------------
Residential Discount Loans............................. -- (26) 188
Corporate Items and Other.............................. (51) -- --
------------ ----------- -----------
$ (2,684) $ 13,629 $ 15,666
============ =========== ===========
The negative provision that we recorded during 2003 results primarily
from the recovery of reserves on sales of Commercial Finance loans, which were
non-performing, during the second quarter. Our allowance for loan losses as a
percentage of non-performing loans has increased from 11.0% at December 31, 2001
to 27.5% at December 31, 2002 and 38.7% at December 31, 2003.
The decline in provision on Residential Discount Loans in 2002 as
compared to 2001 is primarily the result of sales of loans that were
significantly reserved. The increase in the provision on Affordable Housing
loans is largely the result of increased reserve levels on affordable housing
construction loans based on estimated permanent financing proceeds. The
increased provision on Commercial Finance loans in 2002 reflected an increase in
reserve levels on the seven loans remaining at December 31, 2002.
As indicated in the table below, our allowance as a percentage of loans
increased from 5.3% at December 31, 2001 to 21.3% at December 31, 2002 and 23.2%
at December 31, 2003.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth the allowance for loan losses as a
percentage of the respective loan balances at the dates indicated:
Allowance
as a % of
Allowance Loan Balance Loan Balance
-------------- -------------- --------------
December 31, 2003
- -----------------
Loans:
Commercial Finance......................................... $ 3,786 $ 24,549 15.4%
Affordable Housing......................................... 4,579 11,124 41.2%
Corporate Items and Other.................................. 105 895 11.7%
-------------- --------------
8,470 36,568 23.2%
Match funded loans:
Corporate Items and Other.................................. 94 24,393 0.4%
-------------- --------------
$ 8,564 $ 60,961 14.0%
============== ==============
December 31, 2002
- -----------------
Loans:
Residential Discount Loans................................. $ 154 $ 1,400 11.0%
Commercial Finance......................................... 16,179 85,377 19.0%
Affordable Housing......................................... 4,428 10,657 41.6%
Subprime Finance........................................... -- 184 --%
-------------- --------------
20,761 97,618 21.3%
Match funded loans:
Residential Discount Loans................................. 144 38,129 0.4%
-------------- --------------
$ 20,905 $ 135,747 15.4%
============== ==============
December 31, 2001
- -----------------
Loans:
Residential Discount Loans................................. $ 3,401 $ 41,150 8.3%
Commercial Finance......................................... 5,744 135,548 4.2%
Affordable Housing......................................... 1,269 18,484 6.9%
Subprime Finance........................................... -- 525 --%
-------------- --------------
10,414 195,707 5.3%
Match funded loans:
Residential Discount Loans................................. 170 53,123 0.3%
-------------- --------------
$ 10,584 $ 248,830 4.3%
============== ==============
For additional information regarding our allowance for loan losses on
the above portfolios, see "Changes in Financial Condition - Allowances for Loan
Losses." For information relating to our valuation allowance on real estate, see
"Changes in Financial Condition - Real Estate - Real Estate Owned, Net."
Non-Interest Income. The following table sets forth the principal
components of our non-interest income during the years indicated:
2003 2002 2001
------------ ------------ ------------
Servicing and other fees............................................ $ 158,548 $ 141,991 $ 134,597
Gain (loss) on interest earning assets, net......................... 28 (3,485) (3,949)
Gain (loss) on trading and match funded securities, net............. 3,344 7,012 16,330
Valuation gains (losses) on real estate............................. (7,430) (35,002) (22,282)
Gain (loss) on sales of real estate................................. 466 4,098 14,156
Operating income (loss) from real estate............................ 5,128 7,864 4,495
Amortization of excess of net assets acquired over purchase price... -- -- 18,333
Gain (loss) on repurchase of debt................................... (445) (1,461) 3,774
Equity in income (loss) of investment in unconsolidated entities.... 38 215 304
Other income........................................................ 17,820 12,780 8,530
------------ ------------ ------------
Non-interest income.............................................. $ 177,497 $ 134,012 $ 174,288
============ ============ ============
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Servicing and Other Fees. Our servicing and other fees are primarily
comprised of fees we earned from investors for servicing residential mortgage
loans on their behalf. The following table sets forth the principal components
of our servicing and other fees for the years indicated:
Residential Loan Servicing: 2003 2002 2001
- --------------------------- ------------ ------------ ------------
Loan servicing and related fees:
Loan servicing fees (1)........................................ $ 166,425 $ 139,178 $ 106,441
Late charges................................................... 35,461 28,075 21,071
Interest on custodial accounts (2)............................. 10,821 7,757 8,530
Special servicing fees (3)..................................... 1,933 3,884 9,049
Compensating interest expense (4).............................. (32,315) (19,758) (12,126)
Amortization of servicing rights (5)........................... (93,558) (58,045) (28,870)
Other, net..................................................... 5,691 2,547 3,633
------------ ------------ ------------
94,458 103,638 107,728
Other fees:
Default servicing fees......................................... 3,956 4,418 3,917
Retail banking fees............................................ 7,349 5,036 2,664
Other.......................................................... 12,556 5,159 3,276
------------ ------------ ------------
118,319 118,251 117,585
------------ ------------ ------------
Other Segments:
Loan servicing and related fees:
Loan servicing fees............................................ 10,583 6,710 3,439
Late charges................................................... 897 960 255
Special servicing fees (3)..................................... -- -- (555)
Amortization of servicing rights............................... -- (108) (971)
Other, net..................................................... 8,536 1,518 2,587
------------ ------------ ------------
20,016 9,080 4,755
Other fees:
- -----------
Property valuation fees (ORA).................................. 18,803 14,204 11,789
Default servicing fees......................................... 581 -- --
Retail banking fees............................................ 21 27 26
Other.......................................................... 808 429 442
------------ ------------ ------------
40,229 23,740 17,012
------------ ------------ ------------
$ 158,548 $ 141,991 $ 134,597
============ ============ ============
(1) The increase in loan servicing fees during 2003 and 2002 is largely due
to the growth in residential loans we serviced for others. The average
unpaid principal balance of all loans we serviced during 2003, 2002 and
2001 amounted to $34,568,316, $27,956,823 and $16,738,337,
respectively.
(2) Interest we earned on custodial accounts during the holding period
between collection of borrower payments and remittance to investors.
These custodial accounts are held by an unaffiliated bank and are
excluded from our statement of financial condition. The average
balances held in these custodial accounts were approximately $993,000,
$494,000 and $248,000 during 2003, 2002 and 2001, respectively.
(3) Fees we earned under special servicing arrangements wherein we act as a
special servicer for third parties, typically as part of a
securitization. Under these arrangements, we service loans that become
greater than 90 days past due and receive base special servicing fees
plus incentive fees to the extent we achieve certain loss mitigation
parameters. We have not entered into any new special servicing
arrangements since the middle of 2001. As a result, special servicing
fees have declined in 2002 and 2003.
(4) A servicer of securitized loans is typically obligated to pay to the
securitization trust the difference between a full month of interest
and the interest collected on loans that are repaid before the end of a
calendar month.
(5) The increases in amortization expense reflect increases in our
purchases of rights to service loans for others and an increase in the
rate of amortization to reflect projected prepayment volumes. See
"Changes in Financial Condition - Mortgage Servicing Rights."
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth our loans serviced for others at the
dates indicated:
Subprime Loans (1) Other Loans and REO Total
-------------------------- -------------------------- --------------------------
No. of No. of No. of
Amount Loans Amount Loans Amount Loans
------------ ------------ ------------ ------------ ------------ ------------
December 31, 2003
- -----------------
Performing (2):
Residential servicing .............. $ 32,811,398 293,493 $ 961,766 17,894 $ 33,773,164 311,387
Commercial servicing ............... -- -- 437,011 262 437,011 262
------------ ------------ ------------ ------------ ------------ ------------
$ 32,811,398 293,493 $ 1,398,777 18,156 $ 34,210,175 311,649
============ ============ ============ ============ ============ ============
Non-performing (2)(3):
Residential servicing .............. $ 3,173,976 35,470 $ 750,218 12,735 $ 3,924,194 48,205
Commercial servicing ............... -- -- 379,146 280 379,146 280
------------ ------------ ------------ ------------ ------------ ------------
$ 3,173,976 35,470 $ 1,129,364 13,015 $ 4,303,340 48,485
============ ============ ============ ============ ============ ============
Total loans serviced for others:
Residential servicing .............. $ 35,985,374 328,963 $ 1,711,984 30,629 $ 37,697,358 359,592
Commercial servicing ............... -- -- 816,157 542 816,157 542
------------ ------------ ------------ ------------ ------------ ------------
$ 35,985,374 328,963 $ 2,528,141 31,171 $ 38,513,515 360,134
============ ============ ============ ============ ============ ============
December 31, 2002
- -----------------
Performing (2):
Residential servicing .............. $ 26,817,731 282,926 $ 1,089,109 17,204 $ 27,906,840 300,130
Commercial servicing ............... -- -- 752,722 407 752,722 407
------------ ------------ ------------ ------------ ------------ ------------
$ 26,817,731 282,926 $ 1,841,831 17,611 $ 28,659,562 300,537
============ ============ ============ ============ ============ ============
Non-performing (2):
Residential servicing .............. $ 2,565,823 31,626 $ 261,014 4,277 $ 2,826,837 35,903
Commercial servicing ............... -- -- 582,964 238 582,964 238
------------ ------------ ------------ ------------ ------------ ------------
$ 2,565,823 31,626 $ 843,978 4,515 $ 3,409,801 36,141
============ ============ ============ ============ ============ ============
Total loans serviced for others:
Residential servicing .............. $ 29,383,554 314,552 $ 1,350,123 21,481 $ 30,733,677 336,033
Commercial servicing ............... -- -- 1,335,686 645 1,335,686 645
------------ ------------ ------------ ------------ ------------ ------------
$ 29,383,554 314,552 $ 2,685,809 22,126 $ 32,069,363 336,678
============ ============ ============ ============ ============ ============
December 31, 2001
- -----------------
Performing (2):
Residential servicing .............. $ 18,068,542 242,664 $ 919,639 18,074 $ 18,988,181 260,738
Commercial servicing ............... -- -- 1,062,345 1,962 1,062,345 1,962
------------ ------------ ------------ ------------ ------------ ------------
$ 18,068,542 242,664 $ 1,981,984 20,036 $ 20,050,526 262,700
============ ============ ============ ============ ============ ============
Non-performing (2):
Residential servicing .............. $ 2,638,235 35,585 $ 317,001 5,021 $ 2,955,236 40,606
Commercial servicing ............... -- -- 158,250 247 158,250 247
------------ ------------ ------------ ------------ ------------ ------------
$ 2,638,235 35,585 $ 475,251 5,268 $ 3,113,486 40,853
============ ============ ============ ============ ============ ============
Total loans serviced for others:
Residential servicing .............. $ 20,706,777 278,249 $ 1,236,640 23,095 $ 21,943,417 301,344
Commercial servicing ............... -- -- 1,220,595 2,209 1,220,595 2,209
------------ ------------ ------------ ------------ ------------ ------------
$ 20,706,777 278,249 $ 2,457,235 25,304 $ 23,164,012 303,553
============ ============ ============ ============ ============ ============
(1) Subprime loans represent loans we service which were made by others to
borrowers who generally did not qualify under guidelines of the Fannie
Mae and Freddie Mac ("nonconforming loans").
(2) Non-performing loans serviced for others have been delinquent for 90
days or more. Performing loans serviced for others are current or have
been delinquent for less than 90 days.
(3) Includes $480,388 of residential REO properties serviced for The U.S.
Department of Veterans Affairs under a contract entered into in
September 2003.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Gain (Loss) on Interest Earning Assets. The following table sets forth
the principal components of net gains (losses) we earned on our interest earning
assets for the years indicated:
2003 2002 2001
------------ ------------ ------------
Gain (loss) on loan sales................................ $ 27 $ (4,105) $ (4,380)
Other.................................................... 1 620 431
------------ ------------ ------------
$ 28 $ (3,485) $ (3,949)
============ ============ ============
Gain on Trading and Match Funded Securities Net. The net gain recorded
on trading and match funded securities includes both unrealized gains (losses)
on securities to record them at fair value and realized gains (losses) resulting
from sales thereof. Realized net gains from sales of trading securities totaled
$366, $4,992 and $11,117 during 2003, 2002 and 2001, respectively. The value of
our trading securities has declined from $226,249 at December 31, 2001 to
$58,895 at December 31, 2002 and $49,520 at December 31, 2003 as a result of
sales, maturities and repayments. See "Changes in Financial Condition - Trading
Securities" and Notes 1, 3 and 5 to our Consolidated Financial Statements.
Valuation Gains (losses) on Real Estate. We regularly assess the value
of our remaining real estate assets and provide additional loss reserves or
impairment charges as appropriate. Valuation gains (losses) on real estate
primarily consist of provisions for losses in fair value on real estate owned
and impairment charges on properties acquired for investment, as indicated in
the table below.
2003 2002 2001
---------- ---------- ----------
Provisions for loss in fair value on real estate owned, net:
- ------------------------------------------------------------
Residential Discount Loans (1) .................................... $ -- $ (1,648) $ (9,689)
Commercial Finance (2) ............................................ 342 (17,996) (7,845)
Subprime Finance .................................................. -- (12) (172)
Corporate Items and Other ......................................... (246) (29) (60)
---------- ---------- ----------
96 (19,685) (17,766)
---------- ---------- ----------
Impairment charges:
- -------------------
Commercial Finance:
Properties acquired for investment .............................. (7,526) (14,549) (1,471)
Loans accounted for as investments in real estate ............... -- -- (409)
Investment in real estate partnerships .......................... -- (768) (411)
Assisted living facilities ...................................... -- -- (2,225)
---------- ---------- ----------
(7,526) (15,317) (4,516)
---------- ---------- ----------
$ (7,430) $ (35,002) $ (22,282)
========== ========== ==========
(1) The decline in the provision reflects a decline in the number of
properties from 372 at December 31, 2001 to 47 at December 31, 2002 and
17 at December 31, 2003. See "Changes in Financial Condition - Real
Estate - Real Estate Owned, Net".
(2) The provision in 2002 reflects a significant increase in reserve
levels. Only two commercial properties remained as of December 31,
2003. See "Changes in Financial Condition - Real Estate - Real Estate
Owned, Net".
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Gain (Loss) on Sales of Real Estate. The following table sets forth the
principal components of net gains (losses) we recorded on sales of our real
estate for the years indicated:
2003 2002 2001
---------- ---------- ----------
Gains on sales of real estate owned (1):
- ----------------------------------------
Residential Discount Loans ....................................... $ -- $ 3,025 $ 10,639
Commercial Finance ............................................... 47 60 3,395
Subprime Finance ................................................. 1 17 77
Corporate Items and Other ........................................ 368 1 --
---------- ---------- ----------
416 3,103 14,111
Gains on sales of other real estate:
- ------------------------------------
Commercial Finance ............................................... 50 995 45
---------- ---------- ----------
$ 466 $ 4,098 $ 14,156
========== ========== ==========
(1) The decline in gains from sales of real estate owned reflects
significant declines in the number of properties sold. Only 20
properties remain to be sold at December 31, 2003. See "Changes in
Financial Condition - Real Estate - Real Estate Owned, Net."
Operating Income (Loss) from Real Estate. The following table sets
forth the operating results of our real estate for the years indicated:
2003 2002 2001
--------- --------- ---------
Real estate owned, net (1):
- ---------------------------
Residential Discount Loans .............................................. $ -- $ (987) $ (7,574)
Commercial Finance ...................................................... 1,104 2,104 2,307
Subprime Finance ........................................................ (5) (11) (97)
Corporate Items and Other ............................................... 164 (244) (237)
--------- --------- ---------
1,263 862 (5,601)
--------- --------- ---------
Properties acquired for investment (2):
- ---------------------------------------
Commercial Finance ...................................................... 3,008 3,035 6,127
Corporate Items and Other ............................................... -- -- (86)
--------- --------- ---------
3,008 3,035 6,041
--------- --------- ---------
Equity in earnings of loans accounted for as investments in real estate (3):
- ----------------------------------------------------------------------------
Commercial Finance ...................................................... 857 3,967 3,338
Assisted living facilities:
- ---------------------------
Commercial Finance ...................................................... -- -- 717
--------- --------- ---------
$ 5,128 $ 7,864 $ 4,495
========= ========= =========
(1) Includes rental income and expenses associated with holding and
maintaining the properties.
(2) Includes rental income, depreciation expense and operating expenses
associated with holding and maintaining our properties acquired for
investment. The decrease in operating income during 2002 is primarily
due to the sale of a shopping center property during 2002. Only two
properties remained at December 31, 2003 and 2002.
(3) The balance of loans we accounted for as investments in real estate had
been fully repaid as of December 31, 2003.
See "Changes in Financial Condition - Real Estate".
Amortization of Excess of Net Assets Acquired over Purchase Price. The
amortization of excess of net assets acquired over purchase price (negative
goodwill) resulted from our acquisition of OAC on October 7, 1999. Our
acquisition resulted in an excess of net assets acquired over the purchase price
of $60,042, which we amortized on a straight-line basis through 2001. On January
1, 2002, upon adoption of Statement of Financial Accounting Standard ("SFAS")
No. 142, we reversed the unamortized balance of $18,333 to income as the effect
of a change in accounting principle as required by this statement. See Note 1 to
our Consolidated Financial Statements.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Gain (Loss) on Repurchase of Debt. The following table sets forth the
components of the gains (losses) resulting from our repurchase of our debt
securities during the years indicated:
2003 2002 (3) 2001
--------- --------- ---------
10.875% Capital Securities due August 1, 2027:
- ----------------------------------------------
Face amount repurchased .................................................. $ -- $ 4,910 $ 18,371
Gain (loss) .............................................................. $ -- $ 1,074 $ 3,722
11.875% Notes due October 1, 2003 (1):
- --------------------------------------
Face amount repurchased .................................................. $ -- $ 43,550 $ 13,025
Gain (loss) .............................................................. $ -- $ (1,508) $ 52
11.5% Redeemable Notes due July 1, 2005:
- ----------------------------------------
Face amount repurchased .................................................. $ -- $ 45 $ --
Gain (loss) .............................................................. $ -- $ (2) $ --
12.0% Subordinated Debentures due June 15, 2005 (2):
- ----------------------------------------------------
Face amount repurchased .................................................. $ 33,500 $ 33,500 $ --
Gain (loss) .............................................................. $ (445) $ (1,025) $ --
Total debt repurchases:
- -----------------------
Face amount repurchased .................................................. $ 33,500 $ 82,005 $ 31,396
Gain (loss) .............................................................. $ (445) $ (1,461) $ 3,774
(1) The remaining $43,475 balance of our 11.875% Notes matured on October
1, 2003 and were repaid in full.
(2) On September 30, 2003 we exercised our redemption option and called the
remaining $33,065 balance of our 12.0% Subordinated Debentures at a
price of 101.333%, or a premium of $441. Earlier in the year, we had
repurchased $435 in the open market resulting in a loss of $4.
(3) In November 2002 we exercised redemption options on three of our
outstanding debt obligations for a combined debt reduction of $73,545.
As provided for in the terms of the indentures, we exercised our
redemption option and called $40,000 of our 11.875% Notes at a price of
102.969%, $33,500 of our 12% Subordinated Debentures at a price of
102.667% and the remaining $45 of our 11.5% Redeemable Notes at a price
of 105.75%. As a result of these early redemptions at a premium, we
incurred $2,499 of loss, including the write-off of $416 of unamortized
issuance costs.
See "Changes in Financial Condition - Notes and Debentures" and
"Company Obligated, Mandatorily Redeemable Securities of Subsidiary Trust
Holding Solely Junior Subordinated Debentures of the Company" and Note 15 to our
Consolidated Financial Statements.
Other Income. Other income consists primarily of software revenue
earned by OTX, collections of credit card receivables accounted for under the
cost recovery method, brokerage commissions earned from sales of real estate and
consulting fees. See Note 23 to our Consolidated Financial Statements for a
disclosure of the components of other income for 2003, 2002 and 2001. The $5,040
increase in other income for 2003 as compared to 2002 was primarily the result
of a $6,877 increase in OTX software revenues (primarily from REALTrans), offset
in part by declines in consulting fees and collections of credit card
receivables. Consulting fees for 2002 include $1,398 earned from a one-time
contract with the government of Jamaica.
The $4,250 increase in other income during 2002 as compared to 2001 was
largely the result of $4,191 of collections of unsecured receivables that were
accounted for under the cost recovery method until they had been reduced to zero
as of December 31, 2001 through collections and reserves.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Non-Interest Expense. The following table sets forth the principal
components of our non-interest expense for the years indicated:
2003 2002 2001
--------- --------- ---------
Compensation and employee benefits .......................................... $ 72,221 $ 77,778 $ 84,914
Occupancy and equipment ..................................................... 13,159 11,843 11,577
Technology and communication costs .......................................... 21,121 25,270 26,768
Loan expenses ............................................................... 14,252 12,605 15,811
(Gain) loss on affordable housing properties ................................ 285 21,915 17,535
Amortization/writeoff of excess of purchase price over net assets ........... -- 2,231 3,112
acquired
Professional services and regulatory fees ................................... 26,054 16,383 14,749
Other operating expenses .................................................... 10,409 9,601 8,849
--------- --------- ---------
$ 157,501 $ 177,626 $ 183,315
========= ========= =========
Compensation and Employee Benefits. The following table presents the
principal components of compensation and benefits for the years indicated:
2003 2002 2001
--------- --------- ---------
Salaries (1) ................................................................ $ 49,811 $ 53,746 $ 58,012
Bonuses (2) ................................................................. 9,771 7,904 9,544
Payroll taxes ............................................................... 3,708 4,352 4,763
Commissions ................................................................. 2,460 3,370 3,541
Insurance ................................................................... 2,251 2,668 2,682
Severance ................................................................... 1,397 2,316 1,701
Contract programmers ........................................................ 51 531 1,539
Relocation .................................................................. 578 759 1,049
Other (3) ................................................................... 2,194 2,132 2,083
--------- --------- ---------
$ 72,221 $ 77,778 $ 84,914
========= ========= =========
(1) Salaries include fees paid for the services of temporary employees.
(2) Bonuses include compensation related to employee incentive awards of
restricted stock and stock options.
(3) Other consists primarily of recruiting expenses, matching contributions
to our 401(K) plan and fees paid to directors.
The decline in compensation and benefits in 2003 and 2002 was primarily
due to a decrease in salaries. This decline in costs has occurred in spite of an
increase in the average number of our employees and is due in large part to our
ongoing globalization initiative to reduce labor costs through the migration of
certain functions (primarily in support of our Residential Loan Servicing,
Business Process Outsourcing and OTX businesses) to our offices in Bangalore and
Mumbai, India. This initiative has resulted in a significant increase in the
concentration of our workforce in India. The average total number of our
full-time employees (domestic and international combined) amounted to 2,083,
1,790 and 1,536 during 2003, 2002 and 2001, respectively. The number of
employees in our India offices averaged 1,134 during 2003 as compared to 543
during 2002 and 151 during 2001. We may experience additional growth in our
India workforce during 2004 depending upon the growth of recent business
initiatives, primarily Business Process Outsourcing. See "Workforce and
Operational Capacity" for additional information regarding our operations and
workforce in India. The decline in salaries, in spite of the increase in the
number of employees, is also the result of a change in the mix of our workforce
in the United States to a greater concentration of call center and similar level
positions. This change in mix has occurred as we have exited capital-intensive
businesses in favor of fee-based businesses, primarily residential loan
servicing.
Occupancy and Equipment. Occupancy and equipment costs consist
principally of rents, depreciation (excluding hardware and software), building
maintenance, postage and mailing services, delivery charges and other costs of
our office operations. The increase in occupancy and equipment expense in 2003
as compared to 2002 is primarily attributed to the growth of our Business
Process Outsourcing and International segments, as well as expansion of our
India operations.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Technology and Communication Costs. The following table presents the
principle components of technology and communication costs for the years
indicated:
2003 2002 2001
--------- --------- ---------
Depreciation expense:
Hardware (1) ............................................................. $ 6,579 $ 7,154 $ 5,465
Software ................................................................. 2,455 2,562 2,344
Other .................................................................... 437 326 93
--------- --------- ---------
9,471 10,042 7,902
--------- --------- ---------
Telecommunications expense (2) .............................................. 5,927 4,990 4,491
Consulting fees - technology ................................................ 1,552 1,729 1,610
Amortization expense:
Capitalized software development costs ................................... 1,511 1,424 1,213
Intellectual property .................................................... -- 1,029 1,060
--------- --------- ---------
1,511 2,453 2,273
--------- --------- ---------
Equipment lease expense (1) ................................................. 1,462 1,312 29
Other (3) ................................................................... 1,198 4,744 10,463
--------- --------- ---------
$ 21,121 $ 25,270 $ 26,768
========= ========= =========
(1) The increase in depreciation and leasing expense in 2002 was largely the
result of upgrades to our computer servers and other hardware, as well as
new hardware purchased for expanding our India operations centers.
(2) The increase in telecommunication expense during 2003 and 2002 is largely
due to increased costs of telecommunication lines as a result of our
expansion in India.
(3) Other technology costs for 2002 and 2001 included $1,068 and $3,185,
respectively, of payments related to the acquisition of Amos, Inc., an OTX
subsidiary, in 1997. The final compensatory payment due in connection with
this acquisition was recorded in 2002.
(Gain) loss on Affordable Housing Properties. Net losses we recorded on
investments in affordable housing properties during the past three years
included loss provisions in the amount of $432, $17,350 and $15,587,
respectively, for expected losses on the sale of properties. Losses for 2002
also included a $3,944 charge to record a discount on a long-term sale of seven
properties during the second quarter. We are accreting this discount to income
over the term of the related receivable balance, which extends through 2014.
(Gains) losses from sales of affordable housing properties amounted to ($1,050,)
$(445) and $955 during 2003, 2002 and 2001, respectively. See "Changes in
Financial Condition - Affordable Housing Properties."
Amortization/Writeoff of Excess of Purchase Price over Net Assets
Acquired ("Goodwill"). Goodwill amortization and writeoffs that we recognized
during 2002 and 2001 related entirely to OTX. In accordance with the provisions
of SFAS No. 142, which we adopted on January 1, 2002, we ceased amortization of
the remaining balance of our goodwill beginning in 2002. However, we test our
goodwill annually for impairment. As a result of our annual impairment testing
in 2002, we wrote-off the remaining $2,231 of goodwill associated with the 1997
acquisition of Amos, Inc. No write-off was required as a result of our 2003
impairment testing. See Note 1 to our Consolidated Financial Statements.
Loan Expenses. Loan expenses for 2003, 2002 and 2001 included $10,649,
$9,463 and $8,426, respectively, of appraisal fees incurred in connection with
property valuation services we provided through ORA. See "Segment Profitability
- - ORA". Loan expenses also include other miscellaneous expenses incurred in
connection with loans we own and those we service for others. Loan expenses for
2001 included a charge to write-off $1,485 of deferred costs on commercial loans
we owned.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Professional Services and Regulatory Fees. The following table presents
the principal components of professional services and regulatory fees for the
years indicated:
2003 2002 2001
--------- --------- ---------
Legal fees and settlements (1) .............................................. $ 18,245 $ 8,308 $ 4,107
Consulting fees (non-technology) ............................................ 2,183 2,873 3,392
Audit and accounting fees ................................................... 1,745 1,236 1,269
Corporate insurance ......................................................... 1,513 1,010 725
FDIC insurance (2) .......................................................... 299 398 2,585
Other ....................................................................... 2,069 2,558 2,671
--------- --------- ---------
$ 26,054 $ 16,383 $ 14,749
========= ========= =========
(1) The $9,937 increase in legal fees and settlements in 2003 as compared to
2002 is primarily the result of a $10,000 settlement in connection with the
arbitration award to the former owners of Admiral Home Loan. Legal fees and
settlements for 2002 included $3,250 related to the settlement of two
litigation claims.
(2) The $2,187 decline in FDIC insurance in 2002 as compared to 2001 resulted
from a decline in both our deposit liabilities and the FDIC assessment
rates.
Other Operating Expenses. Other operating expenses include travel and
related costs, check processing and other deposit related costs, amortization of
deferred costs and provisions for uncollectible receivables. See Note 24 to our
Consolidated Financial Statements for a disclosure of the components of other
operating expenses for 2003, 2002 and 2001.
Distributions on Company Obligated, Mandatorily Redeemable Securities
of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the
Company. Cash distributions on our Capital Securities are payable semi-annually
in arrears on February 1 and August 1 of each year at an annual rate of 10.875%.
We recorded $6,117, $6,287, and $7,131 of distributions to holders of the
Capital Securities during 2003, 2002 and 2001, respectively. Effective July 1,
2003 with our adoption of SFAS No. 150, these distributions are reported in the
consolidated statement of operations as interest expense. The decline in
distributions is the result of repurchases we made during 2002 and 2001. See
"Non-Interest Income - Gain (Loss) on Repurchase of Debt", Note 15 to our
Consolidated Financial Statements and "Changes in Financial Condition -
Company-Obligated, Mandatorily Redeemable Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures of the Company."
Income Tax Expense (Benefit). The following table provides details of
our income tax expense (benefit) and effective tax rates for the years
indicated:
2003 2002 2001
--------- --------- ---------
Income tax expense (benefit) on income (loss) before taxes and effect of
change in accounting principle ........................................... $ (1,427) $ (31,066) $ (23,348)
Provision for valuation allowance on current year's deferred tax asset ...... 2,175 34,049 23,348
Provision for valuation allowance on prior year's deferred tax asset ........ -- -- 83,000
--------- --------- ---------
Income tax expense ....................................................... 748 2,983 83,000
Income tax benefit on effect of change in accounting principle .............. -- (1,166) --
--------- --------- ---------
Total income tax expense .................................................... $ 748 $ 1,817 $ 83,000
========= ========= =========
For 2003, 2002 and 2001 our effective tax rate before the provision for
the deferred tax valuation allowance was (28.4)%, 48.1% and 55.9% respectively,
and reflected tax credits of $2,394, $2,686 and $2,078, respectively, resulting
from our investment in affordable housing properties.
The provision for deferred tax asset valuation allowance is a non-cash
charge that we recorded to increase the aggregate valuation allowance, which
amounted to $201,445 and $199,270 at December 31, 2003 and 2002, respectively.
We estimated this valuation allowance based on our assessment of the portion of
the deferred tax asset that more likely than not will not be realized. Reversal
of all or a portion of the valuation allowance may be required in the future
based on the results of our operations.
See Notes 8 and 18 to our Consolidated Financial Statements, and
"Changes in Financial Condition - Affordable Housing Properties."
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Changes in Financial Condition
Trading Securities. The following table sets forth the fair value of
our trading securities at the dates indicated:
December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
U.S. Treasury securities and Collateralized mortgage obligations:
U.S. Treasury securities .................................................. $ 6,679 $ 1,016 $ --
Collateralized mortgage obligations (AAA-rated) (1) ....................... -- 20,540 161,191
--------- --------- ---------
$ 6,679 $ 21,556 $ 161,191
========= ========= =========
Subordinates and residuals: (2)
Single family residential
BB rated subordinates ................................................. $ 579 $ 599 $ 625
B-rated subordinates .................................................. 580 606 799
Unrated subordinates .................................................. 222 344 1,008
Unrated subprime residuals ............................................ 38,883 33,213 60,049
--------- --------- ---------
40,264 34,762 62,481
Nonresidential unrated subordinates ....................................... 2,577 2,577 2,577
--------- --------- ---------
$ 42,841 $ 37,339 $ 65,058
========= ========= =========
(1) During the year ended December 31, 2003, our CMO trading securities
declined to $0 as a result of maturities and principal repayments.
During 2002, the $140,651 decline was primarily due to $227,100 of
maturities and principal repayments offset in part by purchases of
$88,938. We have not replaced maturing CMOs with new purchases
primarily because we no longer need these securities to meet the
Qualified Thrift Lender requirements of the Bank.
(2) During the year ended December 31, 2003, our subordinate and residual
trading securities increased by $5,502. This increase was principally
the result of the transfer of $5,926 match funded securities to trading
securities in June 2003 as a result of early redemption of the related
bonds-match funded agreements. These securities had a fair value of
$5,146 at December 31, 2003. See "Changes in Financial Condition -
Match Funded Assets". Principal repayments and amortization during the
year were largely offset by increases in fair value. During the year
ended December 31, 2002, our subordinate and residual trading
securities declined by $27,719. This decline was primarily due to
$7,419 of maturities and principal repayments and $26,438 of sales,
partly offset by $1,946 of net discount accretion.
Subordinate and residual interests in mortgage-related securities
provide credit support to the more senior classes of the mortgage-related
securities. Principal from the underlying mortgage loans generally is allocated
first to the senior classes, with the most senior class having a priority right
to the cash flow from the mortgage loans until its payment requirements are
satisfied. To the extent that there are defaults and unrecoverable losses on the
underlying mortgage loans, resulting in reduced cash flows, the most subordinate
security will be the first to bear this loss. Because subordinate and residual
interests generally have no credit support, to the extent there are realized
losses on the mortgage loans comprising the mortgage collateral for such
securities, we may not recover the full amount or, indeed, any of our remaining
investment in such subordinate and residual interests.
Subordinate and residual interests are affected by the rate and timing
of payments of principal (including prepayments, repurchase, defaults and
liquidations) on the mortgage loans underlying a series of mortgage-related
securities. The rate of principal payments may vary significantly over time
depending on a variety of factors, such as the level of prevailing mortgage loan
interest rates and economic, demographic, tax, legal and other factors.
Prepayments on the mortgage loans underlying a series of mortgage-related
securities are generally allocated to the more senior classes of
mortgage-related securities. Although in the absence of defaults or interest
shortfalls all subordinates receive interest, amounts otherwise allocable to
residuals generally are used to make payments on more senior classes or to fund
a reserve account for the protection of senior classes until over
collateralization or the balance in the reserve account reaches a specified
level. For residual interests in residential mortgage-backed securities, over
collateralization is the amount by which the collateral balance exceeds the sum
of the bond principal amounts. Over collateralization is achieved by applying
monthly a portion of the interest payments of the underlying mortgages toward
the reduction of the senior class certificate principal amounts, causing them to
amortize more rapidly than the aggregate loan balance. Over collateralization
represents the first tier of loss protection afforded to the non-residual
holders. To the extent not consumed by losses on more highly rated bonds, over
collateralization is remitted to the residual holders. In periods of declining
interest rates, rates of prepayments on mortgage loans generally increase, and
if the rate of prepayments is faster than anticipated, then the yield on
subordinates will be positively affected and the yield on residuals will be
negatively affected.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
We periodically assess the carrying value of our subordinate securities
and residual securities retained. There can be no assurance that our estimates
used to determine the value of subordinate securities and residual securities
retained will remain appropriate for the life of each securitization. If actual
loan prepayments or defaults exceed our estimates, the carrying value of our
subordinate securities and residual securities retained may be decreased during
the period in which we recognized the disparity.
The following table presents information regarding our trading
subordinate and residual securities summarized by classification and rating at
December 31, 2003:
Anticipated
Anticipated Anticipated Weighted
Percent Yield to Yield to Average
Owned by Maturity at Maturity at Remaining
Rating/Description (1) Fair Value Ocwen Purchase (2)(3) 12/31/03 (2)(4) Coupon Life (2)(5)
- ------------------------------------- ---------- -------- --------------- --------------- ------ -----------
Single-family residential:
BB-rated subordinates............ $ 579 100.00% 16.80% 9.73% 6.00% 3.52
B-rated subordinates............. 580 100.00 17.39 24.85 6.06 1.95
Unrated subordinates............. 222 100.00 14.47 31.45 6.90 0.06
Unrated subprime residuals....... 38,883 100.00 17.15 7.99 N/A 4.62
----------
40,264
Commercial:
Unrated subordinates............. 2,577 25.00 22.15 12.10 N/A 1.35
----------
$ 42,841
==========
(1) Refers to the credit rating designated by the rating agency for each
securitization transaction. Classes designated "A" have a superior
claim on payment to those rated "B". Additionally, multiple letters
have a superior claim to designations with fewer letters. Thus, for
example, "BBB" is superior to "BB", which in turn is superior to "B".
The lower class designations in any securitization will receive
interest payments after senior classes and will experience losses
before any senior class. The lowest potential class designation is
"unrated" which, if included in a securitization, will always receive
interest last and experience losses first.
(2) Subordinate and residual securities do not have a contractual maturity
but are paid down over time as cash distributions are received. Because
they do not have a stated maturity, we disclose the weighted average
life of these securities.
(3) Represents the effective yield from inception to maturity based on the
purchase price and anticipated future cash flows under pricing
assumptions.
(4) Represents the effective yield based on the purchase price, actual cash
flows received from inception until the respective date, and the then
current estimate of future cash flows under the assumptions at the
respective date. Changes in the December 31, 2003 anticipated yield to
maturity from that originally anticipated are primarily the result of
changes in prepayment assumptions and loss assumptions.
(5) Represents the weighted average life in years based on the December 31,
2003 book value.
The following table sets forth the principal amount of mortgage loans
by the geographic location of the properties securing the mortgages that
underlie our trading subordinate and residual securities at December 31, 2002:
Description U.K California New York New Jersey Texas Other (1) Total
- ------------------------------ --------- ---------- --------- --------- --------- --------- ---------
Single family residential .... $ 66,494 $ 30,640 $ 26,659 $ 24,348 $ 24,527 $ 207,082 $ 379,750
Commercial ................... -- 6,986 -- -- -- 38,762 45,748
Multi-family ................. -- 477 211 570 -- 1,946 3,204
--------- --------- --------- --------- --------- --------- ---------
Total ........................ $ 66,494 $ 38,103 $ 26,870 $ 24,918 $ 24,527 $ 247,790 $ 428,702
========= ========= ========= ========= ========= ========= =========
Percentage of total .......... 15.51% 8.89% 6.27% 5.81% 5.72% 57.80% 100.00%
========= ========= ========= ========= ========= ========= =========
(1) Consists of properties located in 46 other states, none of which
aggregated over $22,861 in any one state.
See Note 1 and Note 3 to our Consolidated Financial Statements.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Real Estate. Our real estate consisted of the following at the dates
indicated:
December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Properties acquired for investment:
Office buildings ......................................................... $ 21,448 $ 27,602 $ 32,132
Retail ................................................................... 11,402 9,090 29,637
Building improvements .................................................... 15,884 17,387 17,513
Tenant improvements and lease commissions ................................ 6,558 2,795 4,537
Furniture and fixtures ................................................... 36 30 52
--------- --------- ---------
55,328 56,904 83,871
Accumulated depreciation ................................................. (7,118) (5,316) (5,327)
--------- --------- ---------
48,210 51,588 78,544
Nonresidential loans accounted for as investments in real estate ............ -- 2,188 30,436
Investment in real estate partnerships ...................................... 5,220 4,900 7,916
Assisted living facilities (1) .............................................. -- -- 13,418
Real estate owned, net ...................................................... 50,513 62,039 110,465
--------- --------- ---------
$ 103,943 $ 120,715 $ 240,779
========= ========= =========
(1) Consisted of three facilities that were sold during the first quarter
of 2002 for a gain of $669. We had recorded impairment charges of
$2,225 during 2001 based on sales proceeds anticipated at that time.
Properties Acquired for Investment. Properties acquired for investment
at December 31, 2003 consisted of one office building (approximately 62% leased)
located in Jacksonville, Florida and one shopping center (approximately 73%
leased) located in Halifax, Nova Scotia. We acquired these properties as a
result of our acquisition of OAC in 1999. The $3,378 decline in the aggregate
carrying value of these two properties during 2003 was largely due to $7,526 of
impairment charges and $1,802 of depreciation expense, offset in part by $6,303
of capitalized improvements. We sold our office building property in January
2004 for proceeds that approximated carrying value. We also issued a loan to the
buyer in the amount of $15,248 in order to facilitate this sale. The $26,956
decline in the aggregate net carrying value of investments during 2002 was
primarily due to the sale of our shopping center in Bradenton, Florida, which
had a carrying value of $19,902, and impairment charges of $14,549 to reduce the
remaining properties to our estimate of their net realizable value, offset in
part by $8,771 of net capitalized improvements.
Loans Accounted for as Investments in Real Estate. We acquired certain
acquisition, development and construction loans in January 2000 in which we
participated in the expected residual profits of the underlying real estate, and
where the borrower had not contributed substantial equity to the project. As
such, we accounted for these loans under the equity method of accounting as
though we had an investment in a real estate limited partnership. The one loan
remaining at December 31, 2002 was repaid during 2003.
Investment in Real Estate Partnerships. Consists of interests in two
limited partnerships operating as real estate ventures, consisting of
multi-family type properties.
Real Estate Owned, Net. Real estate owned, net, consists of properties
we acquired by foreclosure or deed-in-lieu thereof on loans, primarily those
that we had previously acquired at a discount. Real estate owned has been
declining since 1998 as sales more than offset loan foreclosures during those
years. At December 31, 2003 our portfolio of real estate owned consisted of only
20 properties, of which two are commercial and the remainder are single family
residential. Declines in our originations and acquisitions of loans are the
principal reason for the decline in foreclosures.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth the composition of real estate owned,
net, by property type and segment at the dates indicated:
December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Single family residential:
Residential Discount Loans ............................................... $ -- $ 1,837 $ 16,150
Subprime Finance ......................................................... 89 50 274
Corporate Items and Other ................................................ 793 -- --
--------- --------- ---------
882 1,887 16,424
Nonresidential real estate:
Commercial Finance ....................................................... 49,631 60,152 94,041
--------- --------- ---------
$ 50,513 $ 62,039 $ 110,465
========= ========= =========
The following tables set forth the activity in real estate owned during
the years indicated:
2003 2002 2001
--------- --------- ---------
Amount
- ------
Balance at beginning of period .............................................. $ 62,039 $ 110,465 $ 146,419
Properties acquired through foreclosure or deed-in-lieu thereof:
Loans ..................................................................... 178 16,000 92,949
Less discount transferred ................................................. (50) (6,756) (35,698)
Add advances transferred .................................................. 33 248 6,790
--------- --------- ---------
161 9,492 64,041
--------- --------- ---------
Capital improvements ........................................................ 2,534 2,298 12,737
Sales ....................................................................... (17,533) (53,670) (111,776)
Decrease (increase) in valuation allowance (1)............................... 3,312 (6,546) (956)
--------- --------- ---------
Balance at end of period .................................................... $ 50,513 $ 62,039 $ 110,465
========= ========= =========
2003 2002 2001
--------- --------- ---------
Number of Properties
- --------------------
Balance at beginning of period .............................................. 55 391 1,298
Properties acquired through foreclosure or deed-in-lieu thereof ............. 3 21 747
Sales ....................................................................... (38) (357) (1,654)
--------- --------- ---------
Balance at end of period .................................................... 20 55 391
========= ========= =========
(1) Excludes basis adjustment in 2002, which had no effect on the net carrying
value, as discussed in the table below.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following tables set forth the amount of time that we have held our real
estate owned at the dates indicated:
December 31, 2003 Commercial Finance Corporate Items and Other Subprime Finance Total
- ---------------------- --------------------- ------------------------- --------------------- ---------------------
Net Book Net Book Net Book Net Book
Value Count Value Count Value Count Value Count
-------- -------- --------- -------- --------- -------- --------- --------
Holding Period:
- ---------------
One to six months............. $ -- -- $ 9 1 $ -- -- $ 9 1
Seven to 12 months............ -- -- 60 1 89 1 149 2
13 to 24 months............... -- -- 132 1 -- -- 132 1
Over 24 months................ 49,631 2 592 14 -- -- 50,223 16
-------- -------- --------- -------- --------- -------- --------- --------
$ 49,631 2 $ 793 17 $ 89 1 $ 50,513 20
======== ======== ========= ======== ========= ======== ========= ========
December 31, 2003 Commercial Finance Residential Discount Subprime Finance Total
- ---------------------- --------------------- ------------------------- --------------------- ---------------------
Net Book Net Book Net Book Net Book
Value Count Value Count Value Count Value Count
-------- -------- --------- -------- --------- -------- --------- --------
Holding Period:
- ---------------
One to six months............. $ -- -- $ -- -- $ -- -- $ -- --
Seven to 12 months............ -- -- 176 3 -- -- 176 3
13 to 24 months............... 18,616 4 574 18 35 1 19,225 23
Over 24 months................ 41,536 2 1,087 26 15 1 42,638 29
-------- -------- --------- -------- --------- -------- --------- --------
$ 60,152 6 $ 1,837 47 $ 50 2 $ 62,039 55
======== ======== ========= ======== ========= ======== ========= ========
December 31, 2003 Commercial Finance Residential Discount Subprime Finance Total
- ---------------------- --------------------- ------------------------- --------------------- ---------------------
Net Book Net Book Net Book Net Book
Value Count Value Count Value Count Value Count
-------- -------- --------- -------- --------- -------- --------- --------
Holding Period:
- ---------------
One to six months............. $ -- -- $ 6,020 145 $ 130 3 $ 6,150 148
Seven to 12 months............ 21,607 4 5,805 126 10 1 27,422 131
13 to 24 months............... 377 1 3,718 84 119 2 4,214 87
Over 24 months................ 72,057 6 607 17 15 2 72,679 25
-------- -------- --------- -------- --------- -------- --------- --------
$ 94,041 11 $ 16,150 372 $ 274 8 $ 110,465 391
======== ======== ========= ======== ========= ======== ========= ========
Our sales of real estate owned resulted in gains of $416, $3,103 and
$14,111 during 2003, 2002 and 2001, respectively. Commercial Finance real estate
owned that we have held in excess of 24 months at December 31, 2003 consisted of
a large retail shopping mall with a carrying value of $43,460 and a hotel with a
carrying value of $6,171. As anticipated, the shopping mall property migrated
into the over 24 month category in 2000 because it was being repositioned for
sale. Commercial Finance properties held for 13 to 24 months as of December 31,
2002 consisted of four hotels, three of which were sold in 2003. The average
period during which we held the real estate owned which was sold during the
years ended December 31, 2003, 2002 and 2001, was 31 months, 13 months and 8
months, respectively.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth the activity, in aggregate, in the
valuation allowance on our real estate owned during the years indicated:
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Balance at beginning of year..................... $ 4,591 $ 19,098 $ 18,142 $ 17,181 $ 15,325
Provisions for losses............................ (96) 19,685 17,766 26,674 28,008
Charge-offs...................................... (2,459) (5,304) (2,352) (4,129) (8,012)
Sales............................................ (757) (7,835) (14,458) (21,584) (18,140)
Basis adjustment (1)............................. -- (21,053) -- -- --
---------- ---------- ---------- ---------- ----------
Balance at end of year........................... $ 1,279 $ 4,591 $ 19,098 $ 18,142 $ 17,181
========== ========== ========== ========== ==========
Valuation allowance as a percentage of total
gross real estate owned....................... 2.5% 6.9% 14.7% 11.0% 9.3%
(1) Our shopping mall property, which we have held for more than one year,
is being repositioned for future sale. This valuation allowance had
been established to carry this asset at the lower of cost or fair value
less estimated costs to dispose. Under SFAS No. 144, "Accounting for
the Impairment or Disposal of Long - Lived Assets", which became
effective in 2002, we now account for this property similar to real
estate properties acquired for investment, and we applied the valuation
allowance as a reduction of cost.
See Note 6 to our Consolidated Financial Statements for geographic information
related to real estate owned.
Affordable Housing Properties. Historically, we invested in
multi-family residential projects which have been allocated low-income housing
tax credits under Section 42 of the Internal Revenue Code of 1986, as amended,
by a state tax credit allocating agency. We ceased making new investments in
2000 as part of our shift in strategy to fee-based businesses and because the
volume of tax credits being generated was exceeding our ability to utilize them
effectively. Since that time, we have been marketing each of these properties
for sale. As a result, our investment in affordable housing properties has been
declining and consisted of only four properties at December 31, 2003. The
carrying values of our affordable housing investments are as follows at the
dates indicated:
December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Properties subject to sale agreements (1) ................................... $ -- $ 4,458 $ 49,893
Properties not yet sold ..................................................... 7,410 10,861 52,176
--------- --------- ---------
Total .................................................................. $ 7,410 $ 15,319 $ 102,069
========= ========= =========
Number of properties ........................................................ 4 8 25
(1) Certain of our properties were subject to sales agreements that
resulted in the transfer of tax credits and operating results for these
properties to the purchaser but did not qualify as sales for accounting
purposes due to insufficient cash received or contingencies with
respect to potential repurchase requirements.
The decline in our investment during 2003 and 2002 was due to sales and
loss provisions to increase reserves, offset by additional investments to
complete existing projects under construction. Loss provisions represent
estimated losses from future sales or from sales that have not yet qualified as
such for accounting purposes and include revisions to completion cost estimates
and modifications to projected sales results. During 2003, the $7,909 decline in
our investment was primarily due to sales of $6,145 (net of reserves) and loss
provisions of $432. During 2002, sales of $73,087 (net of reserves) and loss
provisions of $17,350 exceeded additional investments of $3,687.
Low-income housing tax credit partnerships in which we invest both as a
limited and, through a subsidiary, as general partner are presented on a
consolidated basis and totaled $1,374, $3,357 and $73,463 at December 31, 2003,
2002 and 2001, respectively. We account for investments made on or after May 18,
1995, in which we invest solely as a limited partner, using the equity method.
We account for limited partnership investments made prior to May 18, 1995 under
the effective yield method as a reduction of income tax expense.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
See Note 8 to our Consolidated Financial Statements for additional
information regarding our investment in affordable housing properties.
Loans, Net. Our net investment in loans of $28,098 at December 31, 2003
represents 2.3% of total assets and consisted of only 22 loans. Our loans have
been declining since 1998 as sales, resolutions and foreclosures more than
offset acquisitions and originations. This reflects our strategy to dispose of
assets associated with non-core business lines. Originations in 2003, 2002 and
2001 represent loans made to facilitate sales of commercial real estate assets
that we owned and fundings of pre-existing commitments on construction loans.
Otherwise, we have not originated or acquired any loans since 2000. This
reflects our strategy to dispose of assets associated with non-core business
lines.
Composition of Loans. The following table sets forth the composition of
our loans by business segment at the dates indicated:
December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Residential Discount Loans: (1)
- -------------------------------
Single family residential loans .......... $ -- $ 1,965 $ 57,954 $ 297,790 $ 612,115
Unaccreted discount and deferred fees .... -- (565) (16,804) (74,341) (148,160)
Allowance for loan losses ................ -- (154) (3,401) (3,493) (11,169)
----------- ----------- ----------- ----------- -----------
-- 1,246 37,749 219,956 452,786
----------- ----------- ----------- ----------- -----------
Affordable Housing: (2)
- -----------------------
Multifamily residential loans ............ 10,924 10,803 19,714 32,330 6,650
Land and other ........................... 200 200 200 1 2,239
----------- ----------- ----------- ----------- -----------
11,124 11,003 19,914 32,331 8,889
Deferred fees ............................ -- -- -- (46) (67)
Undisbursed loan funds ................... -- (346) (1,430) (4,586) (541)
Allowance for loan losses ................ (4,579) (4,428) (1,269) (139) (459)
----------- ----------- ----------- ----------- -----------
6,545 6,229 17,215 27,560 7,822
----------- ----------- ----------- ----------- -----------
Commercial Finance:
- -------------------
Office buildings ......................... -- 41,215 56,713 98,425 162,529
Hotels ................................... 10,600 11,668 38,576 102,120 113,444
Retail properties ........................ -- 27,500 47,492 85,924 105,247
Multifamily residential loans ............ 14,964 15,215 13,605 118,411 266,638
Land and other ........................... -- 1,188 607 36,608 91,146
----------- ----------- ----------- ----------- -----------
25,564 96,786 156,993 441,488 739,004
Unaccreted discount and deferred fees .... (1,015) (11,409) (19,962) (45,918) (98,232)
Undisbursed loan funds ................... -- -- (1,483) (4,293) (24,113)
Allowance for loan losses ................ (3,786) (16,179) (5,744) (10,877) (13,545)
----------- ----------- ----------- ----------- -----------
20,763 69,198 129,804 380,400 603,114
----------- ----------- ----------- ----------- -----------
Subprime Finance: (3)
- ---------------------
Single family residential loans .......... -- 199 512 3,540 34,091
Unamortized (discount) premium ........... -- (15) 13 (45) 396
----------- ----------- ----------- ----------- -----------
-- 184 525 3,495 34,487
----------- ----------- ----------- ----------- -----------
Unsecured Collections:
- ----------------------
Consumer ................................. -- -- -- 17,188 17,664
Allowance for loan losses ................ -- -- -- (8,770) (1,267)
----------- ----------- ----------- ----------- -----------
-- -- -- 8,418 16,397
----------- ----------- ----------- ----------- -----------
Corporate Items and Other: (1)
- ------------------------------
Single family residential loans .......... 1,307 -- -- 223 1,244
Unaccreted discount and deferred fees .... (412) -- -- -- --
Allowance for loan losses ................ (105) -- -- -- --
----------- ----------- ----------- ----------- -----------
790 -- -- 223 1,244
----------- ----------- ----------- ----------- -----------
Loans, net .................................. $ 28,098 $ 76,857 $ 185,293 $ 640,052 $ 1,115,850
=========== =========== =========== =========== ===========
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
(1) Loans and all other assets of the Residential Discount Loans segment
were transferred to the Corporate Items and Other segment, effective
January 1, 2003. These loans were acquired by us at a discount and are
secured by mortgages on single family residential properties.
(2) Loans we made to affordable housing properties in which we have
invested as a limited partner but do not consolidate in our financial
statements.
(3) We record these loans at the lower of cost, after considering
unamortized (discount) premium and deferred fees, or aggregate market
value.
Contractual Principal Repayments. The following table sets forth
certain information at December 31, 2003 regarding the dollar amount of loans
maturing based on scheduled contractual amortization, as well as the dollar
amount of loans that have fixed or adjustable interest rates. We report demand
loans (loans having no stated schedule of repayments and no stated maturity) and
overdrafts as due in one year or less. We have not reduced loan balances for (i)
undisbursed loan proceeds, unearned fees and the allowance for loan losses or
(ii) non-performing loans.
Maturing in
-----------------------------------------------------------------------
After One After Five
One Year Year Through Years Through After Ten
or Less Five Years Ten Years Years Total
----------- ------------ ------------- ----------- -----------
Commercial Finance .......................... $ 17,411 $ 8,153 $ -- $ -- $ 25,564
Affordable Housing .......................... -- 859 -- 10,265 11,124
Corporate Items and Other ................... 139 80 124 964 1,307
----------- ----------- ----------- ----------- -----------
$ 17,550 $ 9,092 $ 124 $ 11,229 $ 37,995
=========== =========== =========== =========== ===========
Interest rate terms on amounts due:
Fixed .................................... $ 17,550 $ 9,013 $ 124 $ 10,962 $ 37,649
Adjustable ............................... -- 79 -- 267 346
----------- ----------- ----------- ----------- -----------
$ 17,550 $ 9,092 $ 124 $ 11,229 $ 37,995
=========== =========== =========== =========== ===========
Scheduled contractual principal repayments may not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Activity in Loans. The following table sets forth the activity in our
net loans during the periods indicated:
Years Ended December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Amount
- ------
Balance at beginning of period .............. $ 76,857 $ 185,293 $ 640,052 $ 1,115,850 $ 1,434,670
Acquisitions (1) ............................ 420 1,018 -- 221,940 937,902
Originations (2) ............................ 6,277 18,478 18,144 39,792 749,459
Resolutions and repayments (3) .............. (29,362) (50,965) (139,232) (312,856) (541,286)
Loans transferred to real estate owned ...... (157) (16,000) (92,949) (201,010) (220,775)
Sales (4) ................................... (49,110) (77,636) (343,262) (369,630) (1,237,178)
Decrease (increase) in undisbursed loan 346 2,569 5,965 15,774 (17,555)
proceeds ...................................
Decrease (increase) in discount ............. 10,537 24,447 83,710 125,406 9,441
Decrease (increase) in allowance ............ 12,290 (10,347) 12,865 4,786 1,172
----------- ----------- ----------- ----------- -----------
Balance at end of period .................... $ 28,098 $ 76,857 $ 185,293 $ 640,052 $ 1,115,850
=========== =========== =========== =========== ===========
Years Ended December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Number of Loans
- ---------------
Balance at beginning of period .............. 38 931 4,282 8,765 12,425
Acquisitions (1) ............................ 8 17 -- 2,231 8,017
Originations (2) ............................ 1 3 4 4 4,306
Resolutions and repayments (3) .............. (19) (77) (662) (1,572) (2,656)
Loans transferred to real estate owned ...... (3) (21) (747) (2,455) (2,534)
Sales (4) ................................... (3) (815) (1,946) (2,691) (10,793)
----------- ----------- ----------- ----------- -----------
Balance at end of period (5) ................ 22 38 931 4,282 8,765
=========== =========== =========== =========== ===========
(1) The decline in acquisitions reflect our strategic decision to exit
non-core businesses and dispose of the related assets. Acquisitions in
2002 and 2003 represent repurchases of single-family residential
discount loans previously sold. Acquisitions in 2000 and 1999 included
$164,920 (2,208 loans) and $516,744 (6,606 loans), respectively, of
single-family residential discount loans. Acquisitions during 1999 also
included $121,113 of loans we acquired as a result of our acquisition
of OAC.
(2) Originations in 2003, 2002, 2001 and 2000 represent loans made to
facilitate sales of our own commercial assets and fundings of
construction loans we originated in prior years. Originations for 1999
included approximately $509,800 of subprime single-family residential
loans originated by Ocwen UK prior to its sale on September 30, 1999.
(3) Resolutions and repayments consists of loans which we resolved in a
manner which resulted in partial or full repayment of the loan to us,
as well as principal payments on loans which have been brought current
in accordance with their original or modified terms (whether pursuant
to forbearance agreements or otherwise) or on other loans which have
not been resolved.
(4) Sales in 1999 included securitizations of performing single-family
residential discount and subprime loans.
(5) Of the 22 loans remaining at December 31, 2003, three are
nonresidential loans in the Commercial Finance segment, two are
multi-family loans in the Affordable Housing segment and the remainder
are single family loans in the Corporate Items and Other Segments.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth certain information relating to our
non-performing loans and allowance for loan losses at the dates indicated:
December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Non-performing loans (1) .................... $ 21,898 $ 75,549 $ 94,307 $ 297,547 $ 449,647
Non-performing loans as a percentage of: (1)
Total loans (2) ........................... 59.9% 77.4% 48.2% 44.9% 39.4%
Total assets .............................. 1.8% 6.2% 5.5% 13.2% 13.7%
Allowance for loan losses as a percentage of:
Total loans (2) ........................... 23.2% 21.3% 5.3% 3.5% 2.3%
Non-performing loans (1) .................. 38.7% 27.5% 11.0% 7.8% 5.9%
(1) Loans, which are contractually past due 90 days or more in accordance
with the original terms of the loan agreement. We do not accrue
interest on loans past due 90 days or more.
(2) Total loans are net of unaccreted discount, unamortized deferred fees
and undisbursed loan funds.
See Note 4 to our Consolidated Financial Statements for additional
information regarding loans.
Allowances for Loan Losses. As discussed in the "Results of Operations
- - Provision for Loan Losses" section, we maintain an allowance for loan losses
for each of our loans at a level that we consider adequate to provide for
probable losses based upon an evaluation of known and inherent risks. The
following tables set forth (a) the breakdown of the allowance for loan losses on
our loans in each segment and (b) the percentage of loans in each segment to
total loans in the respective segments at the dates indicated:
December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Amount:
- -------
Residential Discount Loans ................ $ -- $ 154 $ 3,401 $ 3,493 $ 11,169
Commercial Finance (1) .................... 3,786 16,179 5,744 10,877 13,545
Affordable Housing ........................ 4,579 4,428 1,269 139 459
Unsecured Collections ..................... -- -- -- 8,770 1,267
Corporate Items and Other ................. 105 -- -- -- --
----------- ----------- ----------- ----------- -----------
$ 8,470 $ 20,761 $ 10,414 $ 23,279 $ 26,440
=========== =========== =========== =========== ===========
(1) The decline in the allowance on Commercial Finance loans during 2003 is
primarily the result of sales. The allowance as a percentage of loan
value for this segment was 15.4% at December 31, 2003 as compared to
19.0% at December 31, 2002 and 4.2% at December 31, 2001. See "Results
of Operations-Provisions for Loan Losses" for additional information
regarding our allowance as a percentage of loans.
December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Percentage of Loans to Total Loans:
- -----------------------------------
Residential Discount Loans................ --% 1.4% 21.0% 33.7% 40.6%
Commercial Finance........................ 67.1 87.5 69.3 59.0 54.0
Affordable Housing........................ 30.4 10.9 9.4 4.2 0.7
Subprime Finance.......................... -- 0.2 0.3 0.5 3.0
Unsecured Collections..................... -- -- -- 2.6 1.5
Corporate Items and Other................. 2.5 -- -- -- 0.2
----------- ----------- ----------- ----------- -----------
100.0% 100.0% 100.0% 100.0% 100.0%
=========== =========== =========== =========== ===========
50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The allocation of the allowance to each segment is not necessarily
indicative of future losses and does not restrict our use of the allowance to
absorb losses in any other segment.
The following table sets forth an analysis of activity in the allowance
for loan losses relating to our loans during the periods indicated:
Years Ended December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Balance at beginning of period .............. $ 20,761 $ 10,414 $ 23,279 $ 26,440 $ 26,330
Provision for loan losses ................... (2,633) 13,655 15,478 15,270 7,070
Charge-offs ................................. (9,658) (3,756) (28,827) (19,068) (8,060)
Recoveries .................................. -- 448 484 637 397
----------- ----------- ----------- ----------- -----------
Net charge-offs .......................... (9,658) (3,308) (28,343) (18,431) (7,663)
----------- ----------- ----------- ----------- -----------
Acquired allowance (OAC acquisition) ........ -- -- -- -- 703
----------- ----------- ----------- ----------- -----------
Balance at end of period .................... $ 8,470 $ 20,761 $ 10,414 $ 23,279 $ 26,440
=========== =========== =========== =========== ===========
Match Funded Assets. Our match funded assets were comprised of the
following at the dates indicated:
December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Single family residential loans ............................................. $ 24,393 $ 38,129 $ 53,123
Allowance for loan losses ................................................... (94) (144) (170)
--------- --------- ---------
Match funded loans, net .................................................. 24,299 37,985 52,953
--------- --------- ---------
Match funded securities ..................................................... -- 8,057 19,435
--------- --------- ---------
Match funded advances on loans serviced for others:
Principal and interest ................................................... 54,516 66,524 65,705
Taxes and insurance ...................................................... 30,176 30,301 21,900
Other .................................................................... 21,096 24,877 14,358
--------- --------- ---------
105,788 121,702 101,963
--------- --------- ---------
$ 130,087 $ 167,744 $ 174,351
========= ========= =========
We acquired single family residential match funded loans in connection
with our acquisition of OAC. OAC had previously securitized these loans and
transferred them to a real estate mortgage investment conduit on November 13,
1998. The transfer did not qualify as a sale for accounting purposes since we
retained effective control of the loans transferred. Accordingly, we recorded
the proceeds we received from the transfer as a secured borrowing with pledge of
collateral (bonds-match funded agreements). Non-performing loans amounted to
$2,321, $3,120 and $4,405 at December 31, 2003, 2002 and 2001, respectively. The
declines in the balance during 2003 and 2002 were due to repayment of loan
principal.
Match funded securities resulted from our transfer of four unrated
residual securities to a trust on December 16, 1999 in exchange for non-recourse
notes. The transfer did not qualify as a sale for accounting purposes since we
retained effective control over the securities transferred. Accordingly, we
reported the amount of proceeds we received from the transfer as a secured
borrowing with pledge of collateral (bonds-match funded agreements). In June
2003, the Ocwen NIM Trust 1999 - OAC1 adopted a plan of complete liquidation,
which caused the early redemption of the related bonds-match funded agreements.
The match funded securities, which had a fair value of $5,926 at the time of
transfer, were transferred to trading securities. See "Changes in Financial
Conditions - Trading Securities" and - "Bonds - Match Funded Agreements."
Match funded advances on loans serviced for others resulted from our
transfer of certain residential loan servicing related advances to a third party
in exchange for cash. The original and subsequent transfers did not qualify as a
sale for accounting purposes since we retained effective control of the
advances. Accordingly, we report the amount of proceeds we received from the
sale as a secured borrowing with pledge of collateral (bonds-match funded
agreements.) See "Bonds-Match Funded Agreements" and Note 12 to our Consolidated
Financial Statements.
51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Advances on Loans and Loans Serviced for Others. Advances related to
our loan portfolios and loans we serviced for others consisted of the following
at the dates indicated:
December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Loans (1):
- ----------
Taxes and insurance .................................................... $ 101 $ 136 $ 2,214
Other .................................................................. 335 502 4,135
--------- --------- ---------
436 638 6,349
--------- --------- ---------
Loans serviced for others:
- --------------------------
Principal and interest ................................................. 118,024 63,326 107,319
Taxes and insurance .................................................... 145,507 117,937 99,972
Other .................................................................. 110,802 84,455 69,543
--------- --------- ---------
374,333 265,718 276,834
--------- --------- ---------
$ 374,769 $ 266,356 $ 283,183
========= ========= =========
(1) The decline in advances on loans reflects the decline in our investment
in loans. See "Changes in Financial Condition - Loans, Net".
During any period in which the borrower is not making payments, we are
required under certain servicing agreements to advance our own funds to meet
contractual principal and interest remittance requirements for certain
investors, pay property taxes and insurance premiums and process foreclosures.
We generally recover such advances from borrowers for reinstated and performing
loans and from investors for foreclosed loans. We record a charge to servicing
income to the extent that we estimate that advances are uncollectible under
provisions of the servicing contracts, taking into consideration historical loss
and delinquency experience, length of delinquency and amount of the advance. The
balances of advances on loans serviced for others do not include match funded
advances that are transferred to a third party in a transaction that does not
qualify as a sale for accounting purposes and that we account for as a secured
borrowing. See "Match Funded Assets".
Mortgage Servicing Rights. The unamortized balance of mortgage
servicing rights is predominantly residential. The increase in our investment
since 2001 reflects the growth of our residential loan servicing business
through purchases of rights to service loans for others. Our investment declined
slightly during 2003 as amortization exceeded purchases. The rate of
amortization has increased in response to increased projected prepayment volumes
on subprime residential mortgage loans. See "Results of Operations -
Non-Interest Income - Servicing and Other Fees" and Note 7 to our Consolidated
Financial Statements.
December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Balance at beginning of period .............................................. $ 171,611 $ 101,107 $ 51,426
Purchases ................................................................... 88,829 128,891 79,522
Amortization ................................................................ (93,558) (58,153) (29,841)
Impairment .................................................................. (387) -- --
Sales ....................................................................... -- (234) --
--------- --------- ---------
Balance at end of period .................................................... $ 166,495 $ 171,611 $ 101,107
========= ========= =========
At December 31, 2003, we serviced loans under approximately 420
servicing agreements for 22 investors. Purchases during 2003 were all
residential and $18,184 were acquired under flow agreements with third party
lenders whereby we have committed to purchase newly originated mortgage
servicing rights up to an agreed upon amount.
52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Receivables. Receivables consisted of the following at the dates
indicated:
December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Residential Loan Servicing (1) ......................... $ 18,564 $ 10,982 $ 9,548
OTX .................................................... 962 532 1,351
Ocwen Realty Advisors .................................. 1,442 1,193 511
Unsecured Collections .................................. 260 296 --
Business Process Outsourcing ........................... 969 -- --
International Operations ............................... 1,314 680 157
Residential Discount Loans ............................. -- 1,286 1,851
Commercial Finance ..................................... 2,858 2,530 2,940
Affordable Housing (2) ................................. 25,581 40,327 13,230
Subprime Finance ....................................... -- -- 800
Corporate Items and Other (3) .......................... 36,449 21,118 24,822
---------- ---------- ----------
$ 88,399 $ 78,944 $ 55,210
========== ========== ==========
(1) Consist principally of fees earned and reimbursable expenses due from
investors.
(2) Primarily represents future payments of proceeds from the sale of
investments in affordable housing properties, net of an unaccreted
discount of $2,901 and $3,400 at December 31, 2003 and 2002,
respectively. See "Results of Operations - Segment Profitability -
Affordable Housing" and "Changes in Financial Condition - Affordable
Housing Properties". Balances are net of reserves for doubtful
accounts.
(3) Primarily comprised of federal tax refund claims, which are pending
completion of Internal Revenue Service examination that is required by
the Joint Committee before the claims can be paid. The claims amounted
to $21,465, $20,841 and $20,842 at December 31, 2003, 2002 and 2001,
respectively. The balance as of December 31, 2003, included amounts
related to our overnight collection account activities.
Other Assets. Other assets consisted of the following at the dates
indicated:
December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Interest earning insurance collateral deposits (1) .......................... $ 8,813 $ -- $ --
Capitalized software development costs, net ................................. 2,599 4,010 6,059
Deferred debt issuance costs, net ........................................... 3,114 2,946 1,750
Investment securities, at cost .............................................. 4,293 5,361 4,659
Deferred tax asset, net (2) ................................................. 7,547 8,387 8,411
Goodwill .................................................................... 1,618 1,618 6,971
Other ....................................................................... 5,381 6,964 9,816
--------- --------- ---------
$ 33,365 $ 29,286 $ 37,666
========= ========= =========
(1) These deposits were required by us in order to obtain surety bonds for
affordable housing properties that we sold before the end of the
fifteen-year tax credit amortization period, and on which we have
previously claimed tax credits on our income tax returns. The surety
bond is necessary in order to avoid the recapture of those tax credits
previously claimed.
(2) Deferred tax assets are net of valuation allowances of $201,445,
$199,270 and $165,221, respectively. See "Results of Operations -
Income Tax Expense (Benefit)".
Deposits. Our customer deposits decreased during 2002 primarily as a
result of maturing brokered certificates of deposits. Brokered certificates of
deposits continued to decline in 2003, but this decline was more than offset by
an increase in non-brokered certificates of deposit. We have not issued any new
brokered certificates of deposit since 2000 and, at this time, do not intend to
issue any such deposits in the foreseeable future. We do continue to rely on
non-brokered deposits as a source of financing our operations.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table sets forth information related to our deposits at
the dates indicated:
Years Ended December 31,
------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ------------------------------ -------------------------------
Weighted % of Weighted % of Weighted % of
Average Total Average Total Average Total
Amount Rate Deposits Amount Rate Deposits Amount Rate Deposits
--------- -------- -------- --------- -------- --------- --------- --------- ---------
Non interest- bearing checking
accounts ..................... $ 4,879 --% 1.1% $ 4,378 --% 1.0% $ 5,624 --% 0.8%
NOW and money market checking
accounts ..................... 18,313 0.90% 4.1% 17,720 1.20% 4.2% 15,479 1.44% 2.4%
Savings accounts ................ 1,657 1.00% 0.4% 1,592 1.00% 0.4% 1,287 1.25% 0.2%
--------- ------- --------- --------- --------- ---------
24,849 5.6% 23,690 5.6% 22,390 3.4%
--------- --------- ---------
Certificates of deposit (1)(2) .. 421,657 402,917 636,037
Unamortized deferred fees ....... (118) (637) (1,549)
--------- --------- ---------
Total certificates of deposit ... 421,539 3.41% 94.4% 402,280 4.89% 94.4% 634,488 6.06% 96.6%
--------- ------- --------- --------- --------- ---------
$ 446,388 100.0% $ 425,970 100.0% 656,878 100.0%
========= ======= ========= ========= ========= =========
(1) Included $84,328, $198,248 and $484,698 at December 31, 2003, 2002 and
2001, respectively, of brokered deposits originated through national,
regional and local investment banking firms that solicit deposits from
their customers, all of which are non-cancelable. During the second
quarter of 2003, we exercised our right to call brokered certificates
of deposit with a face value of $18,194 that carried an interest rate
of 6%.
(2) At December 31, 2003, 2002, and 2001, certificates of deposit with
outstanding balances of $100 or more amounted to $142,408, $125,451 and
$82,771, respectively. Of the $142,408 of such deposits at December 31,
2003, $41,276 were from political subdivisions in New Jersey and were
secured or collateralized as required under state law. The basic
insured amount of a depositor is $100. Deposits maintained in different
categories of legal ownership are separately insured.
The following table sets forth remaining maturities for our term
deposits in amounts of $100 or more at December 31, 2003:
Matures within three months........................................ $ 60,753
Matures after three months through six months...................... 19,036
Matures after six months through twelve months..................... 30,206
Matures after twelve months........................................ 32,413
---------
$ 142,408
=========
Escrow Deposits. Escrow deposits on our loans and loans we serviced for
others amounted to $116,444, $84,986 and $73,565 at December 31, 2003, 2002 and
2001, respectively. The balance consisted principally of custodial deposit
balances representing collections that we made from borrowers for the payment of
taxes and insurance premiums on mortgage properties underlying loans that we
serviced for others. Such balances amounted to $96,924, $72,254 and $71,796 at
December 31, 2003, 2002 and 2001, respectively. The increase in the balance
reflects an increase in the volume of loans we service for others. See "Results
of Operations - Non-Interest Income - Servicing and Other Fees."
Bonds-Match Funded Agreements. Bonds-match funded agreements represent
proceeds received from transfers of loans, residual securities and advances on
our loans serviced for others. Because we retained effective control over the
assets transferred, these transfers did not qualify as sales for accounting
purposes and, therefore, we report them as secured borrowings with pledges of
collateral. Our bonds-match funded agreements were comprised of the following at
the dates indicated:
December 31,
-----------------------------------------------
Collateral Interest rate 2003 2002 2001
- ------------------------------------------ ------------------------------ ------------- -------------- -------------
Single family loans (1) LIBOR plus 65-70 basis points $ 20,427 $ 32,217 $ 46,145
Unrated residual securities (2) 9.50% -- 8,057 18,997
Advances on loans serviced for others (3) LIBOR plus 160 basis points 94,967 106,797 91,766
------------- -------------- -------------
$ 115,394 $ 147,071 $ 156,908
============= ============== =============
(1) The decline in the outstanding balance was primarily due to principal
repayments, offset in part by discount amortization.
54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
(2) During the second quarter of 2003, the Ocwen NIM Trust 1999 - OAC1
adopted a plan of complete liquidation and, thereby, caused the early
redemption of the bonds-match funded agreements that were secured by
residual securities. See "Changes in Financial Condition - Match Funded
Assets."
(3) Under the terms of the agreement, we are eligible to sell additional
advances on loans serviced for others up to a maximum balance of
$200,000.
See "Changes in Financial Condition - Bonds-Match Funded Assets" and
"Liquidity, Commitments and Off-Balance Sheet Risks - Liquidity".
Notes and Debentures. Notes and debentures mature as follows:
December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
2003:
- -----
11.875% Notes due October 1 (1) ............................................. $ -- $ 43,475 $ 87,025
2005:
- -----
12% Subordinated Debentures due June 15 (2) ................................. -- 33,500 67,000
11.5% Redeemable Notes due July 1 (3) ....................................... -- -- 45
2027:
- -----
10.875% Capital Securities due August 1 (4) ................................. 56,249 -- --
--------- --------- ---------
$ 56,249 $ 76,975 $ 154,070
========= ========= =========
(1) The remaining $43,475 balance of these notes matured on October 1,
2003. On November 26, 2002 we had exercised our redemption option and
called $40,000 of these notes at a price of 102.969%. Earlier during
2002, we had repurchased $3,550 of these notes in the open market.
(2) On September 30, 2003 we exercised our redemption option and called the
remaining balance of $33,065 at a price of 101.333%, or a premium of
$441. Also, during the second quarter of 2003 we repurchased $435 in
the open market resulting in a loss of $4. On November 26, 2002 we had
exercised our redemption option and called $33,500 of these debentures
at a price of 102.667%.
(3) On November 5, 2002 we exercised our redemption option and called the
remaining balance of these notes at a price of 105.75%.
(4) Capital Securities were reclassified to notes and debentures effective
July 1, 2003 with our adoption of SFAS No. 150. See Note 1 to our
Consolidated Financial Statements.
For additional information regarding our notes and debentures, see
"Results of Operations - Gain (Loss) on Repurchase of Debt" and Note 14 to our
Consolidated Financial Statements.
55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Lines of Credit and Other Secured Borrowings. We have obtained secured
line of credit arrangements from unaffiliated financial institutions as follows
at the dates indicated:
December 31, December 31,
Borrowing Type Collateral Maturity Interest Rate (1) 2003 2002
- ---------------------- ------------------------------- ------------- -------------------------- ------------ -----------
Line of credit Advances on loans serviced for March 2004 LIBOR + 200 basis points $ 68,548 $ 78,511
others (2) (3)
Line of credit Advances on loans serviced for October 2004 LIBOR + 200 basis points 9,386 --
others (2)
Mortgage note Real estate - office building May 2005 LIBOR + 350 basis points, 20,000 --
(4) floor of 5.75%
Secured loan Trading securities - unrated June 2004 LIBOR + 275 basis points 11,562 --
subprime residuals (UK)
Senior secured credit Purchased mortgage servicing April 2004 LIBOR + 162.5 or 225 basis 35,321 --
agreement rights and advances on loans points
serviced for others (5)
Installment notes Purchased mortgage servicing July 2004 2.81% 2,332 --
rights
Term loan Loan receivable March 2005 LIBOR + 250 basis points, 3,235 4,235
floor of 8.00%
---------- ---------
$ 150,384 $ 82,746
========== =========
(1) 1-month LIBOR was 1.12% and 1.38% at December 31, 2003 and December 31,
2002, respectively.
(2) Maximum amount of borrowing under this facility is $100,000. These lines
were entered into to fund advances purchased in connection with our
acquisition of rights to service loans for others.
(3) This line was fully repaid subsequent to December 31, 2003 and will not be
renewed upon maturity.
(4) We sold our office building in January 2004 and the buyer assumed this note
at that time.
(5) Maximum amount of borrowing under this facility is $60,000. We anticipate
that this facility will be renewed.
During 2003, we have entered in to a number of additional secured
borrowing agreements. These actions are consistent with the strategic plan that
we adopted in 2000, which included, among other things, a commitment to reduce
our reliance on brokered deposits and long-term debt as sources of financing for
our operations. See "Liquidity, Commitments and Off-Balance Sheet Risks."
Company Obligated, Mandatorily Redeemable Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures of the Company ("Capital
Securities"). As indicated above, the outstanding balance of the 10.875% Capital
Securities due August 1, 2027 of $56,249 has been classified as a liability
("Notes and Debentures") effective July 1, 2003 upon our adoption of SFAS No.
150. See Notes 1 and 15 to the Consolidated Financial Statements .The
outstanding balance of the 10.875% Capital Securities amounted to $56,249 and
$61,159, respectively, at December 31, 2002 and 2001. During 2002 and 2001, we
repurchased $4,910 and $18,371, respectively, of our Capital Securities in the
open market. See "Results of Operations -Gain (Loss) on Repurchase of Debt".
Minority Interest in Subsidiaries. Minority interest of $1,286 and
$1,778 at December 31, 2003 and 2002, respectively, represents the investment by
others in Global Servicing Solutions, LLC, which we formed during the third
quarter of 2002 to establish, license and operate distressed asset management
servicing companies in various countries around the world. See the Principles of
Consolidation section of Note 1 to our Consolidated Financial Statements.
Stockholders' Equity. Stockholders' equity amounted to $317,258 at
December 31, 2003 as compared to $310,718 at December 31, 2002 and $379,106 at
December 31, 2001. The $6,540 increase in stockholders' equity during 2003 was
primarily due to net income of $4,772, the issuance of 359,419 shares of common
stock as a result of stock option exercises and the issuance of 236,461 shares
of restricted stock to employees as part of our annual incentive awards for
service in 2002. These increases were offset in part by our repurchase of
500,000 shares of common stock. The $68,388 decline in equity during 2002 was
primarily due to the $68,775 net loss we incurred for that year. See
Consolidated Statements of Changes in Stockholders' Equity and Notes 1 and 19 to
our Consolidated Financial Statements.
56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Asset and Liability Management
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. Our objective is to
control risks associated with interest rate and foreign currency exchange rate
movements. Our Asset/Liability Management Committee (the "Committee"), which is
composed of certain of our officers, formulates and monitors our asset and
liability management strategy in accordance with policies approved by our Board
of Directors. The Committee meets to review, among other things, the sensitivity
of our assets and liabilities to interest rate changes and foreign currency
exchange rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, including those attributable to hedging
transactions, purchase and sale activity, and maturities of investments and
borrowings. The Committee also approves and establishes pricing and funding
decisions with respect to overall asset and liability composition.
The Committee's methods for evaluating interest rate risk include an
analysis of the our interest rate sensitivity "gap," which is defined as the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
The following table sets forth the estimated maturity or repricing of
our interest-earning assets and interest-bearing liabilities at December 31,
2003. The amounts of assets and liabilities shown within a particular period
were determined in accordance with the contractual terms of the assets and
liabilities, except:
o Adjustable-rate loans, performing discount loans and securities
are included in the period in which they are first scheduled to
adjust and not in the period in which they mature,
o Fixed-rate mortgage-related securities reflect prepayments that
were estimated based on analyses of broker estimates, the results
of a prepayment model we use and empirical data,
o Non-performing discount loans reflect the estimated timing of
resolutions that result in repayment to us,
o NOW and money market checking deposits and savings deposits, which
do not have contractual maturities, reflect estimated levels of
attrition, which are based on our detailed studies of each such
category of deposit and,
o Escrow deposits and other non interest-bearing checking accounts,
which amounted to $121,323 at December 31, 2003, are excluded.
57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
We believe that these assumptions approximate actual experience and
consider them reasonable; however, the interest rate sensitivity of our assets
and liabilities in the table could vary substantially if we were to use
different assumptions or actual experience differs from the historical
experience on which we based the assumptions.
December 31, 2003
------------------------------------------------------------------------
Four to More Than
Within Three Twelve One Year to Three Years
Months Months Three Years and Over Total
------------ ------------ ------------ ------------ ------------
Rate-Sensitive Assets:
- ----------------------
Interest-earning deposits...................... $ 324 $ -- $ -- $ -- $ 324
Trading securities............................. 4,563 12,549 15,604 16,804 49,520
Investment securities, net..................... 4,293 -- -- -- 4,293
Loans, net (1)................................. 767 14,879 8,205 4,247 28,098
Match funded loans (1)(2)...................... 2,766 10,564 6,987 3,982 24,299
------------ ------------ ------------ ------------ ------------
Total rate-sensitive assets................... 12,713 37,992 30,796 25,033 106,534
------------ ------------ ------------ ------------ ------------
Rate-Sensitive Liabilities:
- ---------------------------
NOW and money market checking deposits......... 16,313 230 491 1,279 18,313
Savings deposits............................... 1,657 -- -- -- 1,657
Certificates of deposit........................ 101,277 171,295 139,571 9,396 421,539
------------ ------------ ------------ ------------ ------------
Total interest-bearing deposits................ 119,247 171,525 140,062 10,675 441,509
Bonds-match funded agreements.................. 115,394 -- -- -- 115,394
Lines of credit and other secured borrowings... 150,384 -- -- -- 150,384
Notes and debentures........................... -- -- -- 56,249 56,249
------------ ------------ ------------ ------------ ------------
Total rate-sensitive liabilities.............. 385,025 171,525 140,062 66,924 763,536
------------ ------------ ------------ ------------ ------------
Interest rate sensitivity gap (4)................ $ (372,312) $ (133,533) $ (109,266) $ (41,891) $ (657,002)
============ ============ ============ ============ ============
Cumulative interest rate sensitivity gap (3)..... $ (372,312) $ (505,845) $ (615,111) $ (657,002)
============ ============ ============ ============
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets...... (349.48)% (474.82)% (577.38)% (616.71)%
As of December 31, 2002:
- ------------------------
Cumulative interest rate sensitivity gap (3)..... $ (161,606) $ (340,958) $ (426,209) $ (464,988)
============ ============ ============ =============
Cumulative interest rate sensitivity gap on a
percentage of total rate-sensitive assets...... (53.37)% (112.60)% (140.75)% (140.35)%
(1) We have not reduced balances for non-performing loans.
(2) Excludes match funded advances on loans serviced for others, which do
not earn interest, of $105,788 at December 31, 2003.
(3) We have experienced a large negative interest rate sensitivity gap in
recent years. The negative interest rate sensitivity gap reflects the
economics of our residential loan servicing business. Servicing
advances, the largest asset class on our balance sheet, is not
sensitive to changes in interest rates. However, we finance servicing
advances with interest rate sensitive liabilities.
(4) We had no rate-sensitive financial instruments outstanding at December
31, 2003.
58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The OTS has established specific minimum guidelines for thrift
institutions to observe in the area of interest rate risk as described in Thrift
Bulletin No. 13a, "Management of Interest Rate Risk, Investment Securities, and
Derivative Activities" ("TB 13a"). Under TB 13a, institutions are required to
establish and demonstrate quarterly compliance with board-approved limits on
interest rate risk that are defined in terms of net portfolio value ("NPV"),
which is defined as the net present value of an institution's existing assets,
liabilities and off-balance sheet instruments. These limits specify the minimum
net portfolio value ratio ("NPV Ratio") allowable under current interest rates
and hypothetical interest rate scenarios. An institution's NPV Ratio for a given
interest rate scenario is calculated by dividing the NPV that would result in
that scenario by the present value of the institution's assets in that same
scenario. The hypothetical scenarios are represented by immediate, permanent,
parallel movements (shocks) in the term structure of interest rates of plus 100,
200 and 300 basis points and minus 100 basis points from the actual term
structure observed at quarter end. The current NPV Ratio for each of the five
rate scenarios and the corresponding limits approved by the Board of Directors,
as applied to Ocwen Financial Corporation and its subsidiaries, are as follows
at December 31, 2003:
Board Limits Current
Rate Shock in basis points (minimum NPV Ratios) NPV Ratios
- --------------------------------------------- -------------------------- --------------------------
+300 5.00% 33.01%
+200 6.00% 30.49%
+100 7.00% 28.38%
0 8.00% 26.03%
-100 7.00% 23.65%
The Committee also regularly reviews interest rate risk by forecasting
the impact of alternative interest rate environments on net interest income or
expense and NPV and evaluating such impacts against the maximum potential
changes in net interest income and NPV that is authorized by the Board of
Directors, as applied to Ocwen Financial Corporation and its subsidiaries. The
following table quantifies the potential changes in net interest expense and net
portfolio value should interest rates go up or down (shocked) 300 or 100 basis
points, respectively, assuming the yield curves of the rate shocks will be
parallel to each other. We calculate the cash flows associated with the loan
portfolios and securities available for sale based on prepayment and default
rates that vary by asset. We generate projected losses, as well as prepayments,
based upon the actual experience with the subject pool, as well as similar, more
seasoned pools. To the extent available, we use loan characteristics such as
loan-to-value ratio, interest rate, credit history, prepayment penalty terms and
product types to produce the projected loss and prepayment assumptions that are
included in the cash flow projections of the securities. When we shock interest
rates we further adjust these projected loss and prepayment assumptions. The
base interest rate scenario assumes interest rates at December 31, 2003. Actual
results of Ocwen Financial Corporation and its subsidiaries could differ
significantly from the results estimated in the following table:
Estimated Changes in
------------------------------------------------------
Rate Shock in basis points Net Interest NPV
- --------------------------------------------- -------------------------- --------------------------
+300 52.56% 36.35%
+200 35.04% 22.37%
+100 17.52% 11.53%
0 0.00% 0.00%
-100 (17.52)% (11.09)%
59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
The following table shows our financial instruments that are sensitive
to changes in interest rates, categorized by expected maturity or repricing
characteristics, and the fair values of those instruments at December 31, 2003:
Expected Maturity Date At December 31, 2003 (1)
----------------------------------------------------------------------------------------
Total Fair
2004 2005 2006 2007 2008 Thereafter Balance Value
--------- --------- --------- --------- --------- ---------- --------- ---------
Rate-Sensitive Assets:
- ----------------------
Interest-earning deposits....... $ 324 $ -- $ -- $ -- $ -- $ -- $ 324 $ 324
Average interest rate......... 0.15% --% --% --% --% --% 0.15%
Trading securities.............. 17,112 8,367 7,237 4,499 2,649 9,656 49,520 49,520
Average interest rate......... 14.28% 18.71% 16.51% 17.56% 19.90% 24.52% 17.95%
Investment securities, net 4,293 -- -- -- -- -- 4,293 4,293
Average interest rate......... 0.69% --% --% --% --% --% 0.69%
Loans, net (2).................. 15,646 7,235 970 722 628 2,897 28,098 29,407
Average interest rate......... 7.97% 7.63% 5.77% 5.05% 5.05% 5.06% 7.37%
Match funded loans (2)(3)....... 13,330 6,336 651 615 467 2,900 24,299 23,072
Average interest rate......... 6.55% 6.36% 8.76% 8.73% 8.87% 8.94% 6.94%
--------- --------- --------- --------- --------- ---------- --------- ---------
Total rate-sensitive assets. $ 50,705 $ 21,938 $ 8,858 $ 5,836 $ 3,744 $ 15,453 $ 106,534 $ 106,616
========= ========= ========= ========= ========= ========== ========= =========
Rate-Sensitive Liabilities:
- ---------------------------
NOW and money market checking
deposits.................... $ 16,543 $ 266 $ 226 $ 192 $ 163 $ 923 $ 18,313 $ 17,931
Average interest rate......... 0.44% 0.19% 0.19% 0.19% 0.19% 0.19% 0.42%
Savings deposits................ 1,657 -- -- -- -- -- 1,657 1,578
Average interest rate......... 0.99% --% --% --% --% --% 0.99%
Certificates of deposit......... 272,572 112,514 27,057 7,233 2,163 -- 421,539 427,627
Average interest rate......... 3.26% 3.71% 3.28% 4.27% 5.13% --% 3.41%
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-bearing
deposits.................. 290,772 112,780 27,283 7,425 2,326 923 441,509 447,136
Bonds-match funded agreements... 115,394 -- -- -- -- -- 115,394 115,401
Average interest rate......... 2.68% --% --% --% --% --% 2.68%
Lines of credit and other secured
borrowings.................... 150,384 -- -- -- -- -- 150,384 150,384
Average interest rate......... 3.53% --% --% --% --% --% 3.53%
Notes and debentures............ -- -- -- -- -- 56,249 56,249 55,581
Average interest rate......... --% --% --% --% --% 10.88% 10.88%
--------- --------- --------- --------- --------- --------- --------- ---------
Total rate-sensitive
liabilities............... $ 556,550 $ 112,780 $ 27,283 $ 7,425 $ 2,326 $ 57,172 $ 763,536 $ 768,502
========= ========= ========= ========= ========= ========= ========= =========
(1) Expected maturities are contractual maturities adjusted for prepayments
of principal. We use certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments and prepayments of
principal. We base the prepayment experience reflected herein on our
historical experience. The actual maturities of these instruments could
vary substantially if future prepayments differ from our historical
experience.
(2) We have not reduced balances for non-performing loans.
(3) Excludes match funded advances on loans serviced for others, which do
not earn interest, of $105,788 at December 31, 2003.
(4) The expected maturity or repricing dates of interest rate-sensitive
assets and liabilities as of December 31, 2003, 2002 and 2001 compare
as follows:
60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
1st Year 2nd Year 3rd Year 4th Year 5th Year Thereafter Total
----------- ----------- ---------- ---------- ---------- ---------- ------------
Total rate-sensitive assets:
2003
- ----
Amount .......................... $ 50,705 $ 21,938 $ 8,858 $ 5,836 $ 3,744 $ 15,453 $ 106,534
Percent of total ................ 47.59% 20.59% 8.31% 5.48% 3.51% 14.52% 100.00%
2002
- ----
Amount .......................... $ 216,990 $ 47,774 $ 9,460 $ 6,198 $ 4,494 $ 17,888 $ 302,804
Percent of total ................ 71.66% 15.78% 3.12% 2.05% 1.48% 5.91% 100.00%
2001
- ----
Amount .......................... $ 563,761 $ 67,274 $ 20,843 $ 11,700 $ 10,587 $ 52,002 $ 726,167
Percent of total ................ 77.64% 9.26% 2.87% 1.61% 1.46% 7.16% 100.00%
Total rate-sensitive liabilities:
2003
- ----
Amount .......................... $ 556,550 $ 112,780 $ 27,283 $ 7,425 $ 2,326 $ 57,172 $ 763,536
Percent of total ................ 72.89% 14.77% 3.57% 0.97% 0.30% 7.50% 100.00%
2002
- ----
Amount .......................... $ 558,541 $ 79,554 $ 62,929 $ 1,852 $ 4,213 $ 21,295 $ 728,384
Percent of total ................ 76.69% 10.92% 8.64% 0.25% 0.58% 2.92% 100.00%
2001
- ----
Amount .......................... $ 750,269 $ 204,721 $ 61,675 $ 93,035 $ 1,347 $ 21,129 $ 1,132,176
Percent of total ................ 66.27% 18.08% 5.45% 8.22% 0.12% 1.86% 100.00%
We believe that the broad geographic distribution of our loans and
match funded loans reduces the risks that would otherwise result from
concentrating such loans in limited geographic areas. See Notes 4 and 5 to our
Consolidated Financial Statements.
The Committee is authorized to utilize a wide variety of off-balance
sheet financial techniques to assist it in the management of interest rate risk
and foreign currency exchange rate risk. These techniques include interest rate
exchange contracts or "swap" agreements, interest rate caps and floors, U.S.
Treasury interest rate futures contracts, foreign currency futures contracts,
foreign currency forwards and European swaptions and put options.
Interest Rate Risk Management. The amortizing caps and floors we had
purchased to hedge the interest rate exposure relating to our match funded loans
and securities, matured in October 2003 and were not renewed or replaced. An
interest rate cap or interest rate floor is designed to provide protection
against the interest rate on a floating-rate instrument rising above some level
(cap) or falling below some level (floor). These caps and floors had an
aggregate notional amount of $111,799 and $30,563, respectively, at December 31,
2002. See the "Derivative Financial Instruments" section of Note 1 and the
"Interest Rate Management" section of Note 17 to our Consolidated Financial
Statements.
Foreign Currency Exchange Rate Risk Management. We have entered into
foreign currency futures to hedge our net investments in foreign subsidiaries
that own residual interests backed by residential loans originated in the UK
("UK residuals") and the shopping center located in Halifax, Nova Scotia (the
"Nova Scotia shopping center"). Our principal exposure to foreign currency
exchange rates exists with the British Pound versus the U.S. dollar and the
Canadian Dollar versus the U.S. dollar. Our policy is to periodically adjust the
amount of foreign currency derivative contracts that we have entered into in
response to changes in our recorded investment in these foreign entities as well
as to changes in our assets denominated in a foreign currency. Our net exposures
are subject to gain or loss if foreign currency exchange rates fluctuate. See
the "Derivatives Financial Instruments" section of Note 1 and the "Foreign
Currency Management" section of Note 17 to our Consolidated Financial
Statements.
61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Liquidity, Commitments and Off-Balance Sheet Risks
Liquidity. Our primary sources of funds for liquidity are:
o Deposits o Payments received on loans
and securities
o Lines of credit and other o Proceeds from sales of assets
secured borrowings
o Match funded debt o Servicing fees
o Securities sold under agreements
to repurchase
We continue to rely on 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 must replace them with alternative sources of funds, it
is likely that we would incur higher interest costs to fund our assets.
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 obligations 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 be
unable to acquire new servicing rights and make the associated advances.
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. This
facility, which originally matured in December 2003, was extended in January
2004 with a maturity of January 2006. The sales of advances do not qualify as
sales for accounting purposes; therefore, we report them as secured borrowings
with pledges of collateral. We have accounted for additional sales under this
facility in the same manner.
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
facility was fully repaid subsequent to December 31, 2003 and will not be
renewed upon maturity in March 2004. The balance outstanding under this facility
at December 31, 2003 was $68,548. In October 2003, we executed a similar
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.
In April 2003, we also entered into a $60,000 secured credit agreement
that may be used to fund servicing advances and acquisitions of servicing
rights. The agreement matures April 2004 and bears interest at LIBOR plus 162.5
basis points for funding of servicing advances or 225 basis points for funding
of acquisitions of servicing rights. At December 31, 2003, we had a balance
outstanding under this agreement of $35,321. We anticipate that this facility
will be renewed.
In June 2003, we entered into an agreement for seller financing of
purchased mortgage servicing rights. At December 31, 2003, we had $2,332
outstanding under this agreement with an interest rate of 2.81%.
Also in June 2003, we entered into a secured loan agreement under which
we borrowed $18,846. This agreement, which is secured by the assignment of our
interest in certain unrated subprime residual securities, matures in June 2004
and bears interest at LIBOR plus 275 basis points. At December 31, 2003 the
outstanding balance had been reduced to $11,562 through the assignment of
principal and interest payments received on our unrated subprime residual
securities.
We closely monitor our liquidity position and ongoing funding
requirements. At December 31, 2003, we also had $206,705 of unrestricted cash
and cash equivalents. Among the risks and challenges associated with our funding
activities are the following:
62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
o Scheduled maturities of all certificates of deposit for 2004, 2005
and thereafter amount to $272,572, $112,514 and $36,453,
respectively.
o The maturity of existing collateralized lines of credit and other
secured borrowings totaling $127,149 at various times in 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.
We believe that our existing sources of liquidity, including internally
generated funds, will be adequate to fund our planned activities for the
foreseeable future, although there can be no assurances in this regard. As
discussed above, we continue to evaluate other sources of liquidity, such as
lines of credit from unaffiliated parties, match funded debt and other secured
and unsecured borrowings. See the "Short-Term Highly Liquid Investments,"
"Securities Sold Under Agreements to Repurchase," and "Derivative Financial
Instruments" sections of Note 1 and Note 14 to our Consolidated Financial
Statements.
Our operating activities provided $33,129, $251,559 and $51,474 of cash
flows during 2003, 2002 and 2001, respectively. During 2002 and 2001 cash was
generated from operating activities, despite the net losses recorded, for two
reasons. First, the net losses included a significant amount of non-cash
reserves and impairment charges. Second, our securities portfolio generated
positive cash flow through sales and interest and principal payments.
Our investing activities provided (used) cash flows totaling $(18,777),
$75,940 and $428,415 during 2003, 2002 and 2001, respectively. During the
foregoing years, cash flows from our investing activities were provided
primarily from principal payments on our loans, and proceeds from sales of loans
and real estate. We used cash flows from our investing activities primarily to
purchase mortgage servicing rights and fund loans made to facilitate sales of
real estate. The decline in net cash provided by investing activities is
primarily due to a decline in principal payments received on loans and a decline
in proceeds from sales of loans and real estate.
Our financing activities provided (used) cash flows of $9,489,
$(395,907) and $(372,970) during 2003, 2002 and 2001, respectively. Cash flows
related to our financing activities primarily resulted from changes in deposits,
changes in lines of credit, repurchases and repayment of debt and issuance of
match funded debt. A decline in the amount of maturing deposits during 2002 was
offset by repayments of securities sold under agreements to repurchase, an
increase in the repurchase of debt and a decline in proceeds from lines of
credit as compared to 2001. Cash flows from financing activities in 2003 reflect
our continuing effort to pay off our high yield bonds and replace them with less
expensive sources of financing including secured credit facilities and
non-brokered deposits.
On March 14, 2003, Fitch Ratings raised the long-term deposit rating of
Ocwen Federal Bank FSB to B+ from B and revised the ratings outlooks for Ocwen
Financial Corporation and Ocwen Federal Bank FSB to Stable from Negative. All
other ratings were affirmed.
On November 17, 2003, Standard & Poor's revised the ratings outlooks on
Ocwen Financial Corporation and Ocwen Federal Bank FSB to Stable from Negative.
On February 6, 2004, Moody's Investors Service placed the ratings of
Ocwen Financial Corporation and its subsidiaries on review for possible
downgrade due to concerns regarding the ability to sustain recent profitability
improvements.
On February 17, 2004, Moody's Investors Service lowered the ratings of
Ocwen Federal Bank for Primary Servicer of residential subprime mortgage loans
and for Special Servicer to SQ2 ("Above Average") from SQ1 ("Strong"). In its
press release Moody's indicates that the ratings reflect the Bank's excellent
servicing performance but also expresses concern regarding the sustainability of
profitability improvements, including a possible negative outcome with respect
to potential class action lawsuits. See Note 26 to our Consolidated Financial
Statements. Certain of our servicing agreements require minimum servicer
ratings; we remain well in excess of those requirements.
These rating actions have not had a material impact on our business or
financing activities. However, further negative rating actions may adversely
impact our business and financing activities.
63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
Commitments. The following table sets forth certain information
regarding amounts we owe to others as of December 31, 2003 under contractual
obligations based on maturities and payment due dates:
Payments due by period
--------------------------------------------------------------------
After One Year After Three
Less Than Through Three Years Through After Five
Contractual Obligations One Year Years Five Years Years Total
- -------------------------------------------------- ---------- -------------- ------------- ---------- ----------
Capital Trust Securities ......................... $ -- $ -- $ -- $ 56,249 $ 56,249
Operating leases ................................. 3,289 2,505 805 -- 6,599
Certificates of deposit .......................... 272,572 139,571 9,396 -- 421,539
Lines of credit and other secured borrowings ..... 127,149 23,235 -- -- 150,384
---------- ---------- ---------- ---------- ----------
Total ............................................ $ 403,010 $ 165,311 $ 10,201 $ 56,249 $ 634,771
========== ========== ========== ========== ==========
We believe that we have adequate resources to fund all unfunded
commitments to the extent required and meet all contractual obligations as they
come due. See Note 26 to our Consolidated Financial Statements for additional
information regarding commitments and contingencies.
Off-Balance Sheet Risks. In addition to commitments to extend credit,
we are party to various off-balance sheet financial instruments in the normal
course of our business to manage our interest rate risk and foreign currency
exchange rate risk. See Note 26 to our Consolidated Financial Statements and
"Asset and Liability Management" above.
We conduct business with a variety of financial institutions and other
companies in the normal course of business, including counterparties to our
off-balance sheet financial instruments. We are subject to potential financial
loss if the counterparty is unable to complete an agreed upon transaction. We
seek to limit counterparty risk through financial analysis, dollar limits and
other monitoring procedures.
Regulatory Capital and Other Requirements
See Note 21 to our Consolidated Financial Statements.
Recent Accounting Developments
For information relating to the effects of our adoption of recent
accounting standards, see Note 1 to our Consolidated Financial Statements.
64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
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.
65
[OCWEN LOGO] Ocwen Financial Corporation
REPORT OF MANAGEMENT
The management of Ocwen Financial Corporation is responsible for the
accompanying consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States of
America applied on a consistent basis. In preparing the financial statements, it
is necessary for management to make informed judgments and best estimates giving
due consideration to materiality. In the opinion of management, the consolidated
financial statements fairly reflect our financial position and results of
operations. Information, both financial and non-financial, presented elsewhere
in this annual report is consistent with that in the consolidated financial
statements.
To ensure that the financial statements are reliable, the Company
established and maintains an effective system of internal financial reporting
controls and procedures that provide reasonable assurance that assets are
safeguarded and transactions are properly recorded and executed in accordance
with corporate policy and management authorization. The Company believes that
its financial reporting controls provide reasonable assurance that errors or
irregularities, which could be material to the financial statements, are
prevented or would be detected within a timely period and corrected in the
normal course of business.
PricewaterhouseCoopers LLP was engaged to perform an audit of the
consolidated financial statements in accordance with auditing standards
generally accepted in the United States of America. Such standards include the
consideration of internal controls over financial reporting to determine the
nature, timing and extent of their audit procedures. In addition to the use of
independent certified public accountants, the Company maintains a professional
staff of internal auditors who conduct financial, procedural and special audits
and make recommendations on both administrative and accounting controls.
The Audit Committee of the Board of Directors is comprised solely of
independent directors and is responsible for overseeing and monitoring the
quality of our accounting and auditing practices. The independent accountants
and internal auditors have direct access to the Audit Committee and meet
periodically with the committee to discuss the scope and results of their work,
internal controls over financial reporting and financial reporting matters.
/s/ William C. Erbey /s/ Mark S. Zeidman
------------------------------------ -------------------------
William C. Erbey Mark S. Zeidman
Chairman and Chief Executive Officer Senior Vice President and
Chief Financial Officer
66
PRICEWATERHOUSECOOPERS LLP [GRAPHIC LOGO OMITTED]
PricewaterhouseCoopers LLP
222 Lakeview Avenue
Suite 360
West Palm Beach, FL 33401-6136
Telephone (561) 832 0038
Facsimile (561) 805 8181
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Ocwen Financial Corporation
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of operations, of
comprehensive income (loss), of changes in stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of Ocwen
Financial Corporation and its subsidiaries (the "Company") at December 31, 2003
and 2002, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, on
January 1, 2002, the Company changed its method of accounting for goodwill and
intangible assets in accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets", and on July 1, 2003,
its classification of Capital Securities in accordance with SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity".
PRICEWATERHOUSECOOPERS LLP
West Palm Beach, Florida
March 8, 2004
67
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
December 31, December 31,
2003 2002
----------------- -----------------
Assets
Cash and amounts due from depository institutions.................................. $ 215,764 $ 76,598
Interest earning deposits.......................................................... 324 30,649
Federal funds sold and repurchase agreements....................................... -- 85,000
Trading securities, at fair value
U.S. government and sponsored enterprise securities and CMOs (AAA-rated)........ 6,679 21,556
Subordinates and residuals...................................................... 42,841 37,339
Real estate........................................................................ 103,943 120,715
Affordable housing properties...................................................... 7,410 15,319
Loans, net......................................................................... 28,098 76,857
Match funded assets................................................................ 130,087 167,744
Premises and equipment, net........................................................ 41,944 44,268
Advances on loans and loans serviced for others.................................... 374,769 266,356
Mortgage servicing rights.......................................................... 166,495 171,611
Receivables........................................................................ 88,399 78,944
Other assets....................................................................... 33,365 29,286
-------------- --------------
Total assets.................................................................... $ 1,240,118 $ 1,222,242
============== ==============
Liabilities and Stockholders' Equity
Liabilities
Deposits........................................................................ $ 446,388 $ 425,970
Escrow deposits................................................................. 116,444 84,986
Bonds - match funded agreements................................................. 115,394 147,071
Lines of credit and other secured borrowings.................................... 150,384 82,746
Notes and debentures............................................................ 56,249 76,975
Accrued interest payable........................................................ 4,789 7,435
Accrued expenses, payables and other liabilities................................ 31,926 28,314
-------------- --------------
Total liabilities............................................................. 921,574 853,497
-------------- --------------
Minority interest in subsidiaries.................................................. 1,286 1,778
Company obligated, mandatorily redeemable securities of subsidiary trust holding
solely junior subordinated debentures of the Company............................ -- 56,249
Commitments and Contingencies (Note 26)
Stockholders' Equity
Common stock, $.01 par value; 200,000,000 shares authorized; 67,467,220 and
67,339,773 shares issued and outstanding at December 31, 2003 and
December 31, 2002, respectively.............................................. 675 673
Additional paid-in capital...................................................... 225,559 224,454
Retained earnings............................................................... 90,409 85,637
Accumulated other comprehensive income (loss), net of taxes
Net unrealized foreign currency translation gain (loss)....................... 615 (46)
-------------- --------------
Total stockholders' equity.................................................. 317,258 310,718
-------------- --------------
Total liabilities and stockholders' equity................................ $ 1,240,118 $ 1,222,242
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
68
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
For the Years Ended December 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net interest income (expense)
Income .............................................................. $ 24,122 $ 37,235 $ 83,371
Expense.............................................................. 38,716 55,762 93,329
------------ ------------ ------------
Net interest income (expense) before provision for loan losses..... (14,594) (18,527) (9,958)
Provision for loan losses............................................ (2,684) 13,629 15,666
------------ ------------ ------------
Net interest income (expense) after provision for loan losses...... (11,910) (32,156) (25,624)
------------ ------------ ------------
Non-interest income
Servicing and other fees............................................. 158,548 141,991 134,597
Gain (loss) on interest earning assets, net.......................... 28 (3,485) (3,949)
Gain (loss) on trading and match funded securities, net.............. 3,344 7,012 16,330
Valuation gains (losses) on real estate.............................. (7,430) (35,002) (22,282)
Gain (loss) on sales of real estate.................................. 466 4,098 14,156
Operating income (loss) from real estate............................. 5,128 7,864 4,495
Amortization of excess of net assets acquired over purchase price.... -- -- 18,333
Gain (loss) on repurchase of debt.................................... (445) (1,461) 3,774
Equity in income (losses) of investments in unconsolidated entities.. 38 215 304
Other income......................................................... 17,820 12,780 8,530
------------ ------------ ------------
Non-interest income................................................ 177,497 134,012 174,288
------------ ------------ ------------
Non-interest expense
Compensation and employee benefits................................... 72,221 77,778 84,914
Occupancy and equipment.............................................. 13,159 11,843 11,577
Technology and communication costs................................... 21,121 25,270 26,768
Loan expenses........................................................ 14,252 12,605 15,811
(Gain) loss on investments in affordable housing properties.......... 285 21,915 17,535
Amortization/writeoff of excess of purchase price over
net assets acquired............................................... -- 2,231 3,112
Professional services and regulatory fees............................ 26,054 16,383 14,749
Other operating expenses............................................. 10,409 9,601 8,849
------------ ------------ ------------
Non-interest expense............................................... 157,501 177,626 183,315
------------ ------------ ------------
Distributions on Company-obligated, mandatorily redeemable securities
of subsidiary trust holding solely junior subordinated debentures of
the Company.......................................................... 3,058 6,287 7,131
------------ ------------ ------------
Income (loss) before minority interest, income taxes and effect of
change in accounting principle....................................... 5,028 (82,057) (41,782)
Minority interest in net income (loss) of consolidated subsidiaries..... (492) (99) --
Income tax expense...................................................... 748 2,983 83,000
------------ ------------ ------------
Net income (loss) before effect of change in accounting principle.... 4,772 (84,941) (124,782)
Effect of change in accounting principle, net of taxes.................. -- 16,166 --
------------ ------------ ------------
Net income (loss).................................................... $ 4,772 $ (68,775) $ (124,782)
============ ============= ============
Earnings (loss) per share
Basic
Net income (loss) before effect of change in accounting principle.... $ 0.07 $ (1.26) $ (1.86)
Effect of change in accounting principle, net of taxes............... -- 0.24 --
------------ ------------ ------------
Net income (loss).................................................... $ 0.07 $ (1.02) $ (1.86)
============ ============ ============
Diluted
Net income (loss) before effect of change in accounting principle.... $ 0.07 $ (1.26) $ (1.86)
Effect of change in accounting principles............................ -- 0.24 --
------------ ------------ ------------
Net income (loss).................................................... $ 0.07 $ (1.02) $ (1.86)
============ ============ ============
Weighted average common shares outstanding
Basic................................................................ 67,166,888 67,321,299 67,227,058
Diluted.............................................................. 68,063,873 67,321,299 67,227,058
The accompanying notes are an integral part of these
consolidated financial statements.
69
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
For the Years Ended December 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net income (loss)....................................................... $ 4,772 $ (68,775) $ (124,782)
------------ ------------ ------------
Other comprehensive income (loss), net of taxes
Net change in unrealized foreign currency translation loss (net of
tax benefit (expense) of $(459), $43 and $284 for 2003, 2002 and
2001, respectively)................................................ 661 75 (518)
------------ ------------ ------------
Other comprehensive income (loss)..................................... 661 75 (518)
------------ ------------ ------------
Comprehensive income (loss)............................................. $ 5,433 $ (68,700) $ (125,300)
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
70
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
(Dollars in thousands, except share data)
Accumulated
Other
Common Stock Additional Comprehensive
-------------------- Paid-in Retained Income (Loss),
Shares Amount Capital Earnings Net of Taxes Total
------------ ------ ---------- ---------- --------------- ----------
Balances at December 31, 2000................ 67,152,363 $ 672 $ 223,163 $ 279,194 $ 397 $ 503,426
Net loss..................................... -- -- -- (124,782) -- (124,782)
Exercise of common stock options............. 128,155 1 901 -- -- 902
Directors' compensation...................... 8,795 -- 78 -- -- 78
Other comprehensive income, net of taxes
Change in accounting principle for
derivative financial instruments....... -- -- -- -- 59 59
Reclassification of gain on derivative
financial instruments to earnings...... -- -- -- -- (59) (59)
Change in unrealized foreign currency
translation gain....................... -- -- -- -- (518) (518)
------------ ------ ---------- ---------- --------------- ----------
Balances at December 31, 2001................ 67,289,313 673 224,142 154,412 (121) 379,106
Net loss..................................... -- -- -- (68,775) -- (68,775)
Exercise of common stock options............. 32,937 -- 214 -- -- 214
Directors' compensation...................... 17,523 -- 98 -- -- 98
Other comprehensive income, net of taxes
Change in unrealized foreign currency
translation gain....................... -- -- -- -- 75 75
------------ ------ ---------- ---------- --------------- ----------
Balances at December 31, 2002................ 67,339,773 673 224,454 85,637 (46) 310,718
Net income................................... -- -- -- 4,772 -- 4,772
Issuance of restricted common stock awards
to employees.............................. 236,461 2 955 -- -- 957
Repurchase of common stock................... (500,000) (5) (2,257) -- -- (2,262)
Exercise of common stock options............. 359,419 4 2,325 -- -- 2,329
Directors' compensation...................... 31,567 1 82 -- -- 83
Other comprehensive income, net of taxes
Change in unrealized foreign currency
translation gain....................... -- -- -- -- 661 661
------------ ------ ---------- ---------- --------------- ----------
Balances at December 31, 2003................ 67,467,220 $ 675 $ 225,559 $ 90,409 $ 615 $ 317,258
============ ====== ========== ========== =============== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
71
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
For the Years Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities
Net income (loss)............................................................ $ 4,772 $ (68,775) $ (124,782)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities
Net cash provided by trading activities.................................... 20,807 186,511 192,069
Premium amortization (discount accretion) on securities, net............... 2,402 1,469 7,337
Depreciation and amortization.............................................. 107,088 70,040 24,461
Provision for loan losses.................................................. (2,684) 13,629 15,666
Gain (loss) on interest-earning assets, net................................ (28) 3,485 3,949
(Gain) loss on trading and match funded securities......................... (3,344) (7,012) (16,330)
Valuation (gains) losses on real estate.................................... 7,430 35,002 22,281
Provisions for losses on affordable housing properties..................... 432 21,294 15,587
(Gain) loss on sale of real estate......................................... (466) (4,098) (14,156)
(Gain) loss on sale of affordable housing properties....................... (1,050) (444) 956
(Gain) loss on repurchase of debt.......................................... 445 1,461 (3,774)
Effect of change in accounting principle before taxes...................... -- (15,000) --
(Increase) decrease in advances and match funded advances on loans
and loans serviced for others............................................ (92,532) (4,945) (165,123)
(Increase) decrease in other assets, net................................... (11,108) 24,261 109,559
Increase (decrease) in accrued expense, interest payable and other
liabilities.............................................................. 965 (5,319) (16,226)
----------- ----------- -----------
Net cash provided (used) by operating activities............................. 33,129 251,559 51,474
----------- ----------- -----------
Cash flows from investing activities
Principal payments received on match funded loans.......................... 13,736 16,490 30,552
Investment in affordable housing properties................................ -- (3,687) (30,496)
Proceeds from sale of affordable housing properties........................ 5,257 25,017 52,076
Purchase of mortgage servicing rights...................................... (88,442) (128,891) (79,522)
Proceeds from sale of loans................................................ 30,153 60,118 288,387
Principal payments received on loans....................................... 28,337 45,014 102,071
Originations and funded commitments of loans, net.......................... (6,201) (21,722) (25,326)
Capital improvements to real estate........................................ (8,837) (9,340) (20,733)
Proceeds from sale of real estate.......................................... 17,573 105,743 123,698
Additions to premises and equipment........................................ (10,353) (12,802) (12,292)
----------- ----------- -----------
Net cash provided (used) by investing activities............................. (18,777) 75,940 428,415
----------- ----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
72
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
For the Years Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Cash flows from financing activities
Decrease in deposits and escrow deposits................................... 51,876 (216,330) (525,476)
Proceeds from (repayment of) securities sold under agreement to repurchase. -- (79,405) 79,405
(Repayment of) proceeds from lines of credit, net.......................... 67,638 (5,793) 51,371
Proceeds from issuance of bonds - match funded agreements.................. -- -- 91,766
Repayments of bonds - match funded agreements.............................. (31,677) (10,275) (43,144)
Repurchase and repayment of notes and debentures........................... (77,420) (79,214) (13,233)
Exercise of common stock options........................................... 1,334 103 588
Repurchase of Capital Securities, net...................................... -- (3,796) (14,247)
Repayment of other interest-bearing obligations, net....................... -- (1,197) --
Repurchase of common stock................................................. (2,262) -- --
----------- ----------- -----------
Net cash provided (used) by financing activities............................. 9,489 (395,907) (372,970)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents......................... 23,841 (68,408) 106,919
Cash and cash equivalents at beginning of period............................. 192,247 260,655 153,736
----------- ----------- -----------
Cash and cash equivalents at end of period................................... $ 216,088 $ 192,247 $ 260,655
=========== =========== ===========
Reconciliation of cash and cash equivalents at end of period
Cash and amounts due from depository institutions.......................... 215,764 $ 76,598 $ 23,081
Interest-earning deposits.................................................. 324 30,649 111,574
Federal funds sold and repurchase agreements............................... -- 85,000 126,000
----------- ----------- -----------
$ 216,088 $ 192,247 $ 260,655
=========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest................................................................... $ 41,362 $ 61,163 $ 75,834
Income tax refunds (payments).............................................. (869) 2,444 (14,816)
Supplemental schedule of non-cash investing and financing activities
Real estate owned acquired through foreclosure............................. 161 9,492 64,041
Exchange of note receivable for real estate held for sale.................. -- 9,153 --
Accounts receivable from sale of affordable housing properties............. 2,767 44,591 11,427
The accompanying notes are an integral part of these
consolidated financial statements.
73
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Ocwen Financial Corporation ("OCN") is a financial services company
whose primary business activities consist of the servicing and resolution of
nonconforming, subperforming and nonperforming residential and commercial
mortgage loans. We also specialize in the related development of loan servicing
technology and software for the mortgage and real estate industries. Our
consolidated financial statements include the accounts of OCN and its
subsidiaries. We own directly and indirectly all of the outstanding common and
preferred stock of our primary subsidiaries, Ocwen Federal Bank FSB (the
"Bank"), Investors Mortgage Insurance Holding Company ("IMI"), Ocwen Technology
Xchange, Inc. ("OTX"), Ocwen Asset Investment Corp. ("OAC") and Ocwen Financial
Solutions Pvt. Ltd. In 2002, we formed Global Servicing Solutions, LLC ("GSS").
We own 70% of GSS with the remaining 30% owned by Merrill Lynch. We have
eliminated all significant intercompany transactions and balances in
consolidation.
The Bank is a federally chartered savings bank regulated by the Office
of Thrift Supervision ("OTS").
Reclassification
Certain amounts included in our 2002 and 2001 consolidated financial
statements have been reclassified to conform to the 2003 presentation.
Consolidated Statements of Cash Flows
For purposes of reporting cash flows, our cash and cash equivalents
include cash on hand, interest-bearing and non-interest-bearing deposits and all
investments in highly liquid debt instruments that we purchased with an original
maturity of three months or less. Cash flows associated with items we intended
as hedges of identifiable transactions or events are classified in the same
category as the cash flows from the items being hedged.
Short-Term Highly Liquid Investments
Our short-term highly liquid investments generally consist of federal
funds sold and assets we purchased under agreements to resell. We invest in
these assets to maximize the return on liquid funds. At December 31, 2003, we
had no short-term highly liquid investments. At December 31, 2002, such
investments amounted to $85,000 of federal funds sold which had an overnight
maturity. The average balance of our investment in federal funds sold and assets
purchased under agreements to resell amounted to $125,732 and $152,588 during
2003 and 2002, respectively.
The Federal Reserve System requires that the Bank maintain
non-interest-earning cash reserves against certain of its transaction accounts
and time deposit accounts. Such reserves totaled $9,383 and $6,811 at December
31, 2003 and 2002, respectively.
Securities
We report securities in our statement of financial condition at fair
value. We determine fair value within a range based on third party dealer
quotations, where available, and internal values, subject to an internal review
process.
We currently account for our securities as trading. For these
securities, we reported changes in fair value in income in the period of change.
Loans
We report loans at amortized cost, less an allowance for loan losses,
discounts, deferred loan fees and undisbursed loan funds. We defer loan
origination fees and certain direct loan origination costs and recognize them
over the lives of the related loans as a yield adjustment that we include in
interest income using the interest method applied on a loan-by-loan basis.
For loans acquired, we accounted for the initial investment in these
pools of loans based upon the pricing methodologies used to bid on the pool. We
allocated the acquisition cost to each loan within the pool when we determined
the bid price; we made these
74
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
allocations based upon an analysis of the expected future cash flows of each
individual loan. We accounted for the acquisition cost in the aggregate when we
determined the bid price using assumptions concerning the expected future cash
flows from groups of loans within the pool. For those single family residential
mortgage loans that are brought current by the borrower and certain multi-family
and commercial real estate loans that are current and that we believe will
remain current, we accrete the remaining unamortized discount into interest
income as a yield adjustment using the interest method over the contractual
maturity of the loan. For all other loans, we report interest as cash is
received. We report gains on the repayment and discharging of loans as interest
income.
The resolution alternatives applied to loans are:
o The borrower brings the loan current in accordance with
original or modified terms
o The borrower repays the loan or a negotiated amount
o The borrower agrees to a deed-in-lieu of foreclosure, in which
case we classify it as real estate owned and held for sale
o We foreclose on the loan and the property is either acquired
at the foreclosure sale by a third-party or by us, in which
case it is classified as real estate owned and held for sale.
We accrue interest income as it is earned. We place loans on
non-accrual status after being delinquent greater than 89 days or earlier if the
borrower is deemed by management to be unable to continue performance. When we
place a loan on non-accrual status, we reverse interest accrued but not
received. In addition, we suspend the amortization of deferred loan fees when we
place a loan on nonaccrual status. We return loans to accrual status only when
we reinstate the loan and have no doubt regarding ultimate collectibility.
In situations where we foreclose upon the collateral, we transfer the
loans to real estate owned upon receipt of title to the property.
Allowance for Loan Losses
We maintain the allowance for loan losses at a level that, based upon
our evaluation of known and inherent risks in the portfolio, we consider
adequate to provide for probable losses. We establish specific valuation
allowances for impaired loans in the amount by which the carrying value, before
allowance for probable losses, exceeds the fair value of collateral less costs
to dispose on an individual loan basis. In the case of single family residential
mortgage loans and consumer loans, we generally evaluate for impairment as
homogeneous pools of loans. We consider a loan to be impaired when, based upon
current information and events, we believe that we will probably be unable to
collect on a timely basis all amounts due according to the contractual terms of
the loan agreement. We measure these impaired loans at the fair value of the
collateral underlying the loans, less estimated disposal costs. We may leave
impaired loans on accrual status during the period we are pursuing repayment of
the loan. We place these loans on non-accrual status at such time that either:
(i) the loans become 90 days delinquent; or (ii) we determine that the borrower
is incapable of, or has ceased efforts toward, curing the cause of the
non-payment. We recognize impairment losses through an increase in the allowance
for loan losses and a corresponding charge to the provision for loan losses.
When we either sell, transfer to real estate owned ("REO") or charge-off an
impaired loan, we remove valuation allowance from the allowance for loan losses.
Charge-offs occur when we consider loans, or a portion thereof, uncollectible
and of such little value that we consider unwarranted their continuance as
bankable assets. We base our ongoing evaluation of the allowance for loan losses
upon an analysis of the portfolio, historical loss experience, economic
conditions and trends, collateral values and other relevant factors. We may make
subsequent adjustments to the allowance if these factors differ substantially
from the assumptions used in making the evaluation.
Mortgage Servicing Rights
We acquire mortgage servicing rights, which we record at the price
paid. We amortize mortgage servicing assets in proportion to and over the period
of estimated net servicing income. We determine estimated net servicing income
using the estimated future balance of the underlying mortgage loan portfolio,
which, absent new purchases, declines over time from prepayments and scheduled
loan amortization. We adjust amortization prospectively in response to changes
in estimated projections of future cash flows. We evaluate the mortgage
servicing assets for impairment based on the fair value of the servicing assets
by strata. We stratify the servicing assets based on loan type. We estimate fair
value by discounting underlying loan cash flows using discount and prepayment
rates that we believe market participants would use. To the extent the carrying
value of the servicing assets exceeds their fair value by strata, we establish a
valuation allowance, which we may adjust in the future, as the value of the
servicing assets increases or decreases.
75
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
Mortgage Servicing Fees and Advances on Loans Serviced for Others
We receive fees from investors for servicing mortgage loans. We collect
servicing fees, generally expressed as a percent of the unpaid principal
balance, from the borrowers' payments. We also include late charge income and
other ancillary fees, net of amortization of our servicing assets, in servicing
income. During any period in which the borrower is not making payments, we are
required under certain servicing agreements to advance our own funds to meet
contractual principal and interest remittance requirements for certain
investors, pay property taxes and insurance premiums and process foreclosures.
We generally recover such advances from borrowers for reinstated and performing
loans and from investors for foreclosed loans. We record a charge to servicing
income to the extent that we estimate that advances are uncollectible under
provisions of the servicing contracts, taking into consideration historical loss
and delinquency experience, length of delinquency and the amount of the advance.
Real Estate
We record real estate properties acquired for investment at cost less
accumulated depreciation. We review our investments for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. We charge expenditures for repairs and maintenance to operations as
incurred but capitalize significant improvements. We classify our leases as
operating. We defer fees and costs incurred in the successful negotiation of
leases and amortize them on a straight-line basis over the terms of the
respective leases. We report rental income on a straight-line basis over the
terms of the respective leases. We compute depreciation on a straight-line basis
over the estimated useful lives of the assets as follows:
Buildings and improvements 39 - 40 years
Tenant improvements Lesser of lease term or useful life
Land improvements 20 years
Furniture, fixtures and equipment 5 - 10 years
When we commit to a plan to sell real estate assets, we discontinue
depreciation and record the assets at the lower of the carrying amount or fair
value less costs to sell.
Our investments in real estate partnerships are accounted for under the
equity method of accounting. Under the equity method of accounting, we record an
investment in the shares or other interests of an investee at cost of the shares
or interests acquired and thereafter periodically increase (decrease) the
investment by our proportionate share of earnings (losses) of the investee and
decrease it by the dividends or distributions that we receive from the investee.
In addition, we acquired certain acquisition, development and
construction loans in which we participated in the residual profits of the
underlying real estate, and the borrower had not contributed substantial equity
to the project. As such, we accounted for these loans under the equity method of
accounting as though we had made an investment in a real estate limited
partnership.
We value properties acquired through foreclosure and held less than one
year at the lower of the adjusted cost basis of the loan or fair value less
estimated costs of disposal of the property after the date of foreclosure. We
periodically re-evaluate properties held to determine that we are carrying them
at the lower of cost or fair value less estimated costs to dispose. We recognize
sales proceeds and related costs with passage of title to the buyer and, in
cases where we finance the sale, receipt of sufficient down payment. We report
rental income related to properties as a part of operating income on real
estate, as earned. We report holding and maintenance costs related to properties
as period costs as incurred. We record no depreciation expense related to the
properties held less than one year. We recognize decreases in the fair value of
foreclosed real estate after foreclosure as a valuation allowance on a property
specific basis. We report subsequent increases in fair value of the foreclosed
real estate as reductions in the valuation allowance, but only to the extent the
valuation allowance reaches zero. We charge or credit to income such changes in
the valuation allowance. Properties acquired through foreclosure that are held
longer than one year are accounted for similar to real estate properties
acquired for investment.
Affordable Housing Properties
Affordable housing partnerships own multi-family residential properties
that have been allocated tax credits under the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). The obligations of the partnership to
sustain qualifying status of the properties covers a 15-year period; however,
tax credits generally accrue over a 10-year period on a straight-line basis. We
account for investments in affordable housing partnerships that we made on or
after May 18, 1995 and in which we invest solely as a limited partner
76
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
using the equity method. For our limited partnership investments made before
this date, we record our receipt of income tax credits and other tax benefits on
a level yield basis over the 15-year obligation period and report the tax
credits and tax benefits net of amortization of our investment in the limited
partnership as a reduction of income tax expense. We consolidate affordable
housing partnerships in which we have invested as a limited partner, and through
which a subsidiary acts as the general partner, and include them in our
consolidated financial statements. For all investments in affordable housing
partnerships made after May 18, 1995, we capitalize interest expense and certain
direct costs incurred during the pre-operating period.
We report affordable housing properties for which we have entered into
an agreement to sell at the lower of cost or fair value less costs to sell.
Excess of Cost over Net Assets Acquired
We report the excess of purchase price over net assets of acquired
businesses ("goodwill") at cost. Prior to our adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" on
January 1, 2002, we amortized goodwill on a straight-line basis over the
estimated future periods to be benefited, ranging from 3 to 7 years. Effective
January 1, 2002 we no longer amortize our goodwill, but we do review the
carrying value at least annually for impairment in accordance with the
provisions of SFAS No. 142.
SFAS No. 142 prescribes a methodology for performing the impairment
analyses for goodwill and other intangibles. This methodology uses an approach
based on fair value of the assets rather than on undiscounted cash flows, as was
the case prior to adoption. We perform this analysis using projections of future
income discounted at a market rate. The determination of market discount rates
is subjective and may vary by product based on the nature of the underlying
business, stage of development and sales to date.
See "Current Accounting Pronouncements," below, for a discussion of the
initial impact on our financial statements from the adoption of SFAS No. 142.
Premises and Equipment
We report premises and equipment at cost and, except for land,
depreciate them over their estimated useful lives on the straight-line method as
follows:
Buildings 39 years
Land improvements 39 years
Furniture and fixtures 5 years
Computer hardware and software 3 years
Leasehold improvements Life of the lease, with maximum
lease term of 10 years.
Capitalized Software Costs
We currently expense all costs attributable to enhancing our OTX
technology solutions. Prior to 2000, we capitalized certain costs, although we
expensed costs incurred up to the establishment of technological feasibility as
research and development costs. Once the products were made available for
general release to customers, we began amortization of the capitalized costs
using the straight-line method over the estimated economic lives of the
individual products. At each balance sheet date, we perform an impairment
analysis by product by comparing unamortized capitalized costs to the net
realizable value. An impairment charge is recorded to the extent the unamortized
capitalized costs exceed the net realizable value.
Securities Sold Under Agreements to Repurchase
We periodically enter into sales of securities under agreements to
repurchase the same securities. We report repurchase agreements as financings
and report the obligations to repurchase securities sold as a liability in our
consolidated statements of financial condition. We report all securities
underlying repurchase agreements as assets in our consolidated statements of
financial condition. Custodians hold these securities in safekeeping.
77
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
Excess of Net Assets Acquired over Purchase Price
The effects of our acquisition of OAC in 1999 resulted in a new basis
of accounting reflecting fair values of assets and liabilities at the date of
acquisition. We reported the excess of assets over the purchase price of
acquired net assets resulting from the acquisition at cost and amortized it on a
straight-line basis over the estimated future periods to be benefited. Effective
January 1, 2002, we reversed the unamortized balance of the excess of net assets
acquired over purchase price to income in accordance with the provisions of SFAS
No. 141.
Derivative Financial Instruments
We use derivative financial instruments for the purpose of managing our
exposure to adverse fluctuations in interest and foreign currency exchange
rates. While these instruments are subject to fluctuations in value, such
fluctuations are generally offset by the change in value of the underlying
exposures being hedged. We do not enter into any derivative financial
instruments for trading purposes.
We record all of our derivative instruments in the statement of
financial condition at fair value. We record changes in the fair value of
derivatives each period in current earnings or other comprehensive (loss)
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, depending on the type of hedge transaction and the
effectiveness of the hedge.
For cash-flow hedge transactions in which we hedge the variability of
cash flows related to a variable-rate asset, liability or a forecasted
transaction, we report the effective portions of the changes in the fair value
of the derivative instruments in other comprehensive (loss) income. The gains
and losses on the derivative instrument that are reported in other comprehensive
(loss) income are reclassified to earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item.
For hedge transactions of net investments in foreign operations, we
record the effective portions of the changes in fair value of the derivative
instruments as a cumulative translation adjustment and include as a component of
accumulated other comprehensive (loss) income in stockholders' equity.
We recognize the ineffective portions of all hedges in our current
period earnings.
We account for all other derivative instruments used for risk
management purposes that do not meet the hedge accounting criteria and,
therefore, do not qualify for hedge accounting at fair value with changes in
fair value recorded in our consolidated statement of operations.
On January 1, 2001, we adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS No. 137 and SFAS No. 138 (collectively, "SFAS No. 133") and recorded, net
of tax, a cumulative effect adjustment in accumulated other comprehensive income
to recognize at fair value the interest rate swap that was designated as a
cash-flow hedging of an outstanding line of credit. The swap matured in April
2001, and we have reclassified to earnings all of this transaction adjustment.
Adoption of SFAS 133 did not have a material impact on our use of
futures contracts to hedge the net investments in our foreign subsidiaries, as
the SFAS 133 accounting is similar to the pre-existing accounting. In addition,
adoption of SFAS 133 did not have an impact on our other risk management
instruments that do not meet the hedge criteria as these derivatives were
already accounted for at a fair value with changes in fair value recognized
currently in earnings.
Foreign Currency Translation
Where the functional currency is not the U.S. dollar, we translate
assets and liabilities of foreign entities into U.S. dollars at the current rate
of exchange existing at the statement of financial condition date and revenues
and expenses at average monthly rates. We include the resulting translation
adjustments as a component of accumulated other comprehensive income in
stockholders' equity. Where the functional currency of a foreign entity is the
U.S. dollar, translation adjustments are included in the results of operations.
78
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
Income Taxes
We file consolidated Federal income tax returns with our subsidiaries.
Consolidated income tax is allocated among the subsidiaries participating in the
consolidated return as if each subsidiary that has one or more subsidiaries
filed its own consolidated return and those with no subsidiaries filed separate
returns.
We account for income taxes using the asset and liability method, which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. Additionally, we adjust deferred
taxes for subsequent tax rate changes. We conduct periodic evaluations to
determine whether it is more likely than not that some or all of our deferred
tax asset will not be realized. Among the factors considered in this evaluation
are estimates of future earnings, the future reversal of temporary differences
and the impact of tax planning strategies that we can implement if warranted.
Investment in Unconsolidated Entities
We account for our investments in unconsolidated entities under the
equity method of accounting. Under the equity method of accounting, we initially
record an investment in the shares or other interests of an investee at the cost
of the shares or interests acquired. Thereafter, we periodically increase
(decrease) the investment by our proportionate share of the earnings (losses) of
the investee and decrease it by the dividends or distributions that we receive
from the investee.
Basic and Diluted Earnings Per Share
We calculate basic earnings per share based upon the weighted average
number of shares of common stock outstanding during the year. We calculate
diluted earnings per share based upon the weighted average number of shares of
common stock outstanding and all dilutive potential common shares outstanding
during the year. The computation of diluted earnings per share includes the
impact of the exercise of the outstanding options to purchase common stock and
assumes that the proceeds from such issuance are used to repurchase common
shares at fair value. If the Company incurs a net loss for the period, we
exclude common stock equivalents from the diluted calculation since the common
stock equivalents would be antidilutive.
Comprehensive Income
Comprehensive income represents the change in equity of a business
enterprise during a period from transactions and other events and circumstances
excluding those resulting from investments by and distributions to owners. We
present comprehensive income beginning with net income and adding the elements
of comprehensive income not included in the determination of net income to
arrive at comprehensive income. We present accumulated other comprehensive
income net of income taxes and include unrealized foreign currency translation
gains and losses.
Risks and Uncertainties
In the normal course of business, we encounter two significant types of
risk: economic and regulatory. There are three main components of economic risk:
credit risk, market risk and concentration of credit risk. Credit risk is the
risk of default on our loan portfolios and derivative financial instruments that
results from a borrower's inability or unwillingness to make contractually
required payments. Market risk includes interest rate risk, foreign currency
exchange rate risk and liquidity risk. We are exposed to interest rate risk to
the degree that our interest-bearing liabilities mature or reprice at different
speeds, or different bases, than our interest-earning assets. We are exposed to
foreign currency exchange rate risk in connection with our investment in
non-U.S. dollar functional currency operations and to the extent our foreign
exchange positions remain unhedged. Market risk also reflects the risk of
declines in the valuation of trading securities, and in the value of the
collateral underlying loans and the value of real estate held. Concentration of
credit risk refers to the risk that, if we extend a significant portion of the
total outstanding credit to borrowers in a specific geographical area or
industry or on the security of a specific form of collateral, we may experience
disproportionately high levels of default and losses if those borrowers, or the
value of such type of collateral, is adversely affected by economic or other
factors that are particularly applicable to such borrowers or collateral.
We are also exposed to liquidity risk. Our business requires
substantial cash to support the residential loan servicing business, including
acquisitions of mortgage servicing rights and the unfinanced portion of
servicing advances and to fund holding company
79
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
operations, including OTX operations. In general, we finance our operations
through operating cash flows and various other sources, including OFB deposits,
long-term debt and financing facilities, some of which have 90% advance rates.
As we continue to purchase mortgage servicing contracts and fund OTX and other
segment operations from operating cash flows, we must secure additional capital
to support our growth. Failure to secure additional financing sources or to
achieve profitable operations could result in a significant adverse effect on
our financial position and results of operations.
The Bank is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period. The
Bank also undergoes periodic examinations by the regulatory agencies, which may
subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.
The preparation of financial statements in conformity with generally
accepted accounting principles requires that we make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly significant in the near or medium term relate to our determination
of the allowance for loan losses and our valuation of securities, real estate,
affordable housing properties, servicing rights, intangibles and our deferred
tax asset.
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", which amends SFAS No.
123, "Accounting for Stock-Based Compensation", to provide alternative methods
of transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. Certain provisions
of the statement were effective December 31, 2002. Management currently intends
to continue to account for stock-based compensation under the intrinsic value
method set forth in Accounting Principles Board ("APB") Opinion 25 and related
interpretations. For this reason, the transition guidance of SFAS No. 148 does
not have an impact on Ocwen's consolidated financial position or consolidated
results of operations. The Statement does amend existing guidance with respect
to required disclosures, regardless of the method of accounting used.
Ocwen maintains stock-based compensation plans that provide for the
granting of stock and stock options to Ocwen's employees and directors. Ocwen
accounts for its stock option plans based on the intrinsic value method set
forth in APB Opinion No. 25 and related Interpretations, under which no
compensation cost has been recognized, except with respect to stock options that
are granted with an exercise price that is less than the fair value of the
Company's stock at the date of the grant, as disclosed in the accompanying
table. The following table presents Ocwen's net income, basic and diluted
earnings per share as reported and pro forma net income and pro forma earnings
per share. We have determined pro forma amounts by assuming that compensation
costs for Ocwen's stock options plans had been determined based on the fair
value at the grant dates for awards under those plans granted after December 31,
1994, consistent with the method described by SFAS No. 123.
80
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
For the Years Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Net income
Net income (loss) as reported............................................. $ 4,772 $ (68,775) $ (124,782)
Add stock-based compensation expense included in reported net income,
net of tax.......................................................... 797 599 675
Deduct total stock-based employee compensation expense determined
under fair value based method for all awards, net of tax............ (1,559) (1,344) (1,690)
----------- ----------- -----------
Pro forma net income (loss)............................................... $ 4,010 $ (69,520) $ (125,797)
=========== =========== ===========
Basic EPS
As reported............................................................... $ 0.07 $ (1.02) $ (1.86)
Pro forma................................................................. $ 0.06 $ (1.03) $ (1.87)
Diluted EPS
As reported............................................................... $ 0.07 $ (1.02) $ (1.86)
Pro forma................................................................. $ 0.06 $ (1.03) $ (1.87)
We estimate the fair value of our option grants using the Black-Scholes
option-pricing model with the following assumptions:
For the Years Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Expected dividend yield..................................................... 0.00% 0.00% 0.00%
Expected stock price volatility............................................. 48.00 62.00 52.00
Risk-free interest rate..................................................... 3.25% 2.73% 4.23%
Expected life of options.................................................... 5 years 5 years 5 years
Current Accounting Pronouncements
We adopted the provisions of Statement of Financial Accounting Standard
("SFAS") No. 142, "Goodwill and Other Intangible Assets," effective January 1,
2002. As a result, we reversed the unamortized balance of the excess of net
assets acquired over purchase price ("negative goodwill"). This reversal
resulted in a credit to income of $18,333. The impact from the adoption of other
elements of SFAS No. 142 resulted in our recording impairment charges of $3,333
on goodwill and intangible assets originally recorded in connection with the
formation of REALSynergy, Inc. in 1999. These amounts have been reported in the
first quarter of 2002 as the effect of a change in accounting principle, net of
an income tax benefit of $1,166.
81
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
The following tables present the pro forma effect on prior periods of
the adoption of SFAS No. 142:
For the Years Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Income (loss) before effect of change in accounting principle................. $ 4,772 $ (84,941) $ (124,782)
Adjustments related to adoption of SFAS No. 142
Deduct amortization of negative goodwill................................. -- -- (18,333)
Add back amortization of goodwill, net of tax............................ -- -- 2,023
----------- ----------- -----------
-- -- (16,310)
----------- ----------- -----------
Adjusted income (loss) before effect of change in accounting principle...... $ 4,772 $ (84,941) $ (141,092)
=========== =========== ===========
Net income (loss)............................................................. $ 4,772 $ (68,775) $ (124,782)
Adjustments related to adoption of SFAS No. 142
Deduct amortization of negative goodwill................................. -- -- (18,333)
Add back amortization of good will, net of tax........................... -- -- 2,023
----------- ----------- -----------
-- -- (16,310)
----------- ----------- -----------
$ 4,772 $ (68,775) $ (141,092)
=========== =========== ===========
Earnings (loss) per share
Income (loss) before effect of change in accounting principle............... $ 0.07 $ (1.26) $ (1.86)
Adjustments related to adoption of SFAS No. 142
Deduct amortization of negative goodwill................................. -- -- (0.27)
Add back amortization of goodwill, net of tax............................ -- -- 0.03
----------- ----------- -----------
Adjusted income (loss) before effect of change in accounting principle...... $ 0.07 $ (1.26) $ (2.10)
=========== =========== ===========
Net income (loss)............................................................. $ 0.07 $ (1.02) $ (1.86)
Adjustments related to adoption of SFAS No. 142
Deduct amortization of negative goodwill................................. -- -- (0.27)
Add back amortization of goodwill, net of tax............................ -- -- 0.03
----------- ----------- -----------
$ 0.07 $ (1.02) $ (2.10)
=========== =========== ===========
Weighted average common shares outstanding.................................... 67,166,888 67,321,299 67,227,058
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" (EITF 94-3). The principal difference between SFAS No. 146
and EITF 94-3 relates to SFAS No. 146's requirements for recognition of a
liability for a cost associated with an exit or disposal activity. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost as generally defined in EITF 94-3 was recognized at
the date of an entity's commitment to an exit plan. We adopted the new standard
effective January 1, 2003. The adoption of SFAS No. 146 did not have a material
impact on our results of operations, financial position or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The interpretation elaborates on
the disclosures to be made by a guarantor in its financial statements under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. We adopted the
disclosure requirements of the Interpretation as of December 31, 2002, the date
upon which they became effective. These provisions of the Interpretation require
disclosure of the nature of the guarantee, the maximum potential amount of
future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of the
Interpretation were effective January 1, 2003. The implementation of the
recognition requirements of the Interpretation did not have a significant effect
on our consolidated results of operations or financial condition.
82
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation
provides guidance with respect to the identification of variable interest
entities and when assets, liabilities, noncontrolling interests, and the results
of operations of a variable interest entity need to be included in a company's
consolidated financial statements. The Interpretation requires consolidation by
business enterprises of variable interest entities in certain cases. The factors
to be considered in making this determination include the adequacy of the equity
of the entity and the nature of the risks, rights and rewards of the equity
investors in the entity. The Interpretation applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. Due to
significant implementation concerns, the FASB modified the wording of FIN 46 and
issued FIN 46R in December of 2003. FIN 46R deferred the effective date for the
provisions of FIN 46 to entities other than Special Purpose Entities ("SPEs")
until financial statements are issued for periods ending after March 15, 2004.
SPEs are subject to the provisions of either FIN 46 or FIN 46R as of December
15, 2003. We are in the process of assessing the impact of FIN 46R. We are a
limited partner in three partnerships that developed low-income housing
properties and may be subject to the provisions of FIN 46. We do not consolidate
these partnerships but rather record our investment in them using the equity
method of accounting. As of December 31, 2003, our investment in such limited
partnerships amounted to $6,036. In addition, we had loans to these partnerships
with a net book value of $5,771 at December 31, 2003.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with the characteristics of both liabilities and
equity. The statement requires that certain securities, such as our Capital
Securities, which are classified between liabilities and equity in the statement
of financial condition, be classified as liabilities. Further, the distributions
on such securities are to be classified as interest cost. No restatement of
periods prior to the adoption of SFAS No. 150 is permitted. The impact from our
adoption of SFAS No. 150 effective for the quarter beginning July 1, 2003 was to
reclassify our Capital Securities as liabilities (included with notes and
debentures) and begin reporting distributions on our Capital Securities as
interest expense. Our adoption of SFAS No. 150 had no other effect on our
financial statements.
NOTE 2 FAIR VALUE OF FINANCIAL INSTRUMENTS
A majority of our assets, liabilities and off-balance sheet instruments
and commitments are considered financial instruments. For the majority of our
financial instruments, principally loans and deposits, fair values are not
readily available since there are no available trading markets as characterized
by current exchanges between willing parties. Accordingly, fair values can only
be derived or estimated using various valuation techniques, such as computing
the present value of estimated future cash flows using discount rates
commensurate with the risks involved. However, the determination of estimated
future cash flows is inherently subjective and imprecise. In addition, for those
financial instruments with option-related features, prepayment assumptions are
incorporated into the valuation techniques. Minor changes in assumptions or
estimation methodologies can have a material effect on these derived or
estimated fair values.
The fair values reflected below are indicative of the interest rate
environments as of December 31, 2003 and 2002, and do not take into
consideration the effects of interest rate fluctuations. In different interest
rate environments, fair value results can differ significantly, especially for
certain fixed-rate financial instruments and non-accrual assets. In addition,
the fair values presented do not attempt to estimate the value of our fee
generating businesses and anticipated future business activities. In other
words, they do not represent our value as a going concern. Furthermore, the
differences between the carrying amounts and the fair values presented may not
be realized.
Reasonable comparability of fair values among financial institutions is
difficult due to the wide range of permitted valuation techniques and numerous
estimates that must be made in the absence of secondary market prices. This lack
of objective pricing standards introduces a degree of subjectivity to these
derived or estimated fair values. Therefore, while disclosure of estimated fair
values of financial instruments is required, readers are cautioned in using this
data for purposes of evaluating our financial condition.
The methodologies used and key assumptions made to estimate fair value,
the estimated fair values determined and recorded carrying values follow:
83
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
Cash and Cash Equivalents
We have valued cash and cash equivalents at their carrying amounts as
these are reasonable estimates of fair value given the relatively short period
of time between origination of the instruments and their expected realization.
Securities
We adjust our securities portfolio to fair value within a range based
on third party dealer quotations, where available, and internal values, subject
to an internal review process. For those securities, which do not have an
available market quotation, we will request market values and underlying
assumptions from the various securities dealers that underwrote, are currently
financing the securities or have had prior experience with the type of security
to be valued. When we obtain quotations from two or more dealers, we generally
use the average dealer quote.
Loans and Match Funded Loans and Securities
We estimate the fair value of our performing loans based upon quoted
market prices for similar whole loan pools. We base the fair value of our
non-performing loans on estimated cash flows discounted using a rate
commensurate with the risk associated with the estimated cash flows. We estimate
the fair value of our match funded loans and our loans based upon current market
yields at which recent pools of similar mortgages have traded taking into
consideration the timing and amount of expected cash flows. We mark our match
funded securities to fair value in the same manner as securities.
Advances on Loans and Loans Serviced for Others
We value advances we make on our loans and loans we service for others
at their carrying amounts because they have no stated maturity, do not bear
interest and we believe that there is no substantial risk of uncollectibility.
Receivables
The carrying value of receivables approximates fair value because of
the relatively short period of time between their origination and realization.
Certain long-term receivables are carried at a discounted value that we believe
approximates fair value.
Deposits
The fair value of our demand deposits, savings accounts and money
market deposits is the amount payable on demand at the reporting date. We
estimate the fair value of fixed-maturity certificates of deposit by discounting
the required cash payments at the market rates offered for deposits with similar
maturities on the respective financial statement dates.
Borrowings
We base the fair value of our bonds-match funded loan agreements, notes
and debentures and Capital Securities on quoted market prices. The fair value of
our other borrowings, including securities sold under agreements to repurchase
and obligations outstanding under lines of credit, approximates carrying value
because these borrowings are either short-term or bear interest at a rate that
is adjusted regularly based on a market index.
Derivative Financial Instruments
We base the fair values of our derivative financial instruments on
quoted market prices.
84
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
Loan Commitments, Letters of Credit and Guarantees
The fair values of loan commitments, letters of credit and guarantees
are estimated considering the difference between interest rates on the
respective financial statement dates and the committed rates.
The carrying amounts and the estimated fair values of our financial
instruments are as follows:
December 31, 2003 December 31, 2002
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial assets:
Interest earning and non-interest earning cash........... $ 216,088 $ 216,088 $ 107,247 $ 107,247
Federal funds sold and repurchase agreements............. -- -- 85,000 85,000
Trading securities....................................... 49,520 49,520 58,895 58,895
Loans, net............................................... 28,098 29,407 76,857 89,957
Match funded assets...................................... 130,087 128,860 167,744 167,800
Advances on loans and loans serviced for others.......... 374,769 374,769 266,356 266,356
Receivables.............................................. 88,399 88,399 78,944 78,944
Financial liabilities:
Deposits................................................. 446,388 452,015 425,970 439,360
Escrow deposits on loans and loans serviced for others... 116,444 116,444 84,986 84,986
Bonds - match funded agreements.......................... 115,394 115,401 147,071 147,091
Lines of credit and other secured borrowings............. 150,384 150,384 82,746 82,746
Notes and debentures..................................... 56,249 55,581 76,975 78,514
Capital Securities....................................... -- -- 56,249 44,998
Derivative financial instruments:
Caps and floors.......................................... -- -- 592 592
British Pound futures.................................... (737) (737) (793) (793)
Canadian Dollar futures.................................. (34) (34) 78 78
Other:
Loan commitments......................................... -- 451 -- 346
Letters of credit........................................ -- 190 -- 210
Guarantees............................................... -- -- -- 467
NOTE 3 TRADING SECURITIES
The fair value of our trading securities are as follows at December 31:
2003 2002
----------- -----------
U.S. government and sponsored enterprise securities and collateralized
mortgage obligations ("CMOs") (AAA-rated)
U.S. government and sponsored enterprise securities....................................... $ 6,679 $ 1,016
Collateralized mortgage obligations....................................................... -- 20,540
----------- -----------
$ 6,679 $ 21,556
=========== ===========
Subordinates and residual securities
Single family residential
BB-rated subordinates.................................................................. $ 579 $ 599
B-rated subordinates................................................................... 580 606
Unrated subordinates................................................................... 222 344
Unrated subprime residuals ............................................................ 38,883 33,213
----------- -----------
40,264 34,762
Nonresidential unrated subordinates....................................................... 2,577 2,577
----------- -----------
$ 42,841 $ 37,339
=========== ===========
85
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
At December 31, 2003, we had pledged securities from our portfolio of
U.S. government and sponsored enterprise securities with a fair value of $6,130
as security for certificates of deposit in excess of $100 issued to
municipalities in the State of New Jersey.
A profile of the maturities of our trading securities at December 31,
2003 follows. Mortgage-backed securities are included based on their
weighted-average maturities, reflecting anticipated future prepayments.
U.S. Government and Sponsored
Enterprise Securities Subordinates and Residuals
--------------------------------- ---------------------------------
Weighted Average Weighted Average
Yield Fair Value Yield Fair Value
---------------- ------------ ---------------- ------------
Due within one year..................... 2.22% $ 6,679 22.00% $ 10,433
Due after 1 through 5 years............. -- -- 17.92 22,752
Due after 5 through 10 years............ -- -- 23.53 6,517
Due after 10 years...................... -- -- 26.55 3,139
------------ ------------
$ 6,679 $ 42,841
============ ============
Realized and unrealized gains on trading and match funded securities
for the years ended December 31, 2003, and 2002 was comprised of the following:
2003 2002 2001
----------- ----------- -----------
Unrealized gains (losses):
Trading securities.......................................................... $ 3,226 $ 1,727 $ 3,125
Match funded securities..................................................... (248) 293 2,088
------------ ----------- -----------
2,978 2,020 5,213
----------- ----------- -----------
Realized gains:
Trading securities.......................................................... 366 4,992 11,117
----------- ----------- -----------
$ 3,344 $ 7,012 $ 16,330
=========== =========== ===========
Our residual and subordinate securities classified as trading
securities at December 31, 2003 and 2002 include retained interests with a fair
value of $1,346 and $1,465, respectively, from securitizations of our loans
completed in prior years. We have not securitized any loans since 1999.
86
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
NOTE 4 LOANS
Our loans consisted of the following property types by business segment
at December 31:
2003 2002
------------- -------------
Residential Discount Loans: (1)
Unpaid principal balance
Single family residential loans................................. $ -- $ 1,965
Unaccreted discount and deferred fees............................. -- (565)
Allowance for loan losses......................................... -- (154)
------------- -------------
-- 1,246
------------- -------------
Affordable Housing:
Unpaid principal balance
Multi-family residential loans.................................. 11,124 11,003
Undisbursed loan funds............................................ -- (346)
Allowance for loan losses......................................... (4,579) (4,428)
------------- -------------
6,545 6,229
------------- -------------
Commercial Finance:
Unpaid principal balance
Office buildings................................................ -- 41,215
Hotels.......................................................... 10,600 11,668
Retail properties............................................... -- 27,500
Multifamily residential loans................................... 14,964 15,215
Other properties................................................ -- 1,188
------------ ------------
25,564 96,786
Unaccreted discount and deferred fees............................. (1,015) (11,409)
Allowance for loan losses......................................... (3,786) (16,179)
------------- -------------
20,763 69,198
------------- -------------
Subprime Finance:
Unpaid principal balance
Single family residential loans................................. -- 199
Unaccreted discount............................................... -- (15)
------------- --------------
-- 184
------------- -------------
Corporate Items and Other:
Unpaid principal balance
Single family residential loans................................. 1,307 --
Unaccreted discount and deferred fees............................. (412) --
Allowance for loan losses......................................... (105) --
------------- -------------
790 --
------------- -------------
Loans, net........................................................... $ 28,098 $ 76,857
============= =============
(1) Loans and all other assets of the Residential Discount Loans segment
were transferred to the Corporate Items and Other segment, effective
January 1, 2003. These loans were acquired by us at a discount and are
secured by mortgages on single family residential properties.
87
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
Our loans are secured by mortgages on properties located throughout the
United States. The following table sets forth the five states in which the
largest amount of properties securing our loans were located at December 31,
2003:
Affordable Corporate Items
Housing Commercial Finance and Other
-------------- ------------------------------------------------ -----------------
Multi-family Multi-family Nonresidential Single Family
Residential Residential Real Estate Subtotal Residential Grand Total
-------------- -------------- -------------- -------------- ----------------- --------------
New Jersey.............. $ 5,771 $ -- $ -- $ -- $ -- $ 5,771
Michigan................ -- -- 5,400 5,400 -- 5,400
Texas................... -- 4,771 -- 4,771 -- 4,771
Pennsylvania............ -- 3,567 -- 3,567 182 3,749
Ohio.................... -- 3,567 -- 3,567 -- 3,567
Other (1)............... 774 -- 3,458 3,458 608 4,840
------------ ------------ ------------ ------------ ------------ ------------
$ 6,545 $ 11,905 $ 8,858 $ 20,763 $ 790 $ 28,098
============ ============ ============ ============ ============ ============
(1) Consists of properties located in 9 other states, none of which
aggregated over $3,458 in any one state.
The following table presents a summary of our non-performing loans,
allowance for loan losses and significant ratios for our loans, excluding match
funded loans, at and for the years ended December 31:
2003 2002
-------------- --------------
Non-performing loans......................................................... $ 21,898 $ 75,549
Allowance for loan losses:
Balance, beginning of year................................................ $ 20,761 $ 10,414
Provision for loan losses................................................. (2,633) 13,655
Net charge-offs........................................................... (9,658) (3,308)
--------------- --------------
Balance, end of year...................................................... $ 8,470 $ 20,761
============== ==============
Significant ratios:
Non-performing loans as a percentage of
Total loans............................................................... 59.9% 77.4%
Total assets.............................................................. 1.8 6.2
Allowance for loan losses as a percentage of
Total loans............................................................... 23.2% 21.3%
Non-performing loans...................................................... 38.7 27.5
If non-accrual loans had been current in accordance with their original
terms, interest income for the years ended December 31, 2003, 2002 and 2001,
would have been greater by approximately $1,614, $4,235 and $10,841,
respectively.
88
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
The following table sets forth the geographic distribution of
properties securing our non-performing loans, net of allowance, at December 31,
2003:
Affordable Corporate Items
Housing Commercial Finance and Other
-------------- ------------------------------------------------ -----------------
Multi-family Multi family Nonresidential Single Family
Residential Residential Real Estate Subtotal Residential Grand Total
-------------- -------------- -------------- -------------- ----------------- --------------
New Jersey.............. $ 5,259 $ -- $ -- $ -- $ -- $ 5,259
Texas................... -- 4,771 -- 4,771 -- 4,771
Virginia................ -- -- 3,458 3,458 -- 3,458
Florida................. 774 -- -- -- -- 774
Massachusetts........... -- -- -- -- 207 207
Other (1)............... -- -- -- -- 583 583
------------ ------------ ------------ ------------ ------------ ------------
Total............... $ 6,033 $ 4,771 $ 3,458 $ 8,229 $ 790 $ 15,052
============ ============ ============ ============ ============ ============
(1) Consists of properties located in 7 states, none of which aggregated
over $182 in any one state.
The following table presents information regarding our impaired loans
at and for the years ended December 31:
2003 2002
-------------- --------------
Book value............................................................... $ 14,486 $ 43,035
Allowance for loan losses................................................ (5,257) (12,985)
-------------- --------------
Carrying value........................................................... $ 9,229 $ 30,050
============== ==============
Average carrying value of impaired loans during the year................. $ 32,895 $ 58,064
Impaired loans at both December 31, 2003 and 2002 consisted of two
loans, one nonresidential loan and one multi-family loan. We have maintained an
allowance for losses on each of these loans.
NOTE 5 MATCH FUNDED ASSETS
Our match funded assets are comprised of the following at December 31:
2003 2002
-------------- --------------
Single family residential loans (1)...................................... $ 24,393 $ 38,129
Allowance for loan losses................................................ (94) (144)
-------------- --------------
Match funded loans, net............................................... 24,299 37,985
-------------- --------------
Match funded securities at fair value.................................... -- 8,057
-------------- --------------
Match funded advances on loans serviced for others
Principal and interest................................................ 54,516 66,524
Taxes and insurance................................................... 30,176 30,301
Other................................................................. 21,096 24,877
-------------- --------------
105,788 121,702
-------------- --------------
$ 130,087 $ 167,744
============== ==============
(1) Included $2,321 and $3,120 of non-performing loans at December 31, 2003
and 2002, respectively.
Match funded loans were acquired as a result of our acquisition of OAC
in 1999. These loans were securitized and transferred by OAC to OAC Mortgage
Residential Securities, Inc., a real estate mortgage investment conduit (the
"Trust") on November 13, 1998. On that date, the Trust issued two classes of
notes secured by the related group of mortgage loans. At December 31, 2003, Loan
Group I consisted of approximately 181 mortgage loans with original terms of up
to 30 years that are secured by first liens on single family
89
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
residential properties. At that same date, Loan Group II consisted of
approximately 122 mortgage loans with original terms of up to 30 years that are
secured by first or second liens on single family residential properties. Upon
the transfer, OAC received approximately $173,900 of proceeds.
Each class of the notes is subject to redemption at our option at such
time when the remaining aggregate principal balance of the loans has declined to
less than 20% of the initial aggregate principal balance of the loans at the
transfer date. The transfer of the loans to the trust did not qualify for sales
treatment for accounting purposes, since OAC retained effective control of the
loans transferred. Accordingly, the proceeds received from the transfer are
reported as a secured borrowing with pledge of collateral (bonds-match funded
agreements) in our consolidated statement of financial condition. See Note 13.
Our match funded loans are secured by mortgages on properties located
throughout the United States. The following table sets forth the five states in
which the largest amount of properties securing our loans were located at
December 31, 2003:
Michigan.................................................... $ 3,678
Texas....................................................... 2,564
California.................................................. 1,420
Connecticut................................................. 1,417
Illinois.................................................... 1,375
Other (1)................................................... 13,939
---------------
$ 24,393
===============
(1) Consists of properties located in 34 other states, none of which
aggregated over $1,249 in any one state.
Match funded securities resulted from our transfer of four unrated
residual securities to a trust on December 16, 1999 in exchange for non-recourse
notes. The transfer did not qualify as a sale for accounting purposes since we
retained effective control over the securities transferred. Accordingly, we
reported the amount of proceeds we received from the transfer as a secured
borrowing with pledge of collateral (bonds-match funded agreements). In June
2003, the Ocwen NIM Trust 1999 - OAC1 adopted a plan of complete liquidation
that caused the early redemption of the related bonds-match funded agreements.
The match funded securities, which had a fair value of $5,926 at the time of
transfer, were transferred to trading securities.
Match funded advances on loans serviced for others resulted from the
transfer of certain advances on loans serviced for others to a third party.
According to the terms of transfer agreement, we retain the option, at any time,
to purchase from the transferee up to 5% of the aggregate advances outstanding
and the right to select the specific advances to be repurchased. Accordingly, we
retain control of the advances and therefore the transfer did not qualify as a
sale for accounting purposes. As a result, the proceeds we received from the
transfer are reported as a secured borrowing with pledge of collateral
(bonds-match funded agreements) in our consolidated statement of financial
condition. See Note 13.
90
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
NOTE 6 REAL ESTATE
Our real estate assets consisted of the following at December 31:
2003 2002
------------- -------------
Properties acquired for investment (1)
Office buildings.................................................................... $ 21,448 $ 27,602
Retail shopping center.............................................................. 11,402 9,090
Building improvements............................................................... 15,884 17,387
Tenant improvements and lease commissions........................................... 6,558 2,795
Furniture and fixtures.............................................................. 36 30
------------- -------------
55,328 56,904
Accumulated depreciation............................................................ (7,118) (5,316)
-------------- -------------
48,210 51,588
------------- -------------
Nonresidential loan accounted for as investment in real estate (2)..................... -- 2,188
------------- -------------
Investment in real estate partnerships (3)............................................. 5,220 4,900
Real estate owned, net................................................................. 50,513 62,039
------------- -------------
$ 103,943 $ 120,715
============= =============
(1) We acquired these properties as a result of our acquisition of OAC in
1999. The properties at December 31, 2003 and 2002 are comprised of one
office building located in Jacksonville, Florida and one retail
shopping center located in Halifax, Nova Scotia. During 2002, we sold
our shopping center located in Bradenton, Florida. We recorded
impairment charges on these properties of $7,526, $14,549 and $1,471
during 2003, 2002, and 2001, respectively.
(2) We acquired certain acquisition, development and construction loans in
January 2000 in which we participate in the expected residual profits
of the underlying real estate, and where the borrower had not
contributed substantial equity to the project. As such we accounted for
these loans under the equity method of accounting as though we had an
investment in a real estate limited partnership. Our investment at
December 31, 2002 consisted of one loan, which was repaid during 2003.
(3) Consists of interests in two limited partnerships operating as
real estate ventures, consisting of multi-family type properties.
Real estate owned, net of valuation allowance, was acquired through
foreclosure and is comprised of the following property types by segment at
December 31:
2003 2002
---------- ----------
Single family residential:
Residential Discount Loans............................................................. $ -- $ 1,837
Subprime Finance....................................................................... 89 50
Corporate Items and Other.............................................................. 793 --
---------- ----------
882 1,887
Nonresidential real estate:
Commercial Finance (1)................................................................. 49,631 60,152
---------- ----------
$ 50,513 $ 62,039
========== ==========
(1) Consisted of one large retail shopping mall and one hotel at December
31, 2003.
91
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
The following table sets forth by type of property certain geographical
information related to our real estate owned, net, at December 31, 2003:
Commercial Finance Subprime Finance Corporate Items and Other
---------------------- ------------------------- -------------------------
Nonresidential Single Family Residential Single Family Residential Total
---------------------- ------------------------- ------------------------- ----------------------
No. of No. of No. of No. of
Amount Properties Amount Properties Amount Properties Amount Properties
--------- ---------- --------- ---------- -------- ---------- --------- ----------
Florida............... $ 43,460 1 $ -- -- $ -- -- $ 43,460 1
Michigan.............. 6,171 1 -- -- -- -- 6,171 1
New York.............. -- -- -- -- 354 2 354 2
North Carolina........ -- -- -- -- 132 1 132 1
Illinois.............. -- -- 89 1 -- -- 89 1
Other (1)............. -- -- -- -- 307 14 307 14
--------- ---------- --------- ---------- -------- ---------- --------- ----------
$ 49,631 2 $ 89 1 $ 793 17 $ 50,513 20
========= ========== ========= ========== ======== ========== ========= ==========
(1) Consists of properties located in 10 other states, none of which
aggregated over $65 in any one state.
The following schedule presents the activity, in aggregate, in the
valuation allowance on our real estate owned for the years ended December 31:
2003 2002 2001
------------ ------------ ------------
Balance at beginning of year............................................. $ 4,591 $ 19,098 $ 18,142
Provision for losses..................................................... (96) 19,685 17,766
Charge-offs.............................................................. (2,459) (5,304) (2,352)
Sales.................................................................... (757) (7,835) (14,458)
Basis adjustment (1)..................................................... -- (21,053) --
------------ ------------ ------------
Balance at end of year................................................... $ 1,279 $ 4,591 $ 19,098
============ ============ ============
(1) Our shopping mall property, which we have held for more than one year,
is being repositioned for future sale. This valuation allowance had
been established to carry this asset at the lower of cost or fair value
less estimated costs to dispose. Under SFAS No. 144, "Accounting for
the Impairment or Disposal of Long - Lived Assets", which became
effective in 2002, we now account for this property similar to real
estate properties acquired for investment, and we applied the valuation
allowance as a reduction of cost.
NOTE 7 MORTGAGE SERVICING
Under contractual servicing agreements with investors, we service
mortgage and non-mortgage loans that we do not own. The total unpaid principal
balance of such loans we serviced for others was $38,513,515 and $32,069,363 at
December 31, 2003 and 2002, respectively, and is excluded from our consolidated
statements of financial condition. We similarly exclude from our statements of
financial condition funds representing collections of principal and interest we
have received from borrowers that are on deposit with an unaffiliated bank.
Those funds amounted to $1,429,986 and $581,507 at December 31, 2003 and 2002,
respectively. Servicing fees and other servicing-related income we earned on
loans we serviced for others, net of servicing rights amortization, amounted to
$114,474, $112,718 and $112,483 for the years ended December 31, 2003, 2002 and
2001, respectively. These net fees are included in servicing and other fees in
our consolidated statements of operations. In general, these servicing
agreements include guidelines and procedures for servicing the loans, including
servicing, remittance and reporting requirements, among other provisions.
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OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
We earn servicing and sub-servicing income primarily on mortgage loans
secured by real estate in 50 states. At December 31, 2003, the geographic
distribution based on the unpaid principal balance of the loans we serviced was
as follows:
Amount (1) No. of Loans (1)
------------ ----------------
California.................................. $ 11,168,126 64,156
Florida..................................... 2,907,650 29,966
New York.................................... 2,014,999 15,953
Texas....................................... 1,935,412 26,974
Illinois.................................... 1,826,172 16,576
Other (2)................................... 18,661,156 206,509
------------ ------------
$ 38,513,515 360,134
============ ============
(1) Included 1,288 non-mortgage loans with an unpaid principal balance of
$202,838.
(2) Consisted of loans in 45 other states, none of which aggregated over
$1,209,435 in any one state.
The risk inherent in such concentrations is dependent upon regional and
general economic conditions that affect property values.
The following table summarizes the activity in our servicing rights for
the years ended December 31:
2003 2002 2001
------------ ------------ ------------
Balance at the beginning of year............... $ 171,611 $ 101,107 $ 51,426
Purchases...................................... 88,829 128,891 79,522
Amortization................................... (93,558) (58,153) (29,841)
Impairment..................................... (387) -- --
Sales.......................................... -- (234) --
------------ ------------ ------------
Balance at the end of the year................. $ 166,495 $ 171,611 $ 101,107
============ ============ ============
At December 31, 2003 and 2002, we estimated the fair value of our
servicing rights to be $227,825 and $219,600, respectively, by discounting
future underlying loan cash flows. We use independent third-party industry
accepted tools (QRM and LPS Risk model) for modeling and forecasting those cash
flows. Cost and rate assumptions used in the modeling and forecasting are
benchmarked with industry and market information. For purposes of the December
31, 2003 valuation, we used a discount rate of 18% and a constant prepayment
rate (CPR) of 32% to 47% depending on loan type.
Advances related to our loans serviced for others consisted of the
following at December 31:
2003 2002
--------------- ---------------
Principal and interest................ $ 118,024 $ 63,326
Taxes and insurance................... 145,507 117,937
Other................................. 110,802 84,455
--------------- ---------------
$ 374,333 $ 265,718
=============== ===============
Advances related to our loans serviced for others do not include
advances on our loan portfolios of $436 and $638 at December 31, 2003 and 2002,
respectively. These advances also do not include advances reported as part of
match funded assets. See Note 5.
NOTE 8 AFFORDABLE HOUSING PROPERTIES
Our investments in affordable housing properties were as follows at
December 31:
2003 2002
----------- -----------
Investments solely as a limited partner made before May 18, 1995 (1)............ $ -- $ --
Investments solely as a limited partner made on or after May 18, 1995........... 6,036 11,962
Investments both as a limited and, through subsidiaries, as a general partner... 1,374 3,357
----------- -----------
$ 7,410 $ 15,319
=========== ===========
(1) Consists of one fully reserved investment with a gross recorded value
of $1,618.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
The qualified affordable housing projects underlying our investments in
affordable housing properties are geographically located throughout the United
States. At December 31, 2003, our largest single investment was $5,006, which
related to a project located in N. Wildwood, New Jersey.
We record income on our limited partnership investments made before May
18, 1995 under the level yield method as a reduction of income tax expense. This
income amounted to $549, $521 and $388 for the years ended December 31, 2003,
2002 and 2001, respectively. For limited partnership investments made after May
18, 1995, and for investments as a limited and, through subsidiaries, as a
general partner, we recognized tax credits of $1,845, $2,164 and $1,690 for the
years ended December 31, 2003, 2002 and 2001, respectively. For these
investments, we also recorded a loss after depreciation of $903, $1,066 and $993
from operations on the underlying real estate for the years ended December 31,
2003, 2002 and 2001, respectively, which are included in gains (losses) on
investments in affordable housing properties.
Included in gains (losses) on investments in affordable housing
properties, for the years ended December 31, 2003, 2002 and 2001, are gains
(losses) of $1,050, $445 and $(955), respectively, on the sales of affordable
housing properties. The properties sold in 2003, 2002 and 2001 had carrying
values, net of reserves, of $5,888, $73,087 and $55,652, respectively.
During 2003, 2002 and 2001, we recorded charges of $432, $17,350, and
$15,587, respectively, to reserve for estimated losses from the sales of
properties. We incurred an additional charge during 2002 of $3,944 to record a
discount on a long-term note receivable taken in consideration for the sale of
seven properties. We are accreting this discount to income over the term of the
related receivable balance, which extends through September 2014.
NOTE 9 PREMISES AND EQUIPMENT
Our premises and equipment are summarized as follows at December 31:
2003 2002
-------------- --------------
Computer hardware and software.............................................. $ 61,748 $ 64,730
Building.................................................................... 19,601 19,530
Leasehold improvements...................................................... 8,985 10,011
Land and land improvements.................................................. 4,041 4,041
Furniture and fixtures...................................................... 8,395 9,072
Office equipment and other.................................................. 3,573 2,564
Less accumulated depreciation and amortization.............................. (64,399) (65,680)
-------------- --------------
$ 41,944 $ 44,268
============== ==============
Depreciation expense amounted to $12,406, $13,004 and $11,398 for 2003,
2002 and 2001, respectively (of which $2,455, $2,562 and $2,344 for 2003, 2002
and 2001, respectively, related to computer software). Building represents our
customer service and collection facility in Orlando, Florida.
94
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
NOTE 10 RECEIVABLES
Receivables consisted of the following at the dates indicated:
December 31,
-----------------------
2003 2002
---------- ----------
Residential Loan Servicing (1) ................................ $ 18,564 $ 10,982
OTX ........................................................... 962 532
Ocwen Realty Advisors ......................................... 1,442 1,193
Unsecured Collections ......................................... 260 296
Business Process Outsourcing .................................. 969 --
International Operations ...................................... 1,314 680
Residential Discount Loans .................................... -- 1,286
Commercial Finance ............................................ 2,858 2,530
Affordable Housing (2) ........................................ 25,581 40,327
Corporate Items and Other (3) ................................. 36,449 21,118
---------- ----------
$ 88,399 $ 78,944
========== ==========
(1) Consist principally of fees earned and reimbursable expenses due from
investors.
(2) Primarily represents future payments of proceeds from the sale of
affordable housing properties, net of unaccreted discount of $2,901 and
$3,400 at December 31, 2003 and 2002, respectively. Balances are net of
reserves for doubtful accounts.
(3) Primarily comprised of federal tax refund claims, which are pending
completion of Internal Revenue Service examination that is required by
the Joint Committee before the claims can be paid. The claims which
amounted to $21,465, $20,841 and $20,842 at December 31, 2003, 2002 and
2001, respectively. The balance as of December 31, 2003, included
amounts related to our overnight collection account activities.
NOTE 11 DEPOSITS
Our deposits consisted of the following at December 31:
2003 2002
------------ ------------
Non-interest-bearing deposits................................................ $ 4,879 $ 4,378
NOW and money market checking accounts....................................... 18,313 17,720
Savings accounts............................................................. 1,657 1,592
------------ ------------
24,849 23,690
------------ ------------
Certificates of deposit (1)(2)............................................... 421,657 402,917
Unamortized deferred fees.................................................... (118) (637)
------------- ------------
421,539 402,280
------------ ------------
$ 446,388 $ 425,970
============ ============
(1) At December 31, 2003 and 2002, certificates of deposit, net of
unamortized deferred fees, included $84,328 and $198,248, respectively,
of brokered deposits originated through national, regional and local
investment banking firms which solicit deposits from their customers,
all of which are non-cancelable. We have not issued any new brokered
certificates of deposit since 2000 and, at this time, do not intend to
issue any such deposits in the foreseeable future.
(2) At December 31, 2003 and 2002, certificates of deposit with outstanding
balances of $100 or more amounted to $142,408 and $125,451,
respectively. Of such deposits at December 31, 2003, $41,276 were from
political subdivisions in New Jersey and are secured or collateralized
as required under state law.
95
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
The contractual remaining maturity of our certificates of deposit at
December 31, 2003 is as follows:
Within one year............................................. $ 272,572
Within two years............................................ 112,514
Within three years.......................................... 27,057
Within four years........................................... 7,233
Within five years........................................... 2,163
------------
$ 421,539
============
We amortize deferred fees on certificates of deposit on a straight-line
basis over the term of the respective certificates of deposit. Such amortization
amounted to $519, $912 and $2,441 for the years ended December 31, 2003, 2002
and 2001, respectively, and is included in interest expense on deposits.
Interest expense we incurred by type of deposit account was as follows for the
years ended December 31:
2003 2002 2001
----------- ----------- -----------
NOW accounts and money market checking................................ $ 193 $ 239 $ 393
Savings............................................................... 14 18 29
Certificates of deposit............................................... 17,339 27,198 59,545
----------- ----------- -----------
$ 17,546 $ 27,455 $ 59,967
=========== =========== ===========
Accrued interest payable on our deposits amounted to $1,693 and $3,093
at December 31, 2003 and 2002, respectively.
NOTE 12 ESCROW DEPOSITS
Escrow deposits on loans we own and on loans we serviced for others
consisted of the following at December 31:
2003 2002
--------------- ---------------
Taxes and insurance payments held on loans serviced for others............... $ 96,924 $ 72,254
Other escrow deposits........................................................ 19,520 12,732
--------------- ---------------
$ 116,444 $ 84,986
=============== ===============
NOTE 13 BONDS-MATCH FUNDED AGREEMENTS
Our bonds-match funded agreements are accounted for as secured
borrowings with pledges of collateral and were comprised of the following at
December 31:
Collateral 2003 2002
- ----------------------------------------------------------------------------- --------------- ---------------
Single family residential loans.............................................. $ 20,427 $ 32,217
Unrated residual securities.................................................. -- 8,057
Advances on loans serviced for others........................................ 94,967 106,797
--------------- ---------------
$ 115,394 $ 147,071
=============== ===============
Our bonds-match funded agreements are obligations secured by the
collateral underlying the related match funded assets, and are repaid through
the cash proceeds arising from those assets.
At December 31, 2003 and 2002, our bonds-match funded agreements had a
weighted average interest rate of 2.56% and 3.13%, respectively. Accrued
interest payable on our bonds-match funded agreements amounted to $71 and $108
at December 31, 2003 and 2002, respectively. We incurred interest expense on our
bonds-match funded agreements of $5,414, $6,573 and $7,315 during 2003, 2002 and
2001, respectively.
Our bonds-match funded agreements contain various qualitative and
quantitative covenants that, among other things, establish requirements for the
monitoring and reporting of specified financial transactions and reporting on
defined events affecting the collateral underlying the agreements.
96
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
The facility underlying our bonds-match funded agreements
collateralized by advances on loans serviced for others matured in December 2003
but was extended to January 2006.
During the second quarter of 2003, the Ocwen NIM Trust 1999-OACI
adopted a plan of complete liquidation and, thereby, caused the early redemption
of the bonds-match funded agreements that were secured by residual securities.
NOTE 14 LINES OF CREDIT AND OTHER SECURED BORROWINGS
Through our subsidiaries we have obtained secured lines of credit from
various unaffiliated financial institutions as follows:
December 31, December 31,
Borrowing Type Collateral Maturity Interest Rate (1) 2003 2002
- ---------------------- ----------------------------- -------------- -------------------------- -------------- --------------
Line of credit Advances on loans March 2004 LIBOR + 200 basis points $ 68,548 $ 78,511
serviced for others (2) (3)
Line of credit Advances on loans October 2004 LIBOR + 200 basis points 9,386 --
serviced for others (2)
Mortgage note Real estate - office building May 2005 LIBOR + 350 basis points, 20,000 --
(4) floor of 5.75%
Secured loan Trading securities - unrated June 2004 LIBOR + 275 basis points 11,562 --
subprime residuals (UK)
Senior secured Purchased mortgage April 2004 LIBOR + 162.5 or 225 35,321 --
credit agreement servicing rights and basis points
advances on loans
serviced for others (5)
Installment notes Purchased mortgage July 2004 2.81% 2,332 --
servicing rights
Term loan Loan receivable March 2005 LIBOR + 250 basis points,
floor of 8.00% 3,235 4,235
--------- ---------
$ 150,384 $ 82,746
========= =========
(1) LIBOR was 1.12% and 1.38% at December 31, 2003 and 2002, respectively.
(2) Maximum amount of borrowing is $100,000 under each facility
(3) This line was fully repaid subsequent to December 31, 2003 and will not
be renewed.
(4) We sold our office building in January 2004 and the buyer assumed this
note at that time.
(5) Maximum amount of borrowing under this facility is $60,000. We
anticipate that this facility will be renewed.
In addition to the specific requirements discussed below, each of our
lines contains qualitative and quantitative covenants that establish, among
other things, the maintenance of specified net worth and restrictions on future
indebtedness, as well as the monitoring and reporting of various specified
transactions or events.
The maximum month end amount outstanding under lines of credit and
other secured borrowings was $188,947 and $110,869 for the years ended December
31, 2003 and 2002, respectively. The average balance of obligations outstanding
under lines of credit and other secured borrowings was $130,886 and $94,169
during the years ended December 31, 2003 and 2002, respectively, and the
weighted average interest rates were 4.45% and 4.41%, respectively.
Accrued interest payable on our obligations outstanding under lines of
credit and other secured borrowings amounted to $516 and $226 at December 31,
2003 and 2002, respectively. Interest expense we incurred on our obligations
outstanding under lines of credit and other secured borrowings amounted to
$5,824, $4,152 and $6,004 during 2003, 2002 and 2001, respectively.
97
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
At December 31, 2003 and 2002, we had no repurchase agreements
outstanding. The maximum month end amount of our borrowings through repurchase
agreements was $0 and $66,817 during the years ended December 31, 2003 and 2002,
respectively. The average balance of repurchase agreements outstanding was $250
and $12,774 during the years ended December 31, 2003 and 2002, respectively, and
the weighted average interest rates were 1.20% and 1.85%, respectively.
As of December 31, the weighted average interest rates of our
obligations outstanding under lines of credit and other secured borrowings were
3.59% and 3.38% at December 31, 2003 and 2002, respectively.
NOTE 15 NOTES AND DEBENTURES
Our notes and debentures and other interest-bearing obligations mature
as follows:
December 31,
-------------------------
2003 2002
----------- -----------
2003:
11.875% Notes due October 1....................................... $ -- $ 43,475
2005:
12% Subordinated Debentures due June 15........................... -- 33,500
2007:
10.875% Capital Securities due August 1........................... 56,249 --
----------- -----------
$ 56,249 $ 76,975
=========== ===========
In addition to the specific requirements discussed below, each of our
notes and debentures contain qualitative and quantitative covenants that
establish, among other things, the maintenance of specified net worth and
restrictions on future indebtedness, as well as the monitoring and reporting of
various specified transactions or events.
Our 11.875% Notes (the "Notes") matured on October 1, 2003 and were
repaid in full at that time. We originally issued the Notes in the amount of
$125,000 with interest payable semiannually on April 1 and October 1. The Notes
were unsecured general obligations and were subordinated in right of payment to
the claims of creditors of our subsidiaries.
On November 26, 2002 we exercised our redemption option and called
$40,000 of the Notes at a price of 102.969%. Earlier in 2002, we also
repurchased $3,550 of the Notes in the open market. We incurred a loss of $1,508
on these transactions in 2002. During 2001, we repurchased $13,025 of our Notes
in the open market, resulting in gains of $52.
In connection with the issuance of the Notes, we incurred certain costs
that we capitalized and amortized through the maturity date of the Notes. The
unamortized balance of these issuance costs amounted to $253 at December 31,
2002 and is included in other assets. Accrued interest payable on the Notes
amounted to $1,291 at December 31, 2002. We incurred interest expense on the
Notes of $3,871, $9,681 and $11,465 during 2003, 2002 and 2001 respectively.
On September 30, 2003 the Bank exercised its redemption option and
called the remaining $33,065 balance of its 12% Subordinated Debentures due 2005
(the "Debentures") at a price of 101.333%, or a premium of $441. During the
second quarter of 2003, the Bank repurchased $435 in the open market resulting
in a loss of $4. On November 26, 2002 the Bank exercised its redemption option
and called $33,500 of the Debentures at a redemption price of 102.667%,
resulting in a loss of $1,025. There were no repurchases during 2001.
The Bank had issued the Debentures in the original amount of $100,000
with interest payable semiannually on June 15 and December 15. The Debentures
were unsecured general obligations of the Bank and were subordinated in right of
payment to all existing and future senior debt. The unamortized balance of
issuance costs amounted to $94 at December 31, 2002 and is included in other
assets. Accrued interest payable on the Debentures amounted to $168 at December
31, 2002. We incurred interest expense on the Debentures of $2,999, $7,660 and
$8,040 during 2003, 2002 and 2001, respectively.
In August 1997, Ocwen Capital Trust ("OCT") issued $125,000 of 10.875%
Capital Securities (the "Capital Securities"). OCT invested the proceeds from
issuance of the Capital Securities in 10.875% Junior Subordinated Debentures
issued by OCN. The Junior Subordinated Debentures, which represent the sole
assets of OCT, will mature on August 1, 2027. Prior to our adoption of SFAS No.
150
98
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
on July 1, 2003, we presented the Capital Securities in a separate caption
between liabilities and stockholders' equity in our consolidated statement of
financial condition as "Company-obligated, mandatorily redeemable securities of
subsidiary trust holding solely Junior Subordinated Debentures of the Company",
and distributions were reported on the Capital Securities in a separate caption
immediately following non-interest expense in our consolidated statement of
operations. As disclosed in Note 1, effective with our adoption of SFAS No. 150
on July 1, 2003, the Capital Securities are presented as a liability in the
consolidated statement of financial condition as a component of notes and
debentures. At the same time, we began reporting distributions on the Capital
Securities as a component of interest expense in the consolidated statement of
operations. During 2002 and 2001, we repurchased $4,910 and $18,371,
respectively, of our Capital Securities in the open market, resulting in gains
of $1,074 and $3,723, respectively.
Holders of the Capital Securities are entitled to receive cumulative
cash distributions accruing from the date of original issuance and payable
semiannually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998, at an annual rate of 10.875% of the liquidation amount of
$1,000 per Capital Security. OCN guarantees payment of distributions out of
moneys held by OCT, and payments on liquidation of OCT or the redemption of
Capital Securities, to the extent OCT has funds available. If Ocwen Financial
Corporation does not make principal or interest payments on the Junior
Subordinated Debentures, OCT will not have sufficient funds to make
distributions on the Capital Securities, in which event the guarantee shall not
apply to such distributions until OCT has sufficient funds available therefore.
Distributions on Capital Securities amounted to $6,118 in 2003, of which $3,059
has been reported as interest expense as discussed in the paragraph above.
Accumulated distributions payable on the Capital Securities amounted to $2,549
at both December 31, 2003 and 2002, and are included in accrued interest
payable.
We have the right to defer payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 10 consecutive semiannual periods with respect to each deferral
period, provided that no extension period may extend beyond the stated maturity
of the Junior Subordinated Debentures. Upon the termination of any such
extension period and the payment of all amounts then due on any interest payment
date, we may elect to begin a new extension period. Accordingly, there could be
multiple extension periods of varying lengths throughout the term of the Junior
Subordinated Debentures. If we defer interest payments on the Junior
Subordinated Debentures, distributions on the Capital Securities will also be
deferred, and we may not, nor may any of our subsidiaries, (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, their capital stock or (ii) make any
payment of principal, interest or premium, if any, on or repay, repurchase or
redeem any debt securities that rank pari passu with or junior to the Junior
Subordinated Debentures. During an extension period, interest on the Junior
Subordinated Debentures will continue to accrue at the rate of 10.875% per
annum, compounded semiannually.
We may redeem the Junior Subordinated Debentures before maturity at our
option, subject to the receipt of any necessary prior regulatory approval, (i)
in whole or in part on or after August 1, 2007, at a redemption price equal to
105.438% of the principal amount thereof on August 1, 2007, declining ratably on
each August 1 thereafter to 100% on or after August 1, 2017, plus accrued
interest thereon, or (ii) at any time, in whole (but not in part), upon the
occurrence and continuation of a special event (defined as a tax event,
regulatory capital event or an investment company event) at a redemption price
equal to the greater of (a) 100% of the principal amount thereof or (b) the sum
of the present values of the principal amount and premium payable with respect
to an optional redemption of such Junior Subordinated Debentures on August 1,
2007, together with scheduled payments of interest from the prepayment date to
August 1, 2007, discounted to the prepayment date on a semiannual basis at the
adjusted Treasury rate plus accrued interest thereon to the date of prepayment.
The Capital Securities are subject to mandatory redemption, in whole or in part,
upon repayment of the Junior Subordinated Debentures at maturity or their
earlier redemption, in an amount equal to the amount of the related Junior
Subordinated Debentures maturing or being redeemed and at a redemption price
equal to the redemption price of the Junior Subordinated Debentures, plus
accumulated and unpaid distributions thereon to the date of redemption.
For financial reporting purposes, we treat OCT as a subsidiary and,
accordingly, the accounts of OCT are included in our consolidated financial
statements. We eliminate intercompany balances and transactions with OCT,
including the balance of Junior Subordinated Debentures outstanding, in our
consolidated financial statements.
In connection with our issuance of the Capital Securities, we incurred
certain costs that we capitalized and are amortizing over the term of the
Capital Securities. The unamortized balance of these issuance costs amounted to
$1,766 and $1,841 at December 31, 2003 and 2002, respectively, and is included
in other assets.
99
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
NOTE 16 BASIC AND DILUTED EARNINGS PER SHARE
We are required to present both basic and diluted EPS on the face of
our statement of operations. Basic EPS excludes common stock equivalents and is
calculated by dividing net income by the weighted average number of common
shares outstanding during the year. We calculate diluted EPS by dividing net
income by the weighted average number of common shares outstanding, including
the dilutive potential common shares related to outstanding stock options.
The following is a reconciliation of the calculation of basic EPS to
diluted EPS for the years ended December 31:
2003 2002 2001
----------- ----------- -----------
Net income (loss)...................................................... $ 4,772 $ (68,775) $ (124,782)
=========== =========== ===========
Basic EPS:
Weighted average shares of common stock............................. 67,166,888 67,321,299 67,227,058
=========== =========== ===========
Basic EPS........................................................... $ 0.07 $ (1.02) $ (1.86)
=========== =========== ===========
Diluted EPS:
Weighted average shares of common stock............................. 67,166,888 67,321,299 67,227,058
Effect of dilutive securities:
Stock options (1)................................................. 493,889 -- --
Restricted stock awards........................................... 403,096 -- --
----------- ----------- -----------
68,063,873 67,321,299 67,227,058
=========== =========== ===========
Diluted EPS......................................................... $ 0.07 $ (1.02) $ (1.86)
=========== =========== ===========
(1) Excludes the effect of all options in the years 2002 and 2001, because
options are antidilutive in the event of a loss, and the effect of an
average of 2,818,332 of options that were antidilutive for 2003 because
their exercise price was greater than the average market price of our
stock.
NOTE 17 DERIVATIVE FINANCIAL INSTRUMENTS
Because interest rate futures and foreign currency futures contracts
are exchange traded, holders of these instruments look to the exchange for
performance under these contracts and not the entity holding the offsetting
futures contract, thereby minimizing the risk of nonperformance under these
contracts. We are exposed to credit loss in the event of nonperformance by the
counterparty to the interest rate and currency swaps and control this risk
through credit monitoring procedures. The notional principal amount does not
represent our exposure to credit loss.
Interest Rate Risk Management
In managing our interest rate risk, we enter into interest rate swaps
from time to time. Under interest rate swaps, we agree with other parties to
exchange, at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed upon
notional amount. The terms of the interest rate swaps provided for us to receive
a floating rate of interest based on the London Interbank Offered Rate ("LIBOR")
and to pay fixed interest rates. We used these interest rate swaps to alter the
interest rate on LIBOR rate debt incurred to fund our acquisitions of real
estate, subordinate and residual securities and securities sold under agreements
to repurchase.
We are exposed to credit loss when we enter into interest rate swaps
if: (i) the counterparty to the interest rate swap does not perform and (ii) the
floating interest rate that we receive exceeds the fixed interest rate that we
pay. All the counterparties had long-term debt ratings of A+ or above by
Standard and Poor's and A1 or above by Moody's. Although a swap generally may
not be sold or transferred without the consent of the counterparty, management
does not believe that this consent would be withheld. Although none of our
interest rate swaps were exchange-traded, there are a number of financial
institutions that enter into these types of transactions as part of their
day-to-day activities.
We had no interest rate swaps outstanding at December 31, 2003 or 2002.
Our swaps had the effect of increasing net interest income by $2 for the year
ended December 31, 2001. During 2003, we realized gains of $1,076 on swaps that
we included in non-interest
100
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
income. During 2001 we realized losses of $(9) on swaps that we included in
operating income (loss) from real estate. We entered into no swap agreements
during 2002.
We have purchased amortizing caps and floors to hedge our interest rate
exposure relating to our match funded loans and securities. An interest rate cap
or interest rate floor is designed to provide protection against the interest
rate on a floating-rate instrument rising above some level (cap) or falling
below some level (floor). The interest rate representing the cap or the floor is
referred to as the "strike rate." We receive payments from the seller on caps
when the current interest rate rises above the strike rate and on floors when
the current interest rate falls below the strike rate. The amount received
represents the difference between the current rate and the strike rate applied
to the notional amount. The caps and floors matured in October 2003. The terms
of our outstanding caps and floors at December 31, 2002 were as follows:
Notional
Amount Maturity Index Strike Rate Fair Value
------------- -------------- ------------- ------------- ------------
Caps........................ $ 111,799 October 2003 LIBOR 1-Month 7.00% $ --
Floors...................... 30,563 October 2003 CMT 2-Year 4.35 592
------------
$ 592
============
During 2001, we determined that our caps and floors no longer qualified
for hedge accounting. Net realized and unrealized gains and (losses) included in
earnings to record our caps and floors at fair value during 2003, 2002 and 2001
amounted to $(592), $188 and $404, respectively. Amortization of premiums on the
caps and floors amounted to $394 during the year ended December 31, 2001.
We purchased no swaptions, put options, U.S. Treasury futures contracts
or US Agency futures contracts during 2003 or 2002. The fair value of our
interest rate swaps and caps and floors represents the estimated amount that we
would receive or pay to terminate these agreements taking into account current
interest rates. Market quotes are available for these agreements. The following
table summarizes our use of interest rate risk management instruments:
Notional Amount
------------------------------------------
Interest Rate
Swaps Caps Floors
------------- ---------- -----------
Balance, December 31, 2001................................................. $ -- $ 125,933 $ 34,101
Maturities................................................................. -- (14,134) (3,538)
--------- --------- ---------
Balance, December 31, 2002................................................. -- 111,799 30,563
Purchases.................................................................. 200,000 -- --
Maturities................................................................. -- (111,799) (30,563)
Terminations............................................................... (200,000) -- --
---------- --------- ---------
Balance, December 31, 2003................................................. $ -- $ -- $ --
========= ========= =========
Foreign Currency Exchange Rate Risk Management
We enter into foreign currency derivatives to hedge our investments in
our foreign subsidiaries which own residual interests backed by residential
loans originated in the UK ("UK residuals") and in our shopping center located
in Halifax, Nova Scotia ("the Nova Scotia shopping center"). It is our policy to
periodically adjust the amount of foreign currency derivative contracts we have
entered into in response to changes in our investments in these assets. Currency
futures are commitments to either purchase or sell foreign currency at a future
date for a specified price.
We have determined that the local currency of our investment in UK
residuals and our investment in the Nova Scotia Shopping Center is the
functional currency. Our foreign currency derivative financial instruments
qualify for hedge accounting. Accordingly, we include the gains or losses in the
net unrealized foreign currency translation in accumulated other comprehensive
income in stockholders' equity.
101
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
The following table sets forth the terms and values of our foreign
currency financial instruments at December 31, 2003 and 2002:
Strike
Position Maturity Notional Amount Rate Fair Value
------------ ------------ ----------------- ---------- -------------
December 31, 2003:
Canadian Dollar currency futures............. Short March 2004 C$ 10,000 0.7660 $ (34)
British Pound currency futures............... Short March 2004 (pound) 16,500 1.7292 (737)
-----------
$ (771)
===========
December 31, 2002:
Canadian Dollar currency futures............. Short March 2003 C$ 11,400 0.6390 $ 78
British Pound currency futures............... Short March 2003 (pound) 18,750 1.5599 (793)
----------
$ (715)
===========
NOTE 18 INCOME TAXES
The components of income tax expense (benefit) were as follows:
Years Ended December 31,
----------------------------------------
Current: 2003 2002 2001
---------- ---------- ----------
Federal..................................................................... $ 667 $ 1,817 $ --
State....................................................................... 49 -- --
Foreign..................................................................... 163 -- --
---------- ---------- ----------
879 1,817 --
---------- ---------- ----------
Deferred:
Federal..................................................................... (2,401) (30,798) (21,339)
State....................................................................... 95 (2,085) (2,009)
Provision for valuation allowance on prior year's deferred tax asset........ -- -- 83,000
Provision for valuation allowance on current year's deferred tax asset...... 2,175 34,049 23,348
---------- ---------- ----------
Income tax expense before change in accounting principle.................... 748 2,983 83,000
Income tax benefit on change in accounting principle........................ -- (1,166) --
---------- ---------- ----------
Total....................................................................... $ 748 $ 1,817 $ 83,000
========== ========== ==========
Income tax expense before the effect of change in accounting principle
differs from the amounts computed by applying the U.S. Federal corporate income
tax rate of 35% as follows:
Years Ended December 31,
----------------------------------------
2003 2002 2001
---------- ---------- ----------
Expected income tax expense (benefit) at statutory rate.................. $ 1,760 $ (27,933) $ (14,532)
Differences between expected and actual expense (benefit)
Excess of cost over net assets acquired, net.......................... (931) 1,051 1,108
Excess of net assets acquired over purchase price..................... -- -- (6,416)
State tax (after Federal tax benefit)................................. 94 (1,355) (1,306)
Low-income housing tax credits........................................ (2,393) (2,685) (2,078)
Deferred tax asset valuation allowance current year tax benefit....... 2,175 34,049 23,348
Deferred tax asset valuation allowance prior year..................... -- -- 83,000
Other................................................................. 43 (144) (124)
---------- ---------- ----------
Actual income tax expense (benefit)................................. $ 748 $ 2,983 $ 83,000
========== ========== ==========
102
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
The net deferred tax asset was comprised of the following as of:
December 31,
-----------------------------------
2003 2002
--------------- ---------------
Deferred Tax Assets:
Tax residuals and deferred income on tax residuals........................ $ 5,688 $ 4,506
State taxes............................................................... 8,456 7,944
Accrued incentive compensation............................................ 2,609 2,597
Accrued other liabilities................................................. 418 317
Interest expense related to discount loan portfolio....................... 5,453 7,031
Valuation allowance on real estate owned.................................. 10,455 11,895
Gain on loan foreclosure.................................................. 4,430 4,891
Bad debt and allowance for loan losses.................................... 7,936 14,936
Impairment on securities available for sale and unrealized gains and
losses on trading securities............................................ 10,011 57,709
Mortgage servicing rights amortization.................................... 24,094 11,564
Goodwill amortization..................................................... 1,152 1,267
Foreign currency exchange................................................. 1,075 1,075
Capital loss carryforward................................................. 21,110 9,347
Net operating loss carryforward........................................... 71,061 26,178
Partnership losses and low-income housing tax credits..................... 42,550 51,078
Other..................................................................... -- 2,821
--------------- ---------------
216,498 215,156
--------------- ---------------
Deferred Tax Liabilities:
Deferred interest income on loans......................................... 6,421 6,421
Research and development costs............................................ 647 1,078
Other..................................................................... 439 --
--------------- ---------------
7,507 7,499
--------------- ---------------
208,991 207,657
Valuation allowances......................................................... (201,445) (199,270)
--------------- ----------------
Net deferred tax asset....................................................... $ 7,546 $ 8,387
=============== ===============
We conduct periodic evaluations of positive and negative evidence to
determine whether it is more likely than not that the deferred tax asset can be
realized in future periods. Among the factors considered in this evaluation are
estimates of future taxable income, the future reversal of temporary
differences, tax character and the impact of tax planning strategies that can be
implemented if warranted. As a result of this evaluation, we included in the tax
provision an increase of $2,175, $34,049 and $106,348 to the valuation allowance
for 2003, 2002 and 2001 respectively.
As of December 31, 2003, we had a deferred tax asset valuation
allowance totaling $201,445. This allowance is comprised of $38,873 relating to
built-in loss limitations arising from our acquisition of OAC and $160,397
relating to our evaluation of the future realization of prior years deferred tax
asset and $2,175 related to the future realization of our current year tax
benefit.
Before our acquisition of OAC, OAC was a REIT for federal tax purposes
and filed a REIT federal income tax return through October 20, 1999. We have
included OAC in our consolidated federal income tax return since October 21,
1999. OAC had, at October 6, 1999, approximately $131,567 of net unrealized
built-in losses. Any such losses recognized within the five-year period
beginning on October 7, 1999 (the "recognition period") are treated as
pre-change losses and, as such, are subject to an annual limit as to the amount
which may offset the taxable income of Ocwen Financial Corporation and its
subsidiaries ("the IRC section 382 limitation"). A net unrealized built-in loss
is an amount by which the tax basis of the corporation's assets at the time of
the change in ownership exceeds the aggregate fair market value of those assets
at that time. The IRC section 382 limitation is determined by multiplying the
value of OAC's stock by the federal long-term tax-exempt rate and amounts to
approximately $5,700. If a deduction is denied for any recognized built-in loss
in any post-change year, the loss is carried forward to subsequent years under
rules similar to the standard loss carryforward rules. As a result of these
limitations, we established a corresponding deferred tax asset valuation
allowance at the acquisition date as part of purchase accounting in the amount
of $38,873. At December 31, 2003, we had realized built-in losses of $103,878
which consists of net operating loss carryforwards of $79,330 and capital loss
carryforwards of $24,548.
103
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
Deferred tax assets, net of deferred fees, include tax residuals which
result from the ownership of Real Estate Mortgage Investment Conduits ("REMIC").
While a tax residual is anticipated to have little or no future cash flows from
the REMIC from which it has been issued, the tax residual does bear the income
tax liability and benefit resulting from the annual differences between the
interest paid on the debt instruments issued by the REMIC and the interest
received on the mortgage loans held by the REMIC. Typically this difference
generates taxable income to the Company in the first several years of the REMIC
and equal amounts of tax losses thereafter, thus resulting in the deferred tax
asset. The current Federal tax expense in 2003 and 2002 is the result of excess
inclusion income generated by REMIC residuals.
At December 31, 2003, we had net operating loss carryforwards of
$123,699, of which $10,771 expire in 2021, $105,317 expire in 2022 and $7,611
expire in 2023. At December 31, 2003, we had capital loss carryforwards of
$35,767, of which $15,180 expire in 2006 and $20,587 expire in 2007. At December
31, 2003, we had tax credit carryforwards of $35,675 related to our low-income
housing tax credits, which expire in the years 2018 through 2023.
Prior to December 31, 1996, The Bank was permitted to deduct from
taxable income an allowance for bad debts, which was in excess of the provision
for such losses charged to income. Accordingly, at December 31, 2003 retained
earnings includes $5,700, for which no provision for income tax has been
provided. The base reserves will continue to be subject to recapture, and the
Bank could be required to recognize a tax liability if: (1) the Bank fails to
qualify as a "bank" for federal income tax purposes, (2) certain distributions
are made with respect to the stock of the Bank, (3) the bad debt reserves are
used for any purpose other than to absorb bad debt losses or (4) there is a
change in federal tax law.
We have not recognized a deferred tax liability for the tax bad debt
reserves of the Bank. If in the future, this portion of retained earnings is
distributed or Ocwen Federal Bank no longer qualifies as a bank for tax
purposes, federal income tax of approximately $2,000 would be imposed.
NOTE 19 EMPLOYEE BENEFIT AND COMPENSATION PLANS
We maintain a defined contribution plan to provide postretirement
benefits to our eligible employees. We also adopted a number of compensation
plans for certain of our employees. We designed these plans to facilitate a
pay-for-performance policy, further align the interests of our officers and key
employees with the interests of our shareholders and assist in the attraction
and retention of employees vital to our long-term success. These plans are
summarized below.
Retirement Plan
We maintain a defined contribution 401(k) plan. We match 50% of each
employee's contributions, limited to 2% of the employee's compensation. Our
contributions to the 401(k) plan for the years ended December 31, 2003, 2002 and
2001, were $417, $593 and $613, respectively.
In connection with our acquisition of Berkeley Federal Savings Bank in
June 1993, the Bank assumed the obligations under a noncontributory defined
benefit pension plan (the "Plan") covering substantially all employees upon
their eligibility under the terms of the Plan. We froze and fully funded the
Plan after the plan year ended December 31, 1993.
Annual Incentive Plan
The Ocwen Financial Corporation 1998 Annual Incentive Plan (the "AIP")
is our primary incentive compensation plan for executives and other key
employees. Under the terms of the AIP participants can earn cash and equity
based awards as determined by the Compensation Committee. The awards are based
on objective performance criteria established by the Committee, including growth
in our core businesses, reduction in non-core assets, cost savings through Six
Sigma initiatives and utilization of India operations and the achievement of
other established performance goals. Non-qualified stock options to purchase our
common stock are issued as part of the AIP and are granted pursuant to the Ocwen
Financial Corporation 1991 Non-Qualified Stock Option Plan.
104
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
The following table provides a summary of our stock option activity for
the years ended December 31, 2003, 2002 and 2001, respectively, and stock
options exercisable at the end of each of those years:
2003 2002 2001
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
----------- ---------- ----------- ---------- ----------- ----------
Outstanding at beginning of year..... 4,723,166 $ 7.97 4,655,269 $ 9.01 3,424,594 $ 13.11
Granted (1).......................... 431,982 $ 6.15 634,228 $ 1.87 1,584,093 $ 7.67
Exercised............................ (359,419) $ 4.51 (32,937) $ 4.62 (128,156) $ 4.59
Forfeited............................ (214,359) $ 7.74 (533,394) $ 9.98 (225,262) $ 4.87
----------- ----------- -----------
Outstanding at end of year........... 4,581,370 $ 8.08 4,723,166 $ 7.97 4,655,269 $ 9.01
=========== =========== ===========
Exercisable at end of year........... 2,541,593 $ 9.72 2,744,160 $ 9.46 2,483,697 $ 11.29
=========== =========== ===========
(1) The weighted average grant-date fair value was $8.74 in 2003, $2.67 in
2002 and $8.36 in 2001.
The following table summarizes information about our stock options
outstanding at December 31, 2003:
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Weighted Weighted
Average Remaining Average
Number of Exercise Contractual Number of Exercise
Award Year Options Price (1) Life Options Price
- --------------------------------------------------- ----------- ---------- ----------- ---------- -----------
2003............................................... 431,982 $ 6.15 10 84,396 $ 6.18
2002............................................... 573,286 $ 1.87 9 141,307 $ 1.87
2001............................................... 1,253,393 $ 7.95 8 365,356 $ 5.79
2000............................................... 902,873 $ 4.09 7 530,698 $ 4.09
1999............................................... 151,303 $ 6.25 6 151,303 $ 6.25
1998............................................... 83,121 $ 12.31 5 83,121 $ 12.31
1997............................................... 572,200 $ 20.35 4 572,200 $ 20.35
1996............................................... 524,212 $ 11.00 3 524,212 $ 11.00
1995............................................... 89,000 $ 2.88 2 89,000 $ 2.88
----------- ----------
4,581,370 $ 8.08 2,541,593 $ 9.72
=========== ==========
(1) With the exception of 2001 and 2003, the weighted average exercise
price of outstanding options represents the actual exercise price. For
2001, 400,000 options are outstanding with an exercise price of $12.55
and 853,393 have an exercise price of $5.79. Options outstanding for
2003 include 10,000 options with an exercise price of $4.92 and 421,982
with an exercise price of $6.18.
After the awards of 431,982 options for 2003, the number of authorized
shares remaining and available for future awards of stock options is 6,293,554.
Stock options we awarded under the annual incentive plan prior to 1998
have a one-year vesting period. Stock options we awarded under the AIP for 1998
and 1999 vest ratably over a three-year period. Stock options we awarded under
the AIP for 2000 and thereafter vest ratably over a five-year period including
the award year. The term of all options granted is ten years from the grant
date. We treat the difference, if any, between the fair market value of our
stock at the date of grant and the exercise price as compensation expense. We
record compensation expense ratably over the vesting period of the grant.
Included in compensation expense for the years ended December 31, 2003, 2002 and
2001 was $1,226, $922 and $1,038, respectively, related to options granted below
fair market value.
105
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
NOTE 20 STOCKHOLDERS' EQUITY
On May 9, 2000, we announced that our Board of Directors authorized the
repurchase of up to six million of our issued and outstanding shares of common
stock. On May 16, 2003 we announced our initiation of a stock repurchase program
to purchase approximately 700,000 shares of our issued and outstanding common
stock with the intent to utilize these repurchased shares as a portion of our
annual incentive awards to employees for service in 2002. During 2003, we
repurchased 500,000 shares and issued 236,461 to employees.
NOTE 21 REGULATORY REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
and the regulations promulgated thereunder established certain minimum levels of
regulatory capital for savings institutions subject to OTS supervision. The Bank
must follow specific capital guidelines stipulated by the OTS, which involve
quantitative measures of the Bank's assets, liabilities and certain off-balance
sheet items. An institution that fails to comply with its regulatory capital
requirements must obtain OTS approval of a capital plan and can be subject to a
capital directive and certain restrictions on its operations.
At December 31, 2003 and 2002, the Bank was "well capitalized" under
the prompt corrective action regulations adopted by the OTS pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991. To be categorized
as "well capitalized," the Bank must maintain minimum core capital, Tier 1
risk-based capital and risk-based capital ratios as set forth in the following
table. The Bank's capital amounts and classification are subject to review by
federal regulators regarding components, risk-weightings and other factors.
There are no conditions or events since December 31, 2003 that we believe have
changed the Bank's category.
Since 1997, the Bank has committed to the OTS to maintain a core
capital (leverage) ratio and a total risk-based capital ratio of at least 9.00%
and 13.00%, respectively. The Bank continues to be in compliance with this
commitment as well as with the regulatory capital requirements of general
applicability (as indicated in the table below). In addition during 2002, we
committed to maintain our investment in mortgage servicing rights at
approximately 60% of core capital (before any deduction thereto for mortgage
servicing rights) at the Bank and 50% of stockholders' equity on a consolidated
basis. We regularly review actual results, which currently exceed these
committed levels of investment in mortgage servicing rights, with the OTS.
Following the completion of the annual safety and soundness examination
of the OTS in 2000, we submitted a written business plan and budget to the OTS
regarding our plans for the business, primarily that of the Bank, over the next
several years. The OTS approved the initial plan in February 2001, and also
approved the revised plan submitted to them in April of 2002. The Plan included
as its primary focus the reduction of risk through the sale or resolution of our
non-core assets and the reduction of our reliance on brokered certificates of
deposit as a source of funding. This plan formally concluded on December 31,
2003.
106
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
The following table summarizes the Bank's actual and required
regulatory capital at December 31, 2003 and 2002:
To Be Well Capitalized Committed
Minimum For Capital For Prompt Corrective Capital
Actual Adequacy Purposes Action Provisions Requirements
--------------------- ------------------- ---------------------- ------------
Ratio Amount Ratio Amount Ratio Amount Ratio
------- ----------- ------- --------- ------- --------- ------------
December 31, 2003
- -----------------
Stockholders' equity and ratio to total assets.. 18.10% $ 183,230
Non-includable subsidiary....................... (839)
Disallowed deferred tax assets.................. (21,052)
Disallowed servicing assets..................... (10,846)
Intangible assets (1)........................... (3,078)
-----------
Tier 1 (core) capital and ratio to adjusted
total assets................................. 15.09% 147,415 4.00% $ 39,064 5.00% $ 48,830 9.00%
===========
Non-mortgage servicing assets................... (1,892)
-----------
Tangible capital and ratio to tangible assets... 14.93% $ 145,523 1.50% $ 14,621
===========
Tier 1 capital and ratio to risk-weighted
assets....................................... 20.00% $ 147,415 6.00% $ 44,230
===========
Allowance for loan losses....................... 6,247
Qualifying subordinated debentures (2).......... --
-----------
Tier 2 capital.................................. 6,247
-----------
Real estate owned required to be deducted (3) (43,460)
-----------
Total risk-based capital and ratio to
risk-weighted assets......................... 14.95% $ 110,202 8.00% $ 58,973 10.00% $ 73,717 13.00%
===========
Total regulatory assets......................... $ 1,012,437
===========
Adjusted total assets........................... $ 976,606
===========
Tangible assets................................. $ 974,714
===========
Risk-weighted assets............................ $ 737,168
===========
December 31, 2002
- -----------------
Stockholders' equity and ratio to total assets.. 16.62% $ 161,242
Non-includable subsidiary....................... (875)
Disallowed deferred tax assets.................. (1,053)
Disallowed servicing assets..................... (10,662)
------------
Tier 1 (core) capital and ratio to adjusted
total assets................................. 15.51% 148,652 4.00% $ 38,325 5.00% $ 47,907 9.00%
Non-mortgage servicing rights................... (2,703)
-----------
Tangible capital and ratio to tangible assets... 15.28% $ 145,949 1.50% $ 14,331
===========
Tier 1 capital, and ratio to risk-weighted
assets....................................... 18.76% $ 148,652 6.00% $ 47,555
-----------
Allowance for loan losses....................... 10,019
Qualifying subordinated debentures.............. 13,400
-----------
Tier 2 capital.................................. 23,419
-----------
Total risk-based capital and ratio to
risk-weighted assets 21.71% $ 172,071 8.00% $ 63,407 10.00% $ 79,259 13.00%
===========
Total regulatory assets......................... $ 969,945
===========
Adjusted total assets........................... $ 958,133
===========
Tangible assets................................. $ 955,430
===========
Risk-weighted assets............................ $ 792,589
===========
(1) Unamortized balance of capitalized computer software.
(2) On September 30, 2003 we redeemed the remaining $33,065 of our 12%
subordinated debentures at a price of 101.333%.
(3) Nonresidential commercial real estate, which we originally acquired in
satisfaction of a debt and have held in excess of five years.
107
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
NOTE 22 NET INTEREST INCOME (EXPENSE) BEFORE PROVISION FOR LOAN LOSSES
The following table presents the components of net interest income
(expense) for each category of our interest-earning assets and interest-bearing
liabilities for the years ended December 31:
2003 2002 2001
------------ ------------ ------------
Interest income:
Federal funds sold and repurchase agreements......................... $ 1,403 $ 2,629 $ 7,328
Trading securities................................................... 17,345 16,580 18,865
Loans................................................................ 1,614 11,279 46,090
Match funded loans and securities.................................... 3,402 6,463 10,345
Interest earning cash and other...................................... 358 284 743
------------ ------------ ------------
24,122 37,235 83,371
------------ ------------ ------------
Interest expense:
Deposits............................................................. 17,546 27,455 59,967
Securities sold under agreements to repurchase....................... 3 236 529
Notes and debentures................................................. 9,929 17,346 19,514
Bonds - match funded agreements...................................... 5,414 6,573 7,315
Lines of credit and other secured borrowings......................... 5,824 4,152 6,004
------------ ------------ ------------
38,716 55,762 93,329
------------ ------------ ------------
Net interest income (expense) before provision for loan losses....... $ (14,594) $ (18,527) $ (9,958)
============ ============ ============
NOTE 23 OTHER INCOME
The following table presents the principal components of other income
we earned during the years ended December 31:
2003 2002 2001
----------- ----------- -----------
Software revenue (OTX)................................................. $ 10,023 $ 3,146 $ 2,181
Collections of credit card receivables (1)............................. 2,737 4,191 --
Brokerage commissions.................................................. 2,487 2,112 1,386
Consulting fees........................................................ 208 1,596 2,041
Other.................................................................. 2,365 1,735 2,922
----------- ----------- -----------
$ 17,820 $ 12,780 $ 8,530
=========== =========== ===========
(1) We recorded collections on charged-off unsecured credit card
receivables that we have purchased from third parties on the cost
recovery method through the end of 2001, at which time we reduced the
net book value of these receivables to zero as a result of collections
and reserves. In 2003 and 2002, we recorded all collections on the
receivables as other income.
NOTE 24 OTHER OPERATING EXPENSES
The following table presents the principal components of other
operating expenses we incurred during the years ended December 31:
2003 2002 2001
----------- ----------- -----------
Travel, lodging, meals and entertainment............................... $ 2,864 $ 2,585 $ 2,508
Amortization of deferred costs......................................... 1,197 1,436 926
Deposit related expenses............................................... 912 1,198 897
Bad debt expense....................................................... 554 39 413
Conferences and seminars............................................... 361 475 534
Marketing.............................................................. 345 241 757
Investment and treasury services....................................... 282 340 272
Other.................................................................. 3,894 3,287 2,342
----------- ----------- -----------
$ 10,409 $ 9,601 $ 8,649
=========== =========== ===========
108
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
NOTE 25 BUSINESS SEGMENT REPORTING
Public enterprises like ours are required to report financial and
descriptive information about their reportable operating segments. An operating
segment is defined as a component of an enterprise that (a) engages in business
activities from which it may earn revenues and incur expenses, (b) whose
operating results are regularly reviewed by the enterprise's chief operating
decision maker to make decisions about resources to be allocated to the segment
and assess its performance and (c) for which discrete financial information is
available.
109
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
Net Interest Provision Non- Non- Pre-Tax
Income for Loan Interest Interest Income Total
(Expense) Losses Income Expense (Loss) Assets
------------ ---------- ---------- ---------- ---------- -----------
At or for the year ended December 31, 2003
- ------------------------------------------
Core businesses:
Residential Loan Servicing................... $ (20,892) $ -- $ 121,132 $ 69,196 $ 31,043 $ 672,779
OTX.......................................... -- -- 9,933 21,453 (11,520) 5,292
Ocwen Realty Advisors........................ (21) -- 18,804 13,351 5,432 1,056
Unsecured Collections........................ -- -- 12,140 6,840 5,300 323
Business Process Outsourcing................. (5) -- 4,496 2,597 1,893 1,010
International Operations..................... (52) -- 4,490 7,384 (2,946) 5,212
------------ ---------- ---------- ---------- ---------- -----------
(20,970) -- 170,995 120,821 29,202 685,672
------------ ---------- ---------- ---------- ---------- -----------
Non-core businesses:
Commercial Finance........................... (7,217) (3,095) 1,318 7,852 (10,657) 133,044
Affordable Housing........................... (2,767) 151 1,595 3,565 (4,888) 48,974
Subprime Financing........................... 15,210 311 2,914 13,936 4,188 39,162
------------ ---------- ---------- ---------- ---------- -----------
5,226 (2,633) 5,827 25,353 (11,357) 221,180
------------ ---------- ---------- ---------- ---------- -----------
Corporate Items and Other....................... 1,150 (51) 675 11,327 (12,817) 333,266
------------ ---------- ---------- ---------- ---------- -----------
$ (14,594) $ (2,684) $ 177,497 $ 157,501 $ 5,028 $ 1,240,118
============ ========== ========== ========== ========== ===========
At or for the year ended December 31, 2002
- ------------------------------------------
Core businesses:
Residential Loan Servicing................... $ (18,304) $ -- $ 120,024 $ 69,746 $ 31,974 $ 579,114
OTX.......................................... 1 -- 6,522 30,667 (24,144) 6,173
Ocwen Realty Advisors........................ -- -- 14,080 11,484 2,597 532
Unsecured Collections........................ -- (278) 10,652 6,925 4,006 296
Business Process Outsourcing................. -- -- 206 88 118 6
International Operations..................... (51) -- 1,582 2,554 (1,022) 5,366
------------ ---------- ---------- ---------- ---------- -----------
(18,354) (278) 153,066 121,464 13,529 591,487
------------ ---------- ---------- ---------- ---------- -----------
Non-core businesses:
Residential Discount Loans................... 6,068 (2,299) (2,354) 5,250 763 44,831
Commercial Finance........................... (7,627) 12,814 (19,869) 11,637 (51,947) 196,270
Affordable Housing........................... (4,449) 3,392 864 24,544 (31,521) 62,092
Subprime Finance............................. 11,787 -- 7,395 4,646 14,536 41,950
------------ ---------- ---------- ---------- ---------- -----------
5,779 13,907 (13,964) 46,077 (68,169) 345,143
------------ ---------- ---------- ---------- ---------- -----------
Corporate Items and Other....................... (5,952) -- (5,090) 10,085 (27,417) 285,612
------------ ---------- ---------- ---------- ---------- -----------
$ (18,527) $ 13,629 $ 134,012 $ 177,626 $ (82,057) $ 1,222,242
============ ========== ========== ========== ========== ===========
At or for the year ended December 31, 2001
- ------------------------------------------
Core businesses:
Residential Loan Servicing................... $ (16,529) $ -- $ 119,490 $ 68,370 $ 34,591 $ 492,563
OTX.......................................... -- -- 2,149 38,542 (36,392) 13,231
Ocwen Realty Advisors........................ -- -- 11,913 10,968 944 1,351
Unsecured Collections........................ 140 1,176 3,058 7,042 (5,020) --
International Operations..................... (13) -- 2,341 3,248 (920) 1,054
------------ ---------- ---------- ---------- ---------- -----------
(16,402) 1,176 138,951 128,170 (6,797) 508,199
------------ ---------- ---------- ---------- ---------- -----------
Non-core businesses:
Residential Discount Loans................... 15,125 6,060 (4,733) 8,333 (4,002) 117,051
Commercial Finance........................... (3,220) 7,223 3,370 13,941 (21,014) 364,012
Affordable Housing........................... (7,917) 1,207 107 20,900 (29,917) 132,725
Subprime Finance............................. 2,657 -- 13,742 3,243 13,155 82,324
------------ ---------- ---------- ---------- ---------- -----------
6,645 14,490 12,486 46,417 (41,778) 696,112
------------ ---------- ---------- ---------- ---------- -----------
Corporate Items and Other....................... (201) -- 22,851 8,728 6,793 506,839
------------ ---------- ---------- ---------- ---------- -----------
$ (9,958) $ 15,666 $ 174,288 $ 183,315 $ (41,782) $ 1,711,150
============ ========== ========== ========== ========== ===========
110
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
A brief description of our segments follows:
Core Businesses
---------------
o Residential Loan Servicing. Through this business we provide loan
servicing including asset management and resolution services to
third party owners of subprime residential mortgage and high
loan-to-value loans for a fee. We acquire the rights to service
loans and obtain such rights by purchasing them outright or by
entering into sub-servicing contracts.
o OTX. Through this segment we provide technology solutions for the
mortgage and real estate industries. OTX products include a
residential loan servicing system (REALServicing(TM)), a
commercial loan servicing system (REALSynergy(TM)) and an Internet
based mortgage loan processing application and vendor management
system (REALTrans(SM)).
o Ocwen Realty Advisors (ORA). Through ORA we provide residential
property valuation services.
o Unsecured Collections. This core business 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.
o Business Process Outsourcing. This core business segment began
operations in December 2002. Business Process Outsourcing provides
business process outsourcing services to third parties and
leverages the operational capacity of our facilities in India.
o International Operations. This segment is being reported as a
business segment for the first time this year. In 2003, this
segment primarily represents the results of operations of Global
Servicing Solutions, LLC, our new joint servicing venture with
Merrill Lynch for the servicing of assets in various countries.
Results for 2002 primarily reflect a one time consulting project
for the government of Jamaica as well as other precedent ventures.
Non-Core Businesses
-------------------
o 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 completed our
last acquisition of residential loans in 2000. Based on the
relative insignificance of the non-core assets remaining in this
segment, 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.
o Commercial Finance. This segment comprised operations to acquire
sub-performing commercial loans at a discount, as well as
operations to invest in and reposition under-performing real
estate assets. No assets have been acquired since 2000; since that
time, this business has consisted of the repositioning, management
and resolution of the remaining loan and real estate assets.
o Affordable Housing. Includes our investments, primarily through
limited partnerships, in qualified low-income rental housing for
the purpose of obtaining Federal income tax credits pursuant to
Section 42 of the Code. Except to complete those projects in which
an investment had already been made, we ceased making investments
in properties in 2000.
o Subprime Finance. In August 1999, we closed our domestic subprime
origination business, which had been conducted primarily through
OFS. Previously, activities of this segment included our
acquisition and origination of single family residential loans to
non-conforming borrowers. We have continued to manage and resolve
the remaining non-core assets, which consist primarily of unrated
single family subprime residual securities.
Corporate Items and Other
-------------------------
This segment includes business activities that are individually
insignificant, interest income on cash and cash equivalents, interest
expense on corporate assets, gains and losses from debt repurchases and
general corporate expenses.
We allocate interest income and expense to each business segment for
the investment of funds raised or funding of investments made taking into
consideration the duration of such liabilities or assets. We also make
allocations of non-interest expense generated by corporate support services to
each business segment based upon our estimate of time and effort spent in the
respective activity.
111
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
NOTE 26 COMMITMENTS AND CONTINGENCIES
We lease certain premises under various non-cancelable operating leases
with terms expiring at various times through 2006, exclusive of renewal option
periods. Our annual aggregate minimum rental commitments under these leases are
summarized as follows:
2004............................................................. $ 3,289
2005............................................................. 1,635
2006............................................................. 870
2007............................................................. 799
Thereafter....................................................... 6
-----------
Minimum lease payments .......................................... $ 6,599
===========
We converted rental commitments for our facilities outside the United
States of America to U.S. dollars using exchange rates in effect at December 31,
2003. Rent expense for the years ended December 31, 2003, 2002 and 2001 was
$3,511, $3,326 and $3,533, respectively.
Through our investment in subordinated securities and subprime
residuals, which had a fair value of $42,841 at December 31, 2003, we support
senior classes of securities.
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 of 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 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.
The Bank has been named as a defendant in a number of purported class
action lawsuits challenging its mortgage servicing practices. None of these
lawsuits has been certified by any court as a class action. A petition to
consolidate the lawsuits is presently 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 believe the
challenges to the Bank's servicing practices are without merit and are defending
the lawsuits vigorously.
The Bank and OCN are also subject to various other pending legal
proceedings. In our opinion, the resolution of the purported class actions and
other claims will not have a material effect on our financial statements.
112
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
NOTE 27 PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed Statements of Financial Condition of Ocwen Financial Corporation
December 31,
----------------------------
2003 2002
----------- -----------
Assets
Cash and cash equivalents.............................................................. $ 22 $ 116
Cash held at Bank subsidiary........................................................... 19,708 10,647
Investments in subsidiaries
Bank subsidiary..................................................................... 178,838 158,471
Non-Bank subsidiaries............................................................... 374,876 406,538
Advance due from Bank subsidiary....................................................... 3,345 1,641
Loan, net.............................................................................. 7,134 8,009
Investment in Capital Trust Securities issued by non Bank subsidiary................... 68,751 68,751
Income taxes receivable................................................................ 21,217 20,870
Mortgage servicing rights.............................................................. 58,033 64,996
Other assets........................................................................... 6,867 799
----------- -----------
$ 738,791 $ 740,838
=========== ===========
Liabilities and Stockholders' Equity
11.875% Note payable................................................................... $ -- $ 43,475
Secured borrowings..................................................................... 5,567 4,235
Notes and debentures payable to non-Bank subsidiaries.................................. 131,251 131,251
Accrued interest payable to non-Bank subsidiaries...................................... 8,562 8,205
Advance due to non-Bank subsidiaries................................................... 244,614 213,051
Deferred tax liability................................................................. 20,645 20,194
Other liabilities...................................................................... 10,894 9,709
----------- -----------
Total liabilities................................................................... 421,533 430,120
Stockholders' equity................................................................... 317,258 310,718
----------- -----------
$ 738,791 $ 740,838
=========== ===========
Condensed Statements of Operations of Ocwen Financial Corporation
For the Years Ended December 31,
----------------------------------------------
2003 2002 2001
----------- ----------- -----------
Interest income....................................................... $ 782 $ 555 $ 1,947
Interest income from subsidiaries
Bank subsidiary.................................................. 87 222 775
Non-Bank subsidiaries............................................ 1,878 -- --
Interest expense...................................................... 4,263 9,937 11,465
Interest expense - non-Bank subsidiaries.............................. 14,372 14,372 14,387
----------- ----------- -----------
Net interest expense before provision for loan losses................. (15,888) (23,532) (23,130)
Provision for loan losses............................................. (125) 1,144 1,495
------------ ----------- -----------
Net interest expense after provision for loan losses.................. (15,763) (24,676) (24,625)
Non-interest income................................................... 32,094 9,919 543
Non-interest expense.................................................. 21,150 3,731 (37)
Servicing fee expense - Bank subsidiary............................... 21,392 10,772 5,907
----------- ----------- -----------
Income (loss) before income taxes................................ (26,211) (29,260) (29,952)
Income tax expense (benefit).......................................... 3 (1,658) 37,195
----------- ----------- -----------
Income (loss) before equity in net income (losses) of subsidiaries (26,214) (27,602) (67,147)
Equity in net income (losses) of subsidiaries
Bank subsidiary.................................................. 20,366 (40,341) (57,590)
Non-bank subsidiaries............................................ 10,620 (832) (45)
----------- ----------- -----------
Net income (loss)..................................................... $ 4,772 $ (68,775) $ (124,782)
=========== =========== ===========
113
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
Condensed Statements of Cash Flows of Ocwen Financial Corporation
For the Years Ended December 31,
----------------------------------------------
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities
Net income (loss)...................................................... $ 4,772 $ (68,775) $ (124,782)
Adjustments to reconcile net income to net cash
(used) provided by operating activities
Equity in (income) loss of Bank subsidiary........................ (20,366) 40,341 57,590
Equity in (income) loss of non-Bank subsidiaries.................. (10,620) 832 45
Equity in loss (income) of unconsolidated entity, net............. (38) (142) --
Amortization of purchased mortgage servicing rights............... 35,889 9,125 --
Premium amortization, net......................................... -- -- 408
Provision for loan losses......................................... (125) 1,144 1,495
Gain on repurchase of long-term debt.............................. -- -- (53)
Impairment charges on purchased mortgage servicing rights......... 387 -- --
Increase in deferred tax liability................................ 451 3,945 38,624
Decrease (increase) in other assets............................... (3,347) 3,297 (1,458)
Decrease (increase) in income taxes receivable.................... (321) (4,046) 925
Increase (decrease) in accrued expenses and other liabilities..... 2,501 (578) 2,417
----------- ----------- -----------
Net cash used by operating activities............................. 9,183 (14,857) (24,789)
----------- ----------- ------------
Cash flows from investing activities
Net investments in and advances (to) from subsidiaries............ 71,051 118,323 (33,731)
Purchase of mortgage servicing rights............................. (29,196) (74,121) --
Origination of loans.............................................. -- (9,153) --
Principal payments received on loans.............................. 1,000 -- 6,922
Decrease (increase) in investment in real estate.................. -- 1,797 1,503
----------- ----------- -----------
Net cash provided (used) by investing activities.................. 42,855 36,846 (25,306)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from secured borrowings.................................. 5,980 4,235 --
Repurchase or maturity of notes................................... (43,475) (43,550) (13,233)
Repayment of secured borrowings................................... (4,648) -- --
Exercise of common stock options.................................. 1,334 103 588
Repurchase of common stock........................................ (2,262) -- --
------------ ----------- -----------
Net cash used by financing activities.................................. (43,071) (39,212) (12,645)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents................... 8,967 (17,223) (62,740)
Cash and cash equivalents at beginning of year......................... 10,763 27,986 90,726
----------- ----------- -----------
Cash and cash equivalents at end of year............................... $ 19,730 $ 10,763 $ 27,986
=========== =========== ===========
114
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 2003, 2002, AND 2001
(Dollars in thousands, except share data)
NOTE 28 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarters Ended
----------------------------------------------------------------
December 31, September 30, June 30, March 31,
2003 2003 2003 2003
------------- ------------- ------------- -------------
Interest income......................................... $ 6,296 $ 4,071 $ 6,998 $ 6,757
Interest expense........................................ 9,162 10,823 9,405 9,326
Provision for loan losses............................... (14) 415 (3,251) 166
------------- ------------- ------------- -------------
Net interest income (expense) after provision for
loan losses........................................ (2,852) (7,167) 844 (2,735)
Non-interest income..................................... 48,871 46,843 39,401 42,382
Non-interest expense.................................... 41,619 35,027 34,335 46,520
Distributions on Capital Securities..................... -- -- 1,529 1,529
------------- ------------- ------------- -------------
Income (loss) before minority interest and income taxes. 4,400 4,649 4,381 (8,402)
Minority interest in net income (loss) of subsidiaries.. 184 (28) 73 263
Income taxes expense (benefit).......................... 130 6 305 307
------------- ------------- ------------- -------------
Net income (loss)....................................... $ 4,454 $ 4,615 $ 4,149 $ (8,446)
============= ============= ============= ==============
Earnings (loss) per share
Basic................................................ $ 0.07 $ 0.07 $ 0.06 $ (0.13)
Diluted.............................................. $ 0.07 $ 0.07 $ 0.06 $ (0.13)
Quarters Ended
----------------------------------------------------------------
December 31, September 30, June 30, March 31,
2002 2002 2002 2002
------------- ------------- ------------- -------------
Interest income......................................... $ 7,103 $ 8,612 $ 8,806 $ 12,714
Interest expense........................................ 11,727 12,925 14,714 16,396
Provision for loan losses............................... 3,119 (901) 10,732 679
------------- ------------- ------------- -------------
Net interest income (expense) after provision for
loan losses........................................ (7,743) (3,412) (16,640) (4,361)
Non-interest income..................................... 41,978 37,520 12,593 41,921
Non-interest expense.................................... 41,065 36,586 44,585 55,390
Distributions on Capital Securities..................... 1,529 1,529 1,566 1,663
------------- ------------- ------------- -------------
Income (loss) before income taxes and effect of change
in accounting principle.............................. (8,359) (4,007) (50,198) (19,493)
Minority interest in net loss of subsidiaries........... (99) -- -- --
Income taxes expense (benefit).......................... 1,818 -- -- 1,165
------------- ------------- ------------- -------------
Income (loss) before effect of change in accounting
principle............................................ (10,078) (4,007) (50,198) (20,658)
Effect of change in accounting principle, net of taxes.. -- -- -- 16,166
------------- ------------- ------------- -------------
Net income (loss)....................................... $ (10,078) $ (4,007) $ (50,198) $ (4,492)
============= ============= ============= =============
Earnings (loss) per share
Basic and diluted.................................... $ (0.15) $ (0.06) $ (0.75) $ (0.07)
115
SHAREHOLDER INFORMATION
Price Range of the Company's Common Stock
Our common stock is traded under the symbol "OCN" on the New York Stock
Exchange ("NYSE"). The following table sets forth the high and low sales prices
for our common stock, as traded on the NYSE:
High Low
---------- ----------
2003
First quarter.................................... $ 3.40 $ 2.71
Second quarter................................... 4.87 3.13
Third quarter.................................... 5.09 4.12
Fourth quarter................................... 8.88 4.60
2002
First quarter.................................... $ 8.48 $ 6.47
Second quarter................................... 7.50 5.31
Third quarter.................................... 5.80 2.67
Fourth quarter................................... 3.05 2.28
At the close of business on March 10, 2004, our common stock price was
$9.49.
We do not currently pay cash dividends on common stock and have no
current plans to do so in the future. The timing and amount of future dividends,
if any, will be determined by our Board of Directors and will depend, among
other factors, upon our earnings, financial condition, cash requirements, the
capital requirements of the Bank and other subsidiaries and investment
opportunities at the time any such payment is considered. In addition, the
indentures relating to the Notes and the Junior Subordinated Debentures contain
certain limitations on the payment of dividends by us.
As a holding company, the payment of any dividends by us will be
significantly dependent on dividends and other payments received from our
subsidiaries, including the Bank. For a description of limitations on our
ability to pay dividends on our common stock and on the ability of the Bank to
pay dividends, see Note 21 to our Consolidated Financial Statements.
Number of Holders of Common Stock
At March 10, 2004, 67,960,607 shares of our common stock were
outstanding and held by approximately 1,292 holders of record. Such number of
stockholders does not reflect the number of individuals or institutional
investors holding our stock in nominee name through banks, brokerage firms and
others.
116
Exhibit 21.0 SIGNIFICANT DIRECT AND INDIRECT SUBSIDIARIES OF OCWEN FINANCIAL CORPORATION State or Other Jurisdiction Name of Organization - --------------------------------------------- ---------------------------- Ocwen Federal Bank FSB New Jersey Ocwen Partnership, L.P. Virginia Ocwen Asset Investment Corp. Florida Ocwen General, Inc. Virginia Investors Mortgage Insurance Holding Company Delaware Ocwen Properties, Inc. New York Ocwen Capital Trust I Delaware Ocwen Asset Investment - UK, LLC Delaware Ocwen Technology Xchange, Inc. Florida Rocaille Acquisition Subsidiary, Inc. Florida Berkeley Realty Group, Inc New Jersey OAIC Halifax, LLC Delaware OAIC Jacksonville, LLC Delaware OAIC Mortgage Residential Holdings, LLC Delaware Residential Real Estate Solutions, Inc. Florida RMSI, Inc New Jersey Ocwen NIMS Corp. Florida REALTrans.Com, Inc. Florida Ocwen Financial Solutions Private Limited India Taiwan Bo Lin Service Co., Ltd. Taiwan SSJ Servicer Co., Ltd. Japan
Exhibit 23.0 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 filed on January 27, 1998 (Registration No. 333-44999), Registration Statement on Form S-8 filed on August 25, 1998 (Registration No. 333-62217) and Registration Statement on Form S-3 filed on November 5, 1998 (Registration No. 333-64915) of Ocwen Financial Corporation of our report dated March 8, 2004 relating to the financial statements, which appears on page 67 of the 2003 Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP West Palm Beach, Florida March 12, 2004
Exhibit 31.1
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
(c) Disclosed in this report any changes in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over financial
reporting.
Date: March 15, 2004 /s/ WILLIAM C. ERBEY
------------------------
William C. Erbey
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
(c) Disclosed in this report any changes in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over financial
reporting.
Date: March 15, 2004 /s/ MARK S. ZEIDMAN
------------------------
Mark S. Zeidman
Chief Financial Officer
Exhibit 32.1 CERTIFICATIONS I, William C. Erbey, state and attest that: (1) I am the Chief Executive Officer of Ocwen Financial Corporation (the "Registrant"). (2) I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that o the Annual Report on Form 10-K of the Registrant for the year ended December 31, 2003 (the "periodic report") containing financial statements fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and o the information contained in the periodic report fairly represents, in all material respects, the financial condition and results of operations of the Registrant for the periods presented. Name: /s/ WILLIAM C. ERBEY ------------------------ Title: Chief Executive Officer Date: March 15, 2004
Exhibit 32.2 CERTIFICATIONS I, Mark S. Zeidman, state and attest that: (1) I am the Chief Financial Officer of Ocwen Financial Corporation (the "Registrant"). (2) I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that o the Annual Report on Form 10-K of the Registrant for the year ended December 31, 2003 (the "periodic report") containing financial statements fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and o the information contained in the periodic report fairly represents, in all material respects, the financial condition and results of operations of the Registrant for the periods presented. Name: /s/ MARK S. ZEIDMAN ------------------------ Title: Chief Financial Officer Date: March 15, 2004