UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-13219
OCWEN FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Florida 65-0039856
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(State or other jurisdiction (I.R.S. Employer
Of incorporation or organization) Identification No.)
1661 Worthington Road, Suite 100, West Palm Beach, Florida 33409
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(Address of principal executive offices) (Zip Code)
(561) 682-8000
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(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].
Number of shares of Common Stock, $0.01 par value, outstanding as of
July 8, 2005: 62,934,102 shares.
OCWEN FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements (Unaudited)............................................................ 3
Consolidated Balance Sheets at June 30, 2005 and December 31, 2004............................................... 3
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004.................. 4
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended
June 30, 2005 and 2004 ......................................................................................... 5
Consolidated Statement of Changes in Stockholders' Equity for the Six Months Ended June 30, 2005................. 6
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004............................ 7
Notes to Consolidated Financial Statements....................................................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................................... 43
Item 4. Controls and Procedures.......................................................................................... 44
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................................ 45
Item 4. Submission of Matters to a Vote of Security Holders.............................................................. 45
Item 6. Exhibits......................................................................................................... 45
Signature................................................................................................................ 47
2
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS (Unaudited)
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
June 30, December 31,
2005 2004
------------- -------------
ASSETS
Cash ............................................................................ $ 310,233 $ 542,891
Trading securities, at fair value
Investment grade .............................................................. 2,942 86,215
Subordinates and residuals .................................................... 45,343 39,527
Match funded assets (including advances on loans serviced for others of $331,337
and $276,626)................................................................... 334,689 280,760
Advances on loans and loans serviced for others ................................. 187,423 240,430
Mortgage servicing rights ....................................................... 132,333 131,409
Receivables ..................................................................... 119,943 126,719
Real estate ..................................................................... 9,314 18,732
Affordable housing properties ................................................... 4,406 5,641
Loans (net of allowance for loan losses of $4,334 and $4,546) ................... 8,725 3,792
Premises and equipment .......................................................... 41,115 37,440
Other assets .................................................................... 86,181 68,976
------------- -------------
Total assets .................................................................. $ 1,282,647 $ 1,582,532
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Match funded liabilities ...................................................... $ 284,822 $ 244,327
Servicer liabilities .......................................................... 310,369 291,266
Lines of credit and other secured borrowings .................................. 52,525 50,612
Debt securities ............................................................... 231,249 231,249
Other liabilities ............................................................. 65,856 56,849
Deposits ...................................................................... -- 290,507
Escrow deposits ............................................................... -- 86,084
------------- -------------
Total liabilities ........................................................... 944,821 1,250,894
------------- -------------
Minority interest in subsidiaries ............................................... 1,742 1,530
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY
Common stock, $.01 per value; 200,000,000 shares authorized; 62,934,102 and
62,739,478 shares issued and outstanding .................................... 629 627
Additional paid-in capital .................................................... 182,254 181,336
Retained earnings ............................................................. 153,428 148,133
Accumulated other comprehensive income (loss), net of taxes ................... (227) 12
------------- -------------
Total stockholders' equity .................................................... 336,084 330,108
------------- -------------
Total liabilities and stockholders' equity .................................. $ 1,282,647 $ 1,582,532
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
Three Months Six Months
---------------------------- ----------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
REVENUE
Servicing and related fees ......................................... $ 44,161 $ 39,460 $ 88,548 $ 80,782
Vendor management fees ............................................. 10,783 11,487 21,665 24,490
Gain (loss) on trading securities, net ............................. (1,269) 2,503 (2,667) 1,860
Valuation gains (losses) on real estate ............................ 4 (1,974) 93 (3,825)
Gain (loss) on sales of real estate ................................ 13 81 48 (460)
Operating income (losses) from real estate ......................... (165) 565 (339) 573
Other income ....................................................... 6,016 6,293 8,903 13,882
------------- ------------- ------------- -------------
Non-interest revenue ............................................. 59,543 58,415 116,251 117,302
------------- ------------- ------------- -------------
Interest income .................................................... 6,764 5,962 13,096 10,567
Interest expense ................................................... 9,072 7,096 17,512 14,898
------------- ------------- ------------- -------------
Net interest income (expense) before provision for loan losses ... (2,308) (1,134) (4,416) (4,331)
Provision for loan losses .......................................... (16) (287) (12) (819)
------------- ------------- ------------- -------------
Net interest income (expense) after provision for loan losses..... (2,292) (847) (4,404) (3,512)
------------- ------------- ------------- -------------
Total revenue .................................................. 57,251 57,568 111,847 113,790
------------- ------------- ------------- -------------
NON-INTEREST EXPENSE
Compensation and employee benefits ................................. 24,355 20,897 48,727 42,930
Occupancy and equipment ............................................ 4,571 4,021 8,813 8,018
Technology and communication costs ................................. 7,862 6,616 15,261 13,285
Loan expenses ...................................................... 6,084 6,783 11,796 14,710
Professional services and regulatory fees .......................... 5,656 7,994 10,377 13,819
Loss (gain) on investments in affordable housing properties ........ (118) (41) 524 (79)
Other operating expenses ........................................... 3,668 2,151 8,239 5,187
------------- ------------- ------------- -------------
Non-interest expense ........................................... 52,078 48,421 103,737 97,870
------------- ------------- ------------- -------------
Income (loss) before income taxes .................................... 5,173 9,147 8,110 15,920
Income tax expense (benefit) ......................................... 2,265 55 2,815 66
------------- ------------- ------------- -------------
Net income (loss) ................................................ $ 2,908 $ 9,092 $ 5,295 $ 15,854
============= ============= ============= =============
EARNINGS (LOSS) PER SHARE
Basic ............................................................ $ 0.05 $ 0.13 $ 0.08 $ 0.23
Diluted .......................................................... $ 0.05 $ 0.13 $ 0.08 $ 0.23
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic ............................................................ 62,809,286 68,160,020 62,776,469 67,961,217
Diluted .......................................................... 63,709,246 69,534,999 63,864,247 69,314,392
The accompanying notes are an integral part of these
consolidated financial statements.
4
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Three Months Six Months
----------------------- -----------------------
For the periods ended June 30, 2005 2004 2005 2004
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
Net income (loss) ............................................. $ 2,908 $ 9,092 $ 5,295 $ 15,854
Other comprehensive income (loss), net of taxes:
Change in unrealized foreign currency translation adjustment
arising during the period (1) ................................ (541) (954) (239) (1,001)
---------- ---------- ---------- ----------
Comprehensive income (loss) ................................... $ 2,367 $ 8,138 $ 5,056 $ 14,853
========== ========== ========== ==========
(1) Net of tax benefit (expense) of $305 and $560 for the three months and of
$127 and $588 for the six months ended June 30, 2005 and 2004,
respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
5
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(Dollars in thousands)
Accumulated
Other
Common Stock Additional Comprehensive
----------------------- Paid-in Retained Income (Loss),
Shares Amount Capital Earnings Net of Taxes Total
---------- ---------- ---------- ---------- -------------- ----------
Balances at December 31, 2004 .......... 62,739,478 $ 627 $ 181,336 $ 148,133 $ 12 $ 330,108
Net income ............................. -- -- -- 5,295 -- 5,295
Issuance of restricted common stock
awards to employees and directors ..... 185,393 2 837 -- -- 839
Exercise of common stock options ....... 9,231 -- 81 -- -- 81
Other comprehensive income (loss), net
of taxes .............................. -- -- -- -- (239) (239)
---------- ---------- ---------- ---------- -------------- ----------
Balances at June 30, 2005 .............. 62,934,102 $ 629 $ 182,254 $ 153,428 $ (227) $ 336,084
========== ========== ========== ========== ============== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
6
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the six months ended June 30, 2005 2004
- ------------------------------------------------------------------------------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................................................... $ 5,295 $ 15,854
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities
Net cash provided by trading activities ......................................... 73,872 5,887
Premium amortization (discount accretion) on securities, net .................... 384 (2,122)
Amortization of servicing rights ................................................ 50,045 48,669
Depreciation and other amortization ............................................. 6,578 7,067
Provision for loan losses ....................................................... (12) (819)
Valuation (gains) losses on real estate ......................................... (93) 3,825
(Gain) loss on trading and match funded securities .............................. 2,667 (1,860)
Provision for losses on affordable housing properties ........................... 721 --
(Gain) loss on sale of real estate .............................................. (48) 460
(Gain) loss on sale of deposits ................................................. (1,750) --
Increase (decrease) in servicer liabilities ..................................... 19,103 64,325
(Increase) decrease in advances and match funded advances on loans and loans
serviced for other .............................................................. (1,704) 36,559
(Increase) decrease in receivables and other assets, net ........................ (10,429) (16,507)
Increase (decrease) in other liabilities, net ................................... 5,884 (4,220)
Other ........................................................................... 2,189 (3,046)
------------- -------------
Net cash provided (used) by operating activities .................................... 152,702 154,072
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments received on match funded loans ............................... 499 5,031
Acquisitions of match funded loans .............................................. -- (7,119)
Proceeds from sale of affordable housing properties ............................. -- 327
Purchase of mortgage servicing rights ........................................... (50,969) (18,348)
Principal payments received on loans ............................................ 461 29,521
Purchases, originations and funded loans commitments, net........................ (219) (15,975)
Proceeds from sale of real estate ............................................... -- 18,910
Additions to premises and equipment ............................................. (6,828) (5,755)
Proceeds from sale of subsidiary ................................................ 4,337 --
------------- -------------
Net cash provided (used) by investing activities .................................... (52,719) 6,592
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits and escrow deposits ............................. (210,850) 38,861
Sale of deposits ................................................................ (165,741) --
Premium received on sale of deposits ............................................ 1,500 --
Proceeds from (repayment of) lines of credit and other secured borrowings, net .. 1,913 (79,802)
Proceeds from (repayment of) match funded liabilities, net ...................... 40,495 2,351
Exercise of common stock options ................................................ 42 2,317
------------- -------------
Net cash provided (used) by financing activities .................................... (332,641) (36,273)
------------- -------------
Net increase (decrease) in cash ..................................................... (232,658) 124,391
Cash at beginning of period ......................................................... 542,891 316,167
------------- -------------
Cash at end of period ............................................................... $ 310,233 $ 440,558
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
7
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
For the six months ended June 30, 2005 2004
- ------------------------------------------------------------------------------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest ........................................................................ $ 18,567 $ 15,588
Income tax payments (refunds) ................................................... 70 (48)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Assumption of line of credit by purchaser of real estate ........................ $ -- $ 20,000
Equipment acquired through capital leases ....................................... 3,123 --
SALE OF SUBSIDIARY
Fair value of subsidiary sold ................................................... $ 9,200 $ --
Financing to buyer .............................................................. (4,863) --
------------- -------------
Net cash received for subsidiary sold ........................................... $ 4,337 $ --
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
8
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Dollars in thousands)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared in conformity with the instructions to Form 10-Q and Article
10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they do not include all of the information and footnotes required by U.S.
generally accepted accounting principles ("GAAP") for complete financial
statements. The interim consolidated financial statements of Ocwen Financial
Corporation ("OCN") include the accounts of OCN and its subsidiaries. At June
30, 2005, OCN owns all of the outstanding stock of its primary subsidiaries,
Ocwen Loan Servicing, LLC ("OLS"), Investors Mortgage Insurance Holding Company,
Ocwen Technology Xchange, Inc. ("OTX"), Ocwen Asset Investment Corp. ("OAC") and
Ocwen Financial Solutions, Private Limited ("India"). OCN also owns 70% of
Global Servicing Solutions, LLC ("GSS") with the remaining 30% minority interest
held by ML IBK Positions, Inc. ("Merrill Lynch"). We have eliminated all
significant intercompany transactions and balances in consolidation.
In our opinion, the accompanying unaudited financial statements
contain all adjustments, consisting only of normal recurring accruals, necessary
for a fair statement of our financial condition at June 30, 2005 and December
31, 2004, the results of our operations for the three and six months ended June
30, 2005 and 2004, our comprehensive income (loss) for the three and six months
ended June 30, 2005 and 2004, our changes in stockholders' equity for the six
months ended June 30, 2005 and our cash flows for the six months ended June 30,
2005 and 2004. The results of operations and other data for the three and six
months ended June 30, 2005 are not necessarily indicative of the results that
may be expected for any other interim period or the entire year ending December
31, 2005. The unaudited consolidated financial statements presented herein
should be read in conjunction with the audited consolidated financial statements
and related notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2004. Certain reclassifications have been made to the
prior periods' interim consolidated financial statements to conform to the June
30, 2005 presentation.
In preparing the consolidated financial statements, we are required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the balance sheet and revenues and expenses for the
periods covered. Material estimates that are particularly significant in the
near or medium term relate to our determination of allowances for loans,
servicing advances, and receivables, as well as our valuation of securities,
affordable housing properties, servicing rights, intangibles and deferred tax
assets. Actual results could differ from those estimates and assumptions.
NOTE 2 CURRENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123 (R),
"Share-Based Payment". This Statement was issued by the Financial Accounting
Standards Board ("FASB") on December 16, 2004 and is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation". This Statement also supersedes
Accounting Principles Board ("APB") Opinion No. 25 and its related
implementation guidance.
SFAS No. 123 (R) requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award - the requisite service period
(usually the vesting period). No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. The fair
value of an award is not re-measured after its initial estimation on the grant
date (except in the case of a liability award or if the award is subsequently
modified). The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of those instruments (unless observable market prices for
the same or similar instruments are available). The notes to financial
statements will disclose information to assist users of financial information to
understand the nature of share-based payment transactions and the effects of
those transactions on the financial statements.
SFAS No. 123 (R) eliminates the alternative to use Opinion 25's
intrinsic value method of accounting that was provided in SFAS No. 123 as
originally issued. Under APB Opinion No. 25, issuing stock options to employees
generally resulted in recognition of no compensation cost, except with respect
to options that were granted with an exercise price that was less than fair
value of the stock at the date of grant.
On April 14, 2005, the Securities and Exchange Commission ("SEC")
approved a new rule that delays the effective date of SFAS 123 (R) for public
companies. Under the SEC's rule, SFAS 123 (R) is now effective for public
companies for annual, rather than interim, periods that begin after June 15,
2005. SFAS 123 (R) applies to all awards granted after the required effective
date and to awards modified, repurchased, or cancelled after that date. The
cumulative effect of initially applying this Statement, if any, is recognized as
of the required effective date.
9
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
As of the required effective date, all public entities will apply this
Statement using a modified version of prospective application. Under that
transition method, compensation cost is recognized on or after the required
effective date for the portion of outstanding awards for which the requisite
service has not yet been rendered, based on the grant-date fair value of those
awards calculated under Statement 123 for either recognition or pro forma
disclosures. For periods before the required effective date, public entities may
elect to apply a modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods by SFAS No. 123.
We have not yet determined which transition method we will apply or
the cumulative effect of initially adopting this Statement. We have determined
that awards we have granted to date will be classified as equity awards (versus
liability awards) because their terms contain service conditions. Therefore, the
fair value of these awards will not be re-measured after our initial estimation
on the grant date. We currently account for our stock option plans based on the
intrinsic value method set forth in APB Opinion No. 25. Therefore, we anticipate
that the amount of compensation expense we recognize in connection with our
stock option awards will increase under the fair value based method of SFAS Nos.
123 and 123(R).
Earnings Per Share - An Amendment of SFAS No. 128. The FASB has
decided to defer the issuance of a final standard on EPS until the third quarter
of 2005. When issued, the provisions of the final standard are expected to
require retrospective application for all prior periods presented. When
computing diluted EPS for year-to-date periods, it is expected that companies
will be required to use the year-to-date average stock price to compute the
number of treasury shares that could theoretically be purchased with the
proceeds from exercise of share contracts such as options or warrants. The
year-to-date computation would be performed independently from the quarterly
computations. The old method required companies to calculate an average of the
potential incremental common shares computed for each quarter when computing
year-to-date incremental shares. This amendment is expected to impact Ocwen as
we use the treasury stock method to determine the number of incremental shares
from the assumed exercise of stock options to be included in the denominator of
diluted EPS computations. Under the treasury stock method, the proceeds from the
assumed exercise of options are assumed to be used to purchase common stock at
the average market price during the period. The incremental shares (the
difference between the number of shares assumed issued and the number of shares
assumed purchased) are included in the denominator of the diluted EPS
computation.
Statement of Position 03-3, "Accounting for Certain Loans for Debt
Securities Acquired in a Transfer" ("SOP 03-3"), which was issued by the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants in December 2003, requires acquired impaired loans for which
it is probable that the investor will be unable to collect all contractually
required payments receivable to be recorded at the present value of expected
cash flows. Under SOP 03-3, it is not appropriate to create or carry over a
valuation allowance at the time of acquisition. SOP 03-3 was issued in December
2003 and is effective for loans acquired on or after January 1, 2005. Our total
net investment in loans at June 30, 2005 amounted to $8,725 and other than to
repurchase single family residential loans previously sold, we have not acquired
any loans since 2000; therefore, the application of SOP 03-3 did not have a
significant impact on our consolidated financial statements.
NOTE 3 BASIC AND DILUTED EARNINGS PER SHARE
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, as adjusted to
add back interest expense on the 3.25% Convertible Notes (if dilutive), by the
weighted average number of common shares outstanding, including the dilutive
potential common shares related to outstanding stock options, restricted stock
awards and the Convertible Notes.
10
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
The following is a reconciliation of the calculation of basic EPS to
diluted EPS for the periods ended:
Three Months Six Months
--------------------------- ---------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------------ ------------ ------------ ------------ ------------
Basic EPS:
Net income (loss) .......................................... $ 2,908 $ 9,092 $ 5,295 $ 15,854
============ ============ ============ ============
Weighted average shares of common stock .................... 62,809,286 68,160,020 62,776,469 67,961,217
============ ============ ============ ============
Basic EPS .................................................. $ 0.05 $ 0.13 $ 0.08 $ 0.23
============ ============ ============ ============
Diluted EPS:
Net income (loss) .......................................... $ 2,908 $ 9,092 $ 5,295 $ 15,854
============ ============ ============ ============
Weighted average shares of common stock .................... 62,809,286 68,160,020 62,776,469 67,961,217
Effect of dilutive elements:
Convertible Notes (1) .................................... -- -- -- --
Stock options (2) ........................................ 798,015 1,113,009 856,606 1,083,721
Restricted stock awards .................................. 101,945 261,970 231,172 269,454
------------ ------------ ------------ ------------
Dilutive weighted average shares of common stock ........... 63,709,246 69,534,999 63,864,247 69,314,392
============ ============ ============ ============
Diluted EPS ................................................ $ 0.05 $ 0.13 $ 0.08 $ 0.23
============ ============ ============ ============
(1) Conversion of the Convertible Notes into shares of common stock is not
assumed for purposes of computing diluted EPS for the second quarter and
first six months of 2005 because the effect would be anti-dilutive. The
effect is anti-dilutive whenever interest expense on the Convertible
Notes, net of income tax, per common share obtainable on conversion
exceeds basic EPS.
(2) Excludes the effect of an average of 1,629,171 and 1,006,205 of options
that were anti-dilutive for the second quarter of 2005 and 2004,
respectively, because their exercise price was greater than the average
market price of our stock. Year to date, an average of 1,630,605 and
1,006,205 options were anti-dilutive for 2005 and 2004, respectively.
NOTE 4 FOREIGN CURRENCY EXCHANGE RATE RISK MANAGEMENT
We entered into foreign currency derivatives to hedge our net
investments in foreign subsidiaries that own residual securities backed by
subprime residential loans originated in the United Kingdom ("U.K.") and that
owned a shopping center located in Halifax, Nova Scotia. During the first
quarter of 2005, we sold our foreign subsidiary that owned the shopping center.
However, in connection with the sale, OCN extended a short-term Canadian Dollar
loan in the amount of C$6,000 ($4,898 U.S. Dollar equivalent at June 30, 2005)
to the buyer. We are managing our exposure to foreign currency exchange rate
risk related to this foreign currency-denominated transaction through the use of
currency futures. 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 we have entered into in response to
changes in our recorded investment 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. 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 U.K.
residuals is the functional currency. The foreign currency derivative financial
instrument related to our foreign subsidiary that owns the residual securities
was designated as a hedge. Accordingly, for this instrument we include the gains
or losses in the net unrealized foreign currency translation in accumulated
other comprehensive income in stockholders' equity. The foreign currency
derivative financial instrument related to our Canadian Dollar-denominated loan
was not designated as a hedge. Gains and losses from this instrument are
included in earnings as an offset to the related foreign currency transaction
gain or loss arising from remeasurement of the loan.
11
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
The following table sets forth the terms and values of these foreign
currency financial instruments at the dates indicated:
Position Maturity Notional Amount (1) Strike Rate Fair Value
-------- ---------- ------------------- ----------- ------------
June 30, 2005:
- ---------------------------------------
Canadian Dollar currency futures....... Short Sept. 2005 C$ 6,000 0.7985 $ (107)
British Pound currency futures......... Short Sept. 2005 (pound) 15,250 1.8143 427
------------
$ 320
============
December 31, 2004:
- ---------------------------------------
Canadian Dollar currency futures....... Short March 2005 C$ 11,500 0.8416 $ 109
British Pound currency futures......... Short March 2005 (pound) 17,000 1.9248 301
------------
$ 410
============
(1) The U.S. Dollar equivalent notional amounts of the Canadian Dollar
currency futures and British Pound currency futures at June 30, 2005 were
$4,898 and $27,319, respectively. At December 31, 2004, the U.S. Dollar
equivalent notional amounts were $9,570 and $32,609, respectively.
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. Accordingly, the notional principal amount does not
represent our exposure to credit loss.
NOTE 5 REGULATORY MATTERS
Effective June 30, 2005, Ocwen Federal Bank FSB (the "Bank"), a wholly
owned subsidiary, terminated its status as a federal savings bank. This process,
which we have referred to as "debanking," began on November 24, 2004, when the
Bank filed an Application for Voluntary Dissolution with the Office of Thrift
Supervision ("OTS"). Prior to returning its original thrift charter to the OTS
on July 1, 2005, the Bank operated as a federal savings bank organized under the
Home Owners' Loan Act (the "Act"), and OCN was a registered savings and loan
holding company. We were subject to extensive federal and state regulation under
the Act, as well as other U.S. federal and state laws. Our primary regulatory
authority was the OTS.
In connection with our debanking process, on February 4, 2005, OCN and
the Bank entered into a Branch Purchase and Deposit Assumption Agreement (the
"Branch Purchase Agreement") with Marathon National Bank of New York
("Marathon"). Pursuant to the Branch Purchase Agreement, Marathon agreed to
assume the deposit liabilities of the accounts associated with the Bank's branch
facility in Fort Lee, New Jersey. In addition, Marathon agreed to take over the
lease and other contracts and acquire the assets related to the branch. We
agreed to make a cash payment to Marathon, which is calculated based upon, among
other things, the amount of those deposit account liabilities as of the closing.
On June 13, 2005, the OTS approved our plan of voluntary dissolution for the
Bank subject to certain conditions, including, among other things, our entering
into a guaranty of the obligations of the Bank (other than the deposit and other
liabilities to be assumed by Marathon in connection with the Branch Purchase
Agreement), a cash collateral agreement and a collateral trust agreement, all on
terms acceptable to the OTS.
Following receipt of OTS approval, OCN entered into an Assignment and
Assumption Agreement, dated June 28, 2005, with its subsidiaries Investors
Mortgage Insurance Holding Company, Rocaille Acquisition Subsidiary, Inc., the
Bank and OLS whereby the Bank assigns to OLS, directly or indirectly, all of its
assets, liabilities and business remaining after the consummation of the
transactions contemplated by the Branch Purchase Agreement (the "Assignment").
On the same date, pursuant to the conditions set forth in the OTS
Approval, OCN entered into a Guaranty, dated June 28, 2005, in favor of the OTS
and any holders of claims with respect to liabilities assumed by OLS from the
Bank in connection with the Assignment (the "Assumed Liabilities"). Assumed
Liabilities include all legal actions against the Bank. The Guaranty contains
affirmative covenants relating to the maintenance of a cash collateral account,
reporting requirements, transactions with affiliates, preservation of the
existence of our subsidiaries and maintenance of not less than $35,000 of
unencumbered assets. Pursuant to the Guaranty, we also agreed that we and our
subsidiaries would not, among other things:
12
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
o incur debt (as defined) if, following the incurrence of such debt, the
ratio of our consolidated debt to our tangible net worth (as defined)
for the most recent fiscal quarter exceeds 7.25:1.00;
o enter into any merger transaction or sale of all or substantially all
of our assets, except for certain mergers among us and our
subsidiaries or with an entity with a specified minimum credit rating
that agrees to assume our obligations under the Guaranty, and provided
that we maintain a specified minimum net worth;
o sell, lease, transfer or otherwise dispose of any assets, except in
exchange for consideration of at least 85% cash for fair value and
provided that, after giving effect to any such sale, lease, transfer
or disposition, the ratio of our consolidated debt to our tangible net
worth for the most recent fiscal quarter does not exceed 7.25:1.00; or
o declare or pay any dividends or acquire any of our capital stock or
ownership interests or make any distributions or return of capital to
our stockholders, partners or members, except for (i) such dividends
or distributions that are payable only in OCN's common stock, (ii)
such declarations, dividends, acquisitions, distributions or returns
of capital in cash if we maintain a minimum net worth of $333,000 and
rating of B2 from Moody's and B- from S&P on our unsecured, non
credit-enhanced debt and any such capital distributions do not exceed
our consolidated net income for the year plus our retained earnings
for the two preceding years or (iii) cash dividends paid by a
subsidiary of OCN to OCN or to any of OCN's wholly owned subsidiaries
of which such entity is a subsidiary.
The Guaranty will remain in effect until the later of (a) the sixth
anniversary of the date on which the Bank's federal bank charter was cancelled
or (b) the date on which we have paid in full (i) any obligations that arise
out of the Assumed Liabilities with respect to which a claim has been asserted
on or prior to the sixth anniversary of the date on which the Bank's federal
bank charter was cancelled and (ii) all other amounts payable by us under the
Guaranty.
OCN also entered into a Cash Collateral Agreement and a Collateral
Trust Agreement, each dated June 28, 2005, with the Bank of New York pursuant to
which we established a collateral trust account to secure payment of our
obligations under the Guaranty. We have agreed to maintain in the cash
collateral account a minimum of $5,000. The Cash Collateral Agreement and the
Collateral Trust Agreement will terminate upon termination of the Guaranty and
receipt of proper notice of such termination. This cash collateral deposit is
included with other assets in the consolidated balance sheet.
On June 30, 2005, we completed our divestiture to Marathon of the
deposit liabilities of the accounts associated with the branch and our
assignment of the remaining assets, liabilities and business of the Bank to OLS.
We recognized a gain of $1,750 from the sale of our branch deposit liabilities
to Marathon. In addition, we recorded a one-time provision of $1,124, which is
net of a related adjustment to the deferred tax asset valuation allowance,
arising from the recapture of bad debt reserves in connection with our
termination of the Bank's status as a federal savings bank.
Effective June 30, 2005, the Supervisory Agreement (the "Agreement")
that the Bank and OTS had entered into on April 19, 2004 terminated because we
are no longer an FDIC-insured institution. The OTS retains, for a period of six
years after termination of the Agreement, the right to bring enforcement actions
in respect of any breach or noncompliance by the Bank with the Agreement, or
other applicable regulations, that may have occurred prior to debanking.
We are continuing the Bank's non-depository businesses, including its
residential mortgage servicing business, under OLS, which is a licensed servicer
in fifty states, the District of Columbia and Puerto Rico. As a result of
debanking, we are no longer able to take deposits in the United States or
benefit from federal preemption with regard to post-debanking activities.
Bankhaus Oswald Kruber GmbH & Co. KG ("BOK"), our German banking
subsidiary that we acquired on September 30, 2004, is licensed as a credit
institution (Kreditinstitut) under the laws of the Federal Republic of Germany
and is supervised and regulated in Germany by the German Federal Financial
Supervisory Authority (Bundesanstalt fur Finanzdienstleistungsaufsicht - BaFin),
the German Central Bank (Deutsche Bundesbank) and, in respect of minimum
reserves on deposits, the European Central Bank.
13
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
Although currently not significant to our operations, BOK, under its
license, may engage not only in a number of traditional banking activities such
as deposit and lending business, but also in investment banking, underwriting
and securities trading transactions, both for its own account and for customers.
German regulatory requirements applicable to BOK concern in particular
the maintenance of adequate regulatory capital and liquidity, the monitoring of,
and limitations on, large credit exposures, limitations on equity and
equity-like participations in other companies, the protection of depositors and
the adoption of certain accounting standards and business practices. The German
Federal Financial Supervisory Authority and the German Central Bank monitor
compliance with the applicable German banking laws, rules and regulations
largely upon the basis of extensive reporting requirements as well as through
general and specific audits. BOK is in compliance in all material respects with
the German regulatory requirements that are applicable to its business.
NOTE 6 BUSINESS SEGMENT REPORTING
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. In the first quarter of 2005, we redefined our segment
reporting. We have restated prior periods to conform to the new segment
structure. A brief description of our segments at June 30, 2005 follows.
o Residential 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. This segment also includes our residential
loan servicing system product (REALServicing).
o Residential Origination Services. This business provides various loan
origination services, including residential property valuation
services (Ocwen Realty Advisors, or ORA), mortgage due diligence,
title services, loan refinancing for Residential Servicing customers
and our internet-based vendor management system (REALTrans). This
segment also includes the results of our subprime residual trading
securities that were reported as a separate segment (Subprime Finance)
prior to 2005.
o Commercial Servicing. This segment includes the results of both our
domestic and international servicing of primarily commercial assets
(loans and real estate), as well as our commercial loan servicing
system product (REALSynergy). International servicing is conducted
through GSS.
o Business Process Outsourcing. Business Process Outsourcing provides
outsourcing services to third parties including mortgage underwriting,
data entry, call center services and mortgage research.
o Ocwen Recovery Group. This 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 Corporate Items and Other. This segment includes certain items of
revenue and expense that are not directly related to a business,
including business activities that are individually insignificant,
interest income on short-term investments of cash and the related
costs of financing these investments and certain other corporate
expenses.
Based on the relative insignificance of the assets remaining in the
following segments, the remaining assets of these businesses and any related
income or loss arising from their resolution have been included in the Corporate
Items and Other segment beginning January 1, 2005.
o Commercial Assets. 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 non-core 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 Internal Revenue Code of 1986, as amended. Except to complete
those projects in which an investment had already been made, we ceased
making investments in properties in 2000.
We allocate interest income and expense to each business segment for
the investment of funds raised or funding of investments made. We also make
allocations of non-interest expense generated by corporate support services to
each business segment.
14
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
Financial information for our segments is as follows for the dates
indicated:
Total Assets
---------------------------
June 30, December 31,
2005 2004
------------ ------------
Core businesses:
Residential Servicing ............. $ 686,165 $ 687,233
Residential Origination Services .. 66,580 49,348
Commercial Servicing .............. 12,425 13,659
Business Process Outsourcing ...... 1,245 2,502
Ocwen Recovery Group .............. 880 541
------------ ------------
767,295 753,283
------------ ------------
Non-core businesses:
Commercial Assets ................. -- 24,149
Affordable Housing ................ -- 36,715
------------ ------------
-- 60,864
------------ ------------
Corporate Items and Other (1) ......... 515,352 768,385
------------ ------------
$ 1,282,647 $ 1,582,532
============ ============
(1) Includes cash of $303,363 and $535,733 at June 30, 2005 and December 30,
2004, respectively.
Net Interest
Income
(Expense) Pre-Tax
Non-Interest after Provision Non-Interest Income
Revenue for Loan Losses Expense (Loss)
--------------- ------------------ --------------- --------
For the three months ended June 30, 2005
Core businesses:
Residential Servicing ................ $ 34,392 $ (5,208) $ 26,585 $ 2,599
Residential Origination Services ..... 12,092 2,891 13,258 1,725
Commercial Servicing ................. 4,757 (7) 4,415 335
Business Process Outsourcing ......... 2,858 (19) 2,575 264
Ocwen Recovery Group ................. 3,296 -- 3,052 244
--------------- ------------------ --------------- --------
57,395 (2,343) 49,885 5,167
--------------- ------------------ --------------- --------
Corporate Items and Other ................ 2,148 51 2,193 6
--------------- ------------------ --------------- --------
$ 59,543 $ (2,292) $ 52,078 $ 5,173
=============== ================== =============== ========
For the three months ended June 30, 2004
Core businesses:
Residential Servicing ................ $ 38,444 $ (5,390) $ 25,614 $ 7,440
Residential Origination Services ..... 10,834 3,354 9,831 4,357
Commercial Servicing ................. 3,908 (1) 4,418 (511)
Business Process Outsourcing ......... 2,193 (5) 1,480 708
Ocwen Recovery Group ................. 3,179 -- 2,290 889
--------------- ------------------ --------------- --------
58,558 (2,042) 43,633 12,883
--------------- ------------------ --------------- --------
Non-core businesses:
Commercial Assets .................... 252 767 829 190
Affordable Housing ................... 17 (473) 731 (1,187)
--------------- ------------------ --------------- --------
269 294 1,560 (997)
--------------- ------------------ --------------- --------
Corporate Items and Other ................ (412) 901 3,228 (2,739)
--------------- ------------------ --------------- --------
$ 58,415 $ (847) $ 48,421 $ 9,147
=============== ================== =============== ========
15
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
Net Interest
Income
(Expense) Pre-Tax
Non-Interest after Provision Non-Interest Income
Revenue for Loan Losses Expense (Loss)
--------------- ------------------ --------------- --------
For the six months ended June 30, 2005
Core businesses:
Residential Servicing ................ $ 69,099 $ (9,312) $ 54,240 $ 5,547
Residential Origination Services ..... 23,026 5,851 24,319 4,558
Commercial Servicing ................. 9,505 (51) 9,097 357
Business Process Outsourcing ......... 5,443 (52) 5,030 361
Ocwen Recovery Group ................. 7,190 -- 6,441 749
--------------- ------------------ --------------- --------
114,263 (3,564) 99,127 11,572
--------------- ------------------ --------------- --------
Corporate Items and Other ................ 1,988 (840) 4,610 (3,462)
--------------- ------------------ --------------- --------
$ 116,251 $ (4,404) $ 103,737 $ 8,110
=============== ================== =============== ========
For the six months ended June 30, 2004
Core businesses:
Residential Servicing ................ $ 75,517 $ (10,662) $ 51,922 $ 12,933
Residential Origination Services ..... 21,998 6,090 20,697 7,391
Commercial Servicing ................. 7,800 (2) 8,351 (553)
Business Process Outsourcing ......... 4,348 (8) 3,237 1,103
Ocwen Recovery Group ................. 6,658 -- 4,368 2,290
--------------- ------------------ --------------- --------
116,321 (4,582) 88,575 23,164
--------------- ------------------ --------------- --------
Non-core businesses:
Commercial Assets .................... (2,042) 983 1,991 (3,050)
Affordable Housing ................... 17 (853) 1,323 (2,159)
--------------- ------------------ --------------- --------
(2,025) 130 3,314 (5,209)
--------------- ------------------ --------------- --------
Corporate Items and Other ................ 3,006 940 5,981 (2,035)
--------------- ------------------ --------------- --------
$ 117,302 $ (3,512) $ 97,870 $ 15,920
=============== ================== =============== ========
NOTE 7 COMMITMENTS AND CONTINGENCIES
Under the terms of the sales agreements entered into in connection
with the sale of certain of our affordable housing properties, we have a
commitment to fund cash deficits that may arise from the operations of those
properties. The remaining term of these commitments ranges from two to five
years. The obligation under these commitments was $4,656 and $4,813 as of June
30, 2005 and December 31, 2004, respectively. Any operating deficits we fund are
supported by a promissory note to be repaid to us from future cash flows of the
property. In addition, we have provided to the purchasers of certain affordable
housing properties guaranties against the possible recapture of future tax
credits. We have never experienced a recapture of tax credits on any of the
affordable housing properties in which we invested or sold. We have not
recognized these guaranties as a liability because the probability of recapture
is considered remote.
As discussed in Note 5, under the terms of the Assignment and
Assumption agreement OLS has become the successor to the Bank with respect to
all legal actions. Therefore, any references to the Bank in connection with the
following legal matters pertain to OLS as successor.
On April 13, 2004 the United States Judicial Panel on Multi-District
Litigation granted our petition to transfer and consolidate a number of lawsuits
against the Bank, OCN and various third parties arising out of the servicing of
plaintiffs' mortgage loans into a single case to proceed in the United States
District Court for the Northern District of Illinois under caption styled: In re
Ocwen Federal Bank FSB Mortgage Servicing Litigation, MDL Docket No. 1604 (the
"MDL Proceeding"). The consolidated lawsuits in which the Bank and/or OCN are
defendants involve 54 mortgage loans currently or previously serviced by the
Bank. Additional similar lawsuits have been brought in other courts, some of
which may be transferred and consolidated in the MDL Proceeding.
The borrowers in these lawsuits seek class action certification. No class has
been certified in the MDL Proceeding or any related lawsuits. On August 23,
2004, plaintiffs in the MDL Proceeding filed a Consolidated Complaint containing
various claims under federal statutes, including the Real Estate Settlement
Procedures Act and Fair Debt Collection Practices Act, state deceptive trade
practices statutes and common law. The claims are generally based on allegations
of improper loan servicing practices, including (i) charging borrowers allegedly
improper or unnecessary fees such as breach letter fees, hazard insurance
premiums, foreclosure-related fees, late fees and property inspection fees; (ii)
untimely posting and misapplication of borrower payments; and (iii) improperly
treating borrowers as in default on their loans. While some of the individual
borrowers had set forth specific damage allegations in their lawsuits prior to
their being consolidated into the MDL Proceeding (e.g., the complaint in
Unatiben Gandabhai and Dineshan Tandel v. Ocwen Federal Bank FSB, Case No.
3:04-2582 (N.D. Cal.) claimed actual damages of $61; the complaint in Kweku
Hanson v. Ocwen Federal Bank, Ocwen Financial Corporation, William Erbey, Litton
Loan Servicing LP, Moss, Codilis, Stawiarski, Morris, Schneider & Prior, LLP,
Moss, Pite & Duncan, LLP, Gerald R. Moss, Codilis & Stawiarski, P.C., Ernie
Codilis, Leo C. Stawiarski, Jr., Morris, Schneider & Prior, LLC, Arthur J.
Morris, Thomas E. Prior, Randolph Schneider, Fein, Such, Khan & Shepard, P.C.,
Alan F. Such, Weltman, Weinberg & Reis Co,, LPA, Larry R. Rothenberg, Boles,
Boles & Ryan, P.L.C., William R. Boles, Jr., Case No. 02-CV-860 (D. Conn.)
claimed actual damages of $150,000 and punitive and exemplary damages of
$1,500,000), the Consolidated Complaint in the MDL Proceeding does not set forth
any specific amounts of claimed damages. The absence of any specification of
damages in the Consolidated Complaint does not, however, preclude plaintiffs in
the MDL Proceeding from requesting leave from the court to amend the
Consolidated Complaint or from otherwise seeking damages should the matter
proceed to trial. On April 25, 2005, the court entered an Opinion and Order
granting partial summary judgment to defendants finding that, as a matter of
law, the mortgage loan contracts signed by plaintiffs authorize the imposition
of breach letter fees and other legitimate default or foreclosure related
expenses. The court explained that its ruling was in favor of defendants to the
specific and limited extent that plaintiffs' claims challenge the propriety of
the above-mentioned fees. The court has not yet ruled on any other claims
presented in the MDL Proceeding. We cannot currently determine the ultimate
outcome of the MDL Proceeding or the other matters described above and have not
established a reserve in respect thereof. We believe the allegations in the MDL
Proceeding and the other matters described above are without merit and will
continue to vigorously defend against them.
16
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
On November 3, 2004, the trial judge in litigation brought by Cartel
Asset Management, Inc. ("Cartel") against OCN, the Bank and OTX in federal court
in Denver, Colorado entered final judgment in the amount of $520 against OTX and
nominal damages of two dollars against the Bank. No damages were entered against
OCN. By the November 3, 2004 order, the judge reduced a prior jury verdict in
the amount of $9,320 after trial on this matter involving allegations of
misappropriation of trade secrets and contract-related claims brought by a
former vendor. The litigation does not relate to our core Residential Loan
Servicing business practices. Notwithstanding the nominal damage award against
the Bank, it was assessed a statutory award to Cartel of attorneys' fees in an
additional amount of $170, and the Bank and OTX were further assessed costs in
the amount of $9. Cartel and defendants are pursuing cross-appeals in the United
States Court of Appeals for the Tenth Circuit. We intend to continue to
vigorously defend this matter.
On February 8, 2005, a jury in Circuit Court for Palm Beach County,
Florida returned verdicts of $1,000 and $1,056 in compensatory damages in favor
of two former employees of the Bank in a lawsuit against OCN and the Bank. The
jury rejected plaintiffs' request for punitive damages. The plaintiffs brought
claims under the Florida Civil Rights Act, the Florida Whistleblower Act and
state tort law, arising out of an alleged invasion of privacy and related
incidents allegedly committed by other former employees of the Bank in 1998 for
which plaintiffs sought to hold the Ocwen defendants vicariously liable. We
believe the verdicts, which were reduced to final judgments on May 20, 2005, are
against the weight of evidence and contrary to law. On June 16, 2005 we filed a
notice to take an appeal to the Florida Court of Appeals for the Fourth District
and, in connection therewith, an appeal bond has been posted in the amount of
$2,397 to cover the amount of the judgments plus interest that may accrue during
the period of the appeal. Also pending in the trial court is plaintiffs' motion
for an award of attorneys' fees in the amount of $1,100 as to which we have
objected and requested a full accounting. We intend to continue to vigorously
defend this matter.
On March 9, 2005, the Bank was served with a complaint filed in
Superior Court for Los Angeles County, California, by Banco Popular North
America, successor by merger to Quaker City Bank ("Banco Popular"), which claims
to be a holder of residual interest in two mortgage loan trusts for which the
Bank provides loan servicing. The case was subsequently removed upon the Bank's
motion to the United States District Court for the Central District of
California. In this lawsuit, Banco Popular challenges the Bank's fee charges for
recoveries on charged-off loans. The complaint variously alleges breach of
contract, conversion, breach of fiduciary duty and fraud, and seeks declaratory
and equitable relief, along with claimed compensatory damages in excess of
$3,000 and punitive damages in an unspecified amount. We believe the allegations
are without merit and were prepared to vigorously defend this matter if
necessary. The parties have reached a settlement agreement in principle pursuant
to which a stipulation is to be filed dismissing all claims with prejudice. The
settlement is subject to the parties finalizing a mutually acceptable written
definitive agreement. We do not expect the amount of the settlement to have any
material effect on our financial condition, results of operations or cash flows.
On August 5, 2005, the trial judge in County Court for Nueces County,
Texas, entered an Agreed Order of Dismissal ("Dismissal Order"), dismissing with
prejudice all claims brought by two investor plaintiffs whose mortgage loan on
an investment property was serviced by the Bank. After a trial in February,
2005, the jury returned a verdict in favor of plaintiffs for compensatory and
statutory damages in the amount of $140. The jury rejected plaintiffs' request
for punitive damages but awarded plaintiff attorneys' fees of $2,900. In April,
2005, we filed an opposition to plaintiffs' request for entry of judgment and a
motion to instead set aside or substantially reduce the attorneys' fee award as
unsupported by the evidence and impermissibly excessive under the controlling
legal authorities. The parties subsequently entered into a definitive settlement
agreement disposing of all claims. In entering the Dismissal Order, the court
ordered that the attorneys' fee award is "null and void" and is to be
"disregarded and deemed stricken." The amount of the settlement was within the
reserve amount established for the case.
17
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
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.
We continuously monitor the status of our litigation, including advice
from external legal counsel, and perform periodic assessments of our litigation
for potential accrual of litigation reserves and disclosure. We have accrued and
maintain litigation reserves where it is probable that a liability had been
incurred and the amount of loss can be reasonably estimated.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in thousand, except share data)
GENERAL
OCN is a diversified financial services holding company with
headquarters in West Palm Beach, Florida and operations in Canada, China,
Germany, India, Japan and Taiwan. We are principally engaged in servicing and
origination processing services for the loan industry. Our five core business
segments, aligned within our two areas of focus - servicing and loan processing
services, were as follows at June 30, 2005:
Servicing
Residential Servicing
Commercial Servicing
Ocwen Recovery Group
Loan Processing Services
Residential Origination Services
Business Process Outsourcing
Based on the relative insignificance of the assets remaining in the
Commercial Assets and Affordable Housing segments, the remaining assets of these
businesses and any related income or loss arising from their resolution have
been included in the Corporate Items and Other segment beginning January 1,
2005. See Note 6 to the Interim Consolidated Financial Statements and "Results
of Operations - Segment Results" for additional information regarding segments.
Key elements of our business strategy are summarized as follows:
o continue to grow our residential servicing business, including the
opportunistic acquisition of servicing and sub-servicing rights;
o grow our residential loan origination services, including mortgage due
diligence, mortgage loan processing, property valuation and loan
refinancing;
o continue our globalization efforts through both the expansion of our
international facilities and the expansion of the potential client
base for our products and services; and
o expand our other core businesses, such as unsecured debt collection
and business process outsourcing.
As disclosed in Note 5 to the Interim Consolidated Financial
Statements, we have terminated the Bank's status as a federal savings bank,
which eliminates the restrictions imposed on the amount of mortgage servicing
rights that we may obtain and, therefore, provides us more flexibility to grow
our residential servicing business. As a result of debanking, we are no longer
able to take deposits in the United States or benefit from federal preemption.
OVERVIEW OF RISKS AND RELATED CRITICAL ACCOUNTING POLICIES
Risks Relating to Our Business. We include a discussion of the
principal risk factors that relate to our businesses and that may affect future
results on pages 13 through 18 of Management's Discussion and Analysis of
Operations and Financial Conditions in our Annual Report on Form 10-K for the
year ended December 31, 2004.
Critical Accounting Policies. Our strategy to grow our core businesses
is 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. We summarize our more subjective and complex accounting
policies as they relate to our overall business strategy on pages 18 through 21
of Management's Discussion and Analysis of Results of Operations and Financial
Condition in our Annual Report on Form 10-K for the year ended December 31,
2004. We discuss our significant accounting policies in detail in Note 1 to our
Consolidated Financial Statements included in our Annual Report on Form 10-K for
the year ended December 31, 2004.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
The following discussion of our consolidated financial condition,
results of operations, capital resources and liquidity should be read in
conjunction with the Interim Consolidated Financial Statements and related
Notes.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables present selected consolidated financial
information at the dates and for the periods indicated.
Increase (Decrease)
June 30, December 31, ---------------------------
Financial Condition Data 2005 2004 $ %
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Total assets .......................................... $ 1,282,647 $ 1,582,532 $ (299,885) (19)%
Cash .............................................. $ 310,233 $ 542,891 $ (232,658) (43)%
Trading securities:
Investment grade ................................ $ 2,942 $ 86,215 $ (83,273) (97)%
Subordinate and residuals ....................... $ 45,343 $ 39,527 $ 5,816 15%
Match funded assets, net .......................... $ 334,689 $ 280,760 $ 53,929 19%
Advances on loans and loans serviced for others ... $ 187,423 $ 240,430 $ (53,007) (22)%
Mortgage servicing rights ......................... $ 132,333 $ 131,409 $ 924 1%
Receivables ....................................... $ 119,943 $ 126,719 $ (6,776) (5)%
Total liabilities ..................................... $ 944,821 $ 1,250,894 $ (306,073) (24)%
Match funded liabilities .......................... $ 284,822 $ 244,327 $ 40,495 17%
Servicer liabilities .............................. $ 310,369 $ 291,266 $ 19,103 7%
Lines of credit and other secured borrowings ...... $ 52,525 $ 50,612 $ 1,913 4%
Debt securities ................................... $ 231,249 $ 231,249 $ -- --%
Deposits .......................................... $ -- $ 290,507 $ (290,507) (100)%
Escrow deposits ................................... $ -- $ 86,084 $ (86,084) (100)%
Stockholders' equity .................................. $ 336,084 $ 330,108 $ 5,976 2%
For the Three Months Ended June 30,
---------------------------------------------------------
Favorable/(Unfavorable)
---------------------------
Operations Data 2005 2004 $ %
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 2,908 $ 9,092 $ (6,184) (68)%
Non-interest revenue .................................. $ 59,543 $ 58,415 $ 1,128 2%
Net interest income (expense) ......................... $ (2,308) $ (1,134) $ (1,174) (104)%
Provision for loan losses ............................. $ (16) $ (287) $ (271) (94)%
Non-interest expense .................................. $ 52,078 $ 48,421 $ (3,657) (8)%
Income tax expense (benefit) .......................... $ 2,265 $ 55 $ (2,210) (4,018)%
Net income (loss) per share:
Basic ............................................. $ 0.05 $ 0.13 $ (0.08) (62)%
Diluted ........................................... $ 0.05 $ 0.13 $ (0.08) (62)%
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
For the Six Months Ended June 30,
---------------------------------------------------------
Favorable/(Unfavorable)
---------------------------
Operations Data 2005 2004 $ %
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 5,295 $ 15,854 $ (10,559) (67)%
Non-interest revenue .................................. $ 116,251 $ 117,302 $ (1,051) (1)%
Net interest income (expense) ......................... $ (4,416) $ (4,331) $ (85) (2)%
Provision for loan losses ............................. $ (12) $ (819) $ (807) (99)%
Non-interest expense .................................. $ 103,737 $ 97,870 $ (5,867) (6)%
Income tax expense (benefit) .......................... $ 2,815 $ 66 $ (2,749) (4,165)%
Net income (loss) per share:
Basic ............................................. $ 0.08 $ 0.23 $ (0.15) (65)%
Diluted ........................................... $ 0.08 $ 0.23 $ (0.15) (65)%
RESULTS OF OPERATIONS
Overview. Net income declined $6,184 or 68% to $2,908 in the second
quarter of 2005, compared with $9,092 in the second quarter of 2004. For the
first six months of 2005, net income declined $10,559 or 67% to $5,295, compared
with $15,854 in the first six months of 2004. The decrease in our earnings
primarily reflects a decline in pre-tax income of the Residential Servicing and
Residential Origination Services segments, an increase in non-interest expenses
in both the Ocwen Recovery Group and Business Process Outsourcing segments and
an increase in income tax expense.
o Residential Servicing's pre-tax income declined $4,841 and $7,386 in
the second quarter and first six months of 2005, respectively, as
compared to the same periods in 2004. The declines in pre-tax income
of this segment reflects the net impact of declines in the results of
our servicing for the United States Department of Veteran's Affairs
("VA") due to reduced transaction volumes and the absence of one-time
REALServicing fees of $2,900 recorded in the second quarter of 2004,
offset in part by an improvement in the results of our Loan Servicing
group.
o Residential Origination Services' pre-tax income declined $2,632 and
$2,833 in the second quarter and first six months of 2005,
respectively, as compared to the same periods in 2004. Results for
this segment reflect unrealized losses on unrated subprime residual
securities of $(1,380) and $(2,708) in the second quarter and first
six months of 2005, respectively, compared with unrealized gains of
$1,110 and $325 in the same periods of 2004. An increase in revenues
associated with the mortgage fulfillment center and due diligence
operation that we acquired in December 2004 was offset by an increase
in related staffing and other operating expenses.
o Despite growth in revenue in 2005, costs in both the Ocwen Recovery
Group and Business Process Outsourcing segments increased, reflecting
increased staffing levels.
o Results for the second quarter and first six months of 2005 are net of
income tax expense of $2,265 and $2,815, respectively, as compared to
$55 and $66 for the same periods of 2004. Income tax expense for 2005
includes a $1,124 provision recorded in the second quarter to
recognize the tax effect of recapturing base year bad debt reserves at
the Bank as a result of debanking.
We discuss the results of our segments in detail in the Segment Results
section, which follows.
Segment Results. 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 and an affordable housing property.
The following is a discussion of income (loss) before income taxes for
each of our business segments.
CORE BUSINESSES
Residential Servicing. Through this business we earn fees for
providing loan servicing, including asset management and resolution services, to
third party owners of subprime and "high loan to value" residential mortgage
loans. Subprime residential mortgages comprise the vast majority of loans we
service. We acquire the rights to service loans by purchasing them outright or
by entering into sub-servicing contracts. Increases in short-term interest rates
have had a positive impact on float earnings in 2005; however, mortgage interest
rates remain low, and as a result prepayments in our servicing portfolio remain
high. Not only do prepayments result in the loss of future servicing fees, they
also result in increases to the rate at which we amortize the balance of our
servicing rights. Prepayments also create an obligation for us to pay
compensating interest expense to investors for the full month of interest on
loans that are repaid before the end of a calendar month.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Selected information 2005 2004
- ------------------------------------------------------------ ------------ ------------
Number of loans at June 30 ................................. 346,708 333,722
Unpaid principal balance at June 30 ........................ $ 38,662,177 $ 34,768,367
Average unpaid principal balance for the following periods:
Three months ended June 30 ............................. $ 37,624,152 $ 35,676,776
Six months ended June 30 ............................... $ 37,210,939 $ 36,370,943
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ 2,599 $ 7,440 $ 5,547 $ 12,933
Net interest income (expense) ......................... $ (5,208) $ (5,390) $ (9,312) $ (10,662)
Non-interest revenue:
Servicing and related fees:
Fees ............................................ $ 62,952 $ 64,301 $ 125,607 $ 132,279
Amortization of servicing rights ................ (24,930) (23,009) (50,045) (48,669)
Compensating interest expense ................... (6,158) (8,899) (11,814) (17,111)
---------- ---------- ---------- ----------
Total servicing and related fees .................. 31,864 32,393 63,748 66,499
Vendor management fees ............................ 1,753 2,117 3,841 4,227
Other ............................................. 775 3,934 1,510 4,791
---------- ---------- ---------- ----------
Total non-interest revenue ............................ $ 34,392 $ 38,444 $ 69,099 $ 75,517
========== ========== ========== ==========
Non-interest expense .................................. $ 26,585 $ 25,614 $ 54,240 $ 51,922
o The decline in fees in the 2005 periods, as compared to 2004, reflects
declines in servicing fees, prepayment penalties and late charges,
offset in large part by an increase in interest on float balances (see
below). The decline in servicing fees was due in large part to a
decline in fees associated with our contract with the VA, as discussed
below.
o Earnings on funds that we have received from borrowers that are held
on deposit with an unaffiliated bank (float balances) amounted to
$6,558 and $13,065 for the second quarter and first six months of
2005, respectively, as compared to $2,750 and $5,763 for the same
periods of 2004. The increase in earning is primarily due to an
increase in short-term interest rates. The yield we earned on float
balances averaged 2.07% and 2.29% during the second quarter and first
six months of 2005, respectively, as compared to 0.85% and 0.90% for
the same periods of 2004.
o Servicing fees for the second quarter of 2005 and 2004 include $3,405
and $5,994, respectively, of real estate property management fees
associated with our contract with the VA. VA servicing fees for the
first six months of 2005 and 2004 were $7,361 and $10,412,
respectively. The decline in fees in 2005 is primarily due to reduced
transaction volumes.
o The decline in other non-interest revenue in the 2005 periods as
compared to 2004 is primarily the result of $2,900 of one-time fees
recognized in the second quarter of 2004 in connection with a service
contract for the use of our REALServicing system.
See "Non-Interest Revenue - Servicing and Related Fees" for a detail
of the principal components of servicing and related fees.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Residential Origination Services. This business provides various loan
origination services, including residential property valuation services,
mortgage due diligence, title services, loan refinancing for Residential
Servicing customers and our internet-based vendor management system (REALTrans).
This segment also includes the results of our subprime residual trading
securities.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ 1,725 $ 4,357 $ 4,558 $ 7,391
Non-interest income (expense):
Servicing and related fees ........................ $ 3,850 $ 345 $ 7,311 $ 441
Vendor management fees ............................ 9,020 9,372 17,805 20,271
Gain (loss) on trading securities ................. (1,380) 1,110 (2,708) 325
Other ............................................. 602 7 618 961
---------- ---------- ---------- ----------
Total non-interest revenue ............................ $ 12,092 $ 10,834 $ 23,026 $ 21,998
========== ========== ========== ==========
Net interest income (expense) ......................... $ 2,891 $ 3,354 $ 5,851 $ 6,090
Non-interest expense .................................. 13,258 9,831 24,319 20,697
o Servicing and related fees for this business are primarily comprised
of mortgage due diligence fees and loan refinancing fees related to
loans held for resale. We acquired a mortgage fulfillment center and
due diligence operation in December 2004. Our loan refinancing program
for Residential Servicing customers began earning fees in the second
quarter of 2004. See "Non-Interest Revenue - Servicing and Related
Fees" for a detail of the principal components of servicing and
related fees.
o Vendor management fees are primarily comprised of fees for residential
property valuation services. Also includes title services and other
fees earned across the business groups in this segment from vendors in
our REALTrans network. See "Non-Interest Revenue - Vendor Management
Fees" for a detail of the principal components of vendor management
fees.
o Gains (losses) on trading securities during the periods primarily
represent unrealized gains and losses on unrated residual securities
backed by subprime residential loans originated in the U.K.
o The increase in non-interest expense in the 2005 periods is in large
part due to increased staffing and other operating expenses associated
with the mortgage fulfillment center and due diligence operation we
acquired in December 2004.
Commercial Servicing. This segment includes the results of both our
domestic and international servicing of commercial assets, as well as our
commercial loan servicing system product (REALSynergy). International servicing
is conducted through GSS, our joint servicing venture with Merrill Lynch. We
have established servicing offices in Tokyo, Japan, Taipei, Taiwan and Toronto,
Canada. We have also established consulting operations in the U. K., Germany and
China. At June 30, 2005, this segment serviced a total of 8,842 loans with an
aggregate unpaid principal balance of $13,006,830, of which our office in Japan
serviced 8,093 loans with an unpaid principal balance of $11,669,561.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ 335 $ (511) $ 357 $ (553)
Net interest income (expense) ......................... $ (7) $ (1) $ (51) $ (2)
Non-interest revenue:
Servicing and related fees ........................ $ 2,700 $ 2,103 $ 5,774 $ 4,632
Other ............................................. 2,057 1,805 3,731 3,168
---------- ---------- ---------- ----------
Total non-interest revenue ............................ $ 4,757 $ 3,908 $ 9,505 $ 7,800
========== ========== ========== ==========
Non-interest expense .................................. $ 4,415 $ 4,418 $ 9,097 $ 8,351
o The majority of servicing and related fees recorded by this segment
were earned through our international offices of GSS, primarily Japan.
See "Non-Interest Revenue - Servicing and Related Fees".
o Other non-interest revenue is primarily comprised of fees for
providing due diligence and underwriting services in Germany as well
as fees and cost reimbursements related to our international
consulting operations. See "Non-Interest Revenue - Other Income".
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Business Process Outsourcing. Business Process Outsourcing provides
outsourcing services to third parties, including mortgage underwriting, data
entry, call center services and mortgage research.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ 264 $ 708 $ 361 $ 1,103
Net interest income (expense) ......................... $ (19) $ (5) $ (52) $ (8)
Servicing and related fees ............................ $ 2,858 $ 2,193 $ 5,443 $ 4,348
Non-interest expense .................................. $ 2,575 $ 1,480 $ 5,030 $ 3,237
o The increase in non-interest expense for the 2005 periods as compared
to 2004 reflects our continued investment in this business. Sales and
marketing costs are higher in 2005, and staffing levels have also
increased.
Ocwen Recovery Group. 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. On collections for third party owners, we generally earn a fee based upon
a percentage of the amount collected.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ 244 $ 889 $ 749 $ 2,290
Non-interest revenue:
Servicing and related fees ........................ $ 2,906 $ 2,655 $ 6,361 $ 5,630
Other ............................................. 390 524 829 1,028
---------- ---------- ---------- ----------
Total non-interest revenue ............................ $ 3,296 $ 3,179 $ 7,190 $ 6,658
========== ========== ========== ==========
Non-interest expense .................................. $ 3,052 $ 2,290 $ 6,441 $ 4,368
o Pre-tax income declined in the second quarter of 2005 in spite of an
increase in non-interest revenue, reflecting both a reduction in
collections on our aging portfolio of receivables, which yielded high
margins, and increased staffing costs.
o Servicing and related fees for this business represent fees earned for
collection activities on behalf of third party owners of unsecured
receivables. Other revenue is primarily comprised of recoveries of
unsecured credit card receivables we own.
o The increase in non-interest expense in 2005 is largely due to an
increase in staffing levels, primarily in India.
Corporate Items and Other. Pre-tax results for this segment include
certain items of revenue and expense that are not directly related to a
business, including business activities that are individually insignificant,
interest income on short-term investments of cash and the related costs of
financing these investments and certain other corporate expenses. The table
below presents the more significant amounts included in each of the periods
indicated.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ 6 $ (2,739) $ (3,462) $ (2,035)
Net interest income (expense) ......................... 35 868 (852) 914
Non-interest revenue .................................. 2,148 (412) 1,988 3,006
Non-interest expense .................................. 2,193 3,228 4,610 5,981
o Net interest expense for the 2005 periods includes a portion of
interest on the $175,000 of 3.25% Convertible Notes that we issued in
July 2004.
o Non-interest revenue includes $554 and $71 of interest income
recognized during the second quarter of 2005 and 2004, respectively,
on federal income tax refund claims. Year to date, $951 and $3,746 of
interest income was recognized on the refund claims for 2005 and 2004,
respectively. See "Changes in Financial Condition - Receivables" for
additional information regarding these claims.
o Non-interest revenue for 2005 also includes a gain of $1,750 we
recognized in the second quarter in connection with the assumption of
our customer deposit liabilities on June 30, 2005 by Marathon National
Bank.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
NON-CORE BUSINESSES
Based on the relative insignificance of the assets remaining in the
following segments, the remaining assets of these businesses and any related
income or loss arising from their resolution have been included in the Corporate
Items and Other segment beginning January 1, 2005.
Commercial Assets. Results for this segment reflect our continuing
exit from the commercial loan and real estate businesses. We have not purchased
any commercial assets since 2000. Since then, this business has consisted of the
management, repositioning and resolution of the remaining non-core assets. At
December 31, 2004 the $21,560 of non-core assets remaining in this business
consisted of four real estate assets (a shopping center, parcel of land and two
partnership interests) and one unrated subordinate security.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ -- $ 190 $ -- $ (3,050)
Net interest income (expense) ......................... -- 512 -- 219
Provision for loan losses ............................. -- (255) -- (764)
Non-interest revenue .................................. -- 252 -- (2,042)
Non-interest expense .................................. -- 829 -- 1,991
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. Our investment in affordable housing
properties at December 31, 2004 consisted of one limited partnership property
with a carrying value of $5,641. In addition, this segment had $3,198 of loans
outstanding at December 31, 2004 to the one remaining limited partnership
property that we do not consolidate in our financial statements.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ -- $ (1,187) $ -- $ (2,159)
Net interest income (expense) ......................... -- (472) -- (882)
Provision for loan losses ............................. -- 1 -- (29)
Non-interest expense .................................. -- 731 -- 1,323
See Note 6 to the Interim Consolidated Financial Statements, for
additional information related to our segments.
Non-Interest Revenue. The following table sets forth the principal
components of non-interest income during the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Servicing and related fees ............................ $ 44,161 $ 39,460 $ 88,548 $ 80,782
Vendor management fees ................................ 10,783 11,487 21,665 24,490
Gain (loss) on trading securities, net ................ (1,269) 2,503 (2,667) 1,860
Valuation gains (losses) on real estate ............... 4 (1,974) 93 (3,825)
Gain (loss) on sales of real estate ................... 13 81 48 (460)
Operating income (losses) from real estate ............ (165) 565 (339) 573
Other income .......................................... 6,016 6,293 8,903 13,882
---------- ---------- ---------- ----------
$ 59,543 $ 58,415 $ 116,251 $ 117,302
========== ========== ========== ==========
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Servicing and Related Fees. Our servicing and related 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 servicing and related fees by segment for the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Residential Servicing:
Servicing fees (1) ................................ $ 44,142 $ 45,522 $ 87,650 $ 91,638
Late charges ...................................... 8,624 10,179 17,750 21,548
Earnings on custodial accounts (2) ................ 6,558 2,750 13,065 5,763
Compensating interest expense (3) ................. (6,158) (8,899) (11,814) (17,111)
Amortization of servicing rights .................. (24,930) (23,009) (50,045) (48,669)
Prepayment and collection related fees............. 2,217 4,110 4,442 8,813
Other fees, net ................................... 1,411 1,740 2,700 4,517
---------- ---------- ---------- ----------
31,864 32,393 63,748 66,499
---------- ---------- ---------- ----------
Residential Origination Services:
Mortgage due diligence fees (4) ................... 2,176 -- 3,989 --
Loan refinancing fees (4) ......................... 1,296 342 2,556 438
Other ............................................. 378 3 766 3
---------- ---------- ---------- ----------
3,850 345 7,311 441
---------- ---------- ---------- ----------
Commercial Servicing:
International servicing fees ...................... 1,942 1,297 3,672 2,657
Domestic servicing fees ........................... 758 806 2,102 1,975
---------- ---------- ---------- ----------
2,700 2,103 5,774 4,632
---------- ---------- ---------- ----------
Business Process Outsourcing .......................... 2,858 2,193 5,443 4,348
Ocwen Recovery Group .................................. 2,906 2,655 6,361 5,630
Corporate Items and Other ............................. (17) (229) (89) (768)
---------- ---------- ---------- ----------
$ 44,161 $ 39,460 $ 88,548 $ 80,782
========== ========== ========== ==========
(1) The decline in residential loan servicing fees in 2005 as compared to 2004
primarily reflects a decline in fees associated with our contract with the
V.A. See "Segment Results - Residential Servicing".
(2) Earnings on float balances during the holding period between collection of
borrower payments and remittance to investors. These custodial accounts
are held at an unaffiliated bank and are excluded from our balance sheet.
The average balances held in these custodial accounts were approximately
$1,270,400 and $1,336,700 for the second quarter of 2005 and 2004,
respectively. Year to date, the balances in these accounts averaged
approximately $1,140,200 and $1,208,300 for 2005 and 2004, respectively.
The increase in earnings during the second quarter of 2005 and the first
half of 2005 as compared to the same periods in 2004 is primarily due to
an increase in short-term interest rates. See "Segment Results -
Residential Servicing". The underlying servicing agreements restrict the
investment of float balances to certain types of instruments. We are
responsible for any losses incurred on the investment of these funds,
although to date, we have not incurred any such losses.
(3) A servicer of securitized loans is typically obligated to pay 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.
(4) We acquired a mortgage fulfillment center and due diligence operation in
December 2004. Our loan refinancing program for Residential Servicing
customers began earning fees in the second quarter of 2004.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
The following table sets forth information regarding loans and real
estate we serviced at the dates indicated.
Loans (1) (2) (3) Real Estate (4) Total
-------------------------- ------------------------- --------------------------
Amount Count Amount Count Amount Count
------------ ----------- ----------- ----------- ------------ -----------
Residential Loan Servicing
June 30, 2005:
Performing ......................... $ 33,325,997 282,574 $ -- -- $ 33,325,997 282,574
Non-performing ..................... 4,214,079 49,828 1,122,101 14,306 5,336,180 64,134
------------ ----------- ----------- ----------- ------------ -----------
$ 37,540,076 332,402 $ 1,122,101 14,306 $ 38,662,177 346,708
============ =========== =========== =========== ============ ===========
December 31, 2004:
Performing ......................... $ 29,227,341 253,617 $ -- -- $ 29,227,341 253,617
Non-performing ..................... 3,971,439 48,711 1,325,711 17,857 5,297,150 66,568
------------ ----------- ----------- ----------- ------------ -----------
$ 33,198,780 302,328 $ 1,325,711 17,857 $ 34,524,491 320,185
============ =========== =========== =========== ============ ===========
Commercial Servicing (5)
June 30, 2005:
Performing ......................... $ 1,232,663 323 $ -- -- $ 1,232,663 323
Non-performing (5) ................. 11,629,411 8,430 144,756 89 11,774,167 8,519
------------ ----------- ----------- ----------- ------------ -----------
$ 12,862,074 8,753 $ 144,756 89 $ 13,006,830 8,842
============ =========== =========== =========== ============ ===========
December 31, 2004:
Performing ......................... $ 847,811 365 $ -- -- $ 847,811 365
Non-performing (5) ................. 12,537,631 9,398 121,210 35 12,658,841 9,433
------------ ----------- ----------- ----------- ------------ -----------
$ 13,385,442 9,763 $ 121,210 35 $ 13,506,652 9,798
============ =========== =========== =========== ============ ===========
(1) At June 30, 2005 we serviced 274,677 subprime loans with a total unpaid
principal balance of $32,156,955, as compared to 238,105 subprime loans
with an unpaid principal balance of $28,374,493 at December 31, 2004.
Subprime loans represent residential loans we service which were made by
others to borrowers who generally did not qualify under guidelines of
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) Under sub-servicing contracts we serviced approximately 75,174 residential
loans with an unpaid principal balance of $8,898,609. This compares to
approximately 58,776 residential loans with an unpaid principal balance of
$7,063,232 serviced under sub-servicing contracts at December 31, 2004.
(4) Includes $665,107 and $839,654 of foreclosed residential properties
serviced for the VA at June 30, 2005 and December 31, 2004, respectively.
(5) At June 30, 2005, our international offices, primarily Japan, serviced a
total of 8,392 loans with an unpaid principal balance of $12,310,900. This
compares to 9,267 loans with an unpaid principal balance of $12,826,411 at
December 31, 2004. Non-performing loans serviced by the Commercial
Servicing segment include unsecured charged-off loans and deficiency
loans.
Vendor Management Fees. Vendor management fees are primarily comprised
of property valuation fees earned by the Residential Origination Services
segment. The following table sets forth the principal components of vendor
management fees by segment for the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Residential Servicing (1) ............................. $ 1,753 $ 2,117 $ 3,841 $ 4,227
Residential Origination Services (2) .................. 9,020 9,372 17,805 20,271
Corporate Items and Other ............................. 10 (2) 19 (8)
---------- ---------- ---------- ----------
$ 10,783 $ 11,487 $ 21,665 $ 24,490
========== ========== ========== ==========
(1) Includes $865 and $1,228 of fees earned from vendors in the REALTrans
network during the second quarter of 2005 and 2004, respectively. These
fees amounted to $2,107 and $2,572 during the year to date periods of 2005
and 2004, respectively.
(2) Includes residential property valuation fees of $7,497 and $7,401 earned
during the second quarter of 2005 and 2004, respectively. For the year to
date periods, property valuation fees of $14,302 and $16,597 were earned
during 2005 and 2004, respectively. The higher fees in 2004 primarily
relates to the initial boarding of the VA portfolio of properties in 2004
and a decline in transaction volume in 2005. Also includes title service
and other fees earned from vendors in the REALTrans network of $1,523 and
$1,971 during the second quarter of 2005 and 2004, respectively. For the
year to date periods, such fees amounted to $3,502 and $3,674 during 2005
and 2004, respectively.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Gain (Loss) on Trading Securities, Net. The following table sets forth
unrealized and realized gains (losses) on trading securities for the periods
indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Unrealized gains (losses):
Residential Origination Services (1)............... $ (1,380) $ 1,061 $ (2,708) $ 269
Commercial Assets (2).............................. -- 1,366 -- 1,366
Corporate Items and Other ......................... 106 28 36 168
---------- ---------- ---------- ----------
(1,274) 2,455 (2,672) 1,803
---------- ---------- ---------- ----------
Realized gains (losses):
Residential Origination Services .................. -- 48 -- 57
Corporate Items and Other ......................... 5 -- 5 --
---------- ---------- ---------- ----------
5 48 5 57
---------- ---------- ---------- ----------
$ (1,269) $ 2,503 $ (2,667) $ 1,860
========== ========== ========== ==========
(1) Primarily represents unrealized gains (losses) on unrated residual
securities backed by subprime residential loans originated in the U.K.
(2) Represents unrealized gains on a commercial unrated subordinate security.
See "Changes in Financial Condition - Trading Securities."
Valuation Gains (Losses) on Real Estate. We regularly assess the value
of our remaining real estate assets and provide valuation allowances or record
impairment charges as appropriate. Valuation gains (losses) on real estate
amounted to $4 and $93 during the second quarter and first six months of 2005,
respectively, as compared to $(1,974) and $(3,825) for the same periods of 2004.
The losses in the 2004 periods consist primarily of impairment charges and
provisions for losses in fair value on three commercial assets, two of which
were subsequently sold. See "Changes in Financial Condition - Real Estate."
Other Income. The following table sets forth the principal components
of other income by segment for the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Consulting fees (1) ................................... $ 1,669 $ 1,309 $ 2,776 $ 2,278
Technology and related revenue (2) .................... 972 4,254 1,954 5,083
Interest on federal tax refund claims (3) ............. 554 71 952 3,746
Collections of credit card receivables (4) ............ 363 492 712 965
Gain on sale on deposits (5) .......................... 1,750 -- 1,750 --
Other ................................................. 708 167 759 1,810
---------- ---------- ---------- ----------
$ 6,016 $ 6,293 $ 8,903 $ 13,882
========== ========== ========== ==========
(1) Consulting fees and cost reimbursements earned by the international group
of our Commercial Servicing segment.
(2) Represents service contract fees, maintenance fees, consulting revenue and
other fees earned through our technology products - REALServicing,
REALSynergy and REALTrans. Revenue for 2004 includes $2,900 of one-time
fees (primarily documentation fees) earned during the second quarter
associated with a service contract for the use of the REALServicing
system.
(3) Interest income on federal tax refund claims due from the Internal Revenue
Service ("IRS"). Our policy is to recognize interest income on income tax
receivable balances upon receipt of a written finding from the IRS agent
that validates our claim. See "Changes in Financial Condition -
Receivables".
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
(4) Comprised of collections of credit card receivables accounted for under
the cost recovery method. See "Segment Results - Ocwen Recovery Group".
(5) As disclosed in Note 5 to the Interim Consolidated Financial Statements,
Marathon National Bank assumed the Bank's customer deposit liabilities on
June 30, 2005. We earned $1,750 as consideration for the sale of these
deposits.
Net Interest Income (Expense). Net interest income (expense) is the
difference between the interest income earned from our interest-earning assets
and the interest expense incurred on our interest-bearing liabilities. Our net
interest income has been negative (i.e., net interest expense) since 2001
because the operations of our core businesses require a significant investment
in non-interest-earning assets, primarily advances on loans serviced for others
and mortgage servicing rights, that are funded by interest-bearing liabilities.
In addition to interest income reported in this caption, we also earn interest
on the custodial accounts we hold in connection with our Residential Servicing
business. These amounts are reported as a component of servicing fees and are
not included in the following information. 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 periods
indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Interest income:
Interest earning cash and other ................... $ 544 $ 225 $ 1,159 $ 339
Federal funds sold and repurchase agreements ...... 155 350 399 742
Trading securities
Investment grade (1) ............................ 1,571 15 3,115 30
Subordinates and residuals ...................... 4,187 4,300 8,104 7,523
---------- ---------- ---------- ----------
5,758 4,315 11,219 7,553
---------- ---------- ---------- ----------
Match funded loans ................................ 140 362 140 763
Loans ............................................. 167 710 179 1,170
---------- ---------- ---------- ----------
Total interest income ............................. 6,764 5,962 13,096 10,567
---------- ---------- ---------- ----------
Interest expense:
Match funded liabilities
Advances on loans serviced for others (2) ....... 3,688 958 6,336 1,860
Loans ........................................... 140 111 140 236
---------- ---------- ---------- ----------
3,828 1,069 6,476 2,096
---------- ---------- ---------- ----------
Lines of credit and other secured borrowings ...... 493 820 1,160 2,028
Debt securities
3.25% Convertible Notes (3) ..................... 1,760 -- 3,531 --
10.875% Capital Securities ...................... 1,529 1,529 3,059 3,059
---------- ---------- ---------- ----------
3,289 1,529 6,590 3,059
---------- ---------- ---------- ----------
Deposits (4) ...................................... 1,462 3,678 3,286 7,715
Total interest expense ............................ 9,072 7,096 17,512 14,898
---------- ---------- ---------- ----------
Net interest income (expense) before provision for
loan losses ....................................... $ (2,308) $ (1,134) $ (4,416) $ (4,331)
========== ========== ========== ==========
(1) The increase in interest income on investment grade securities in the 2005
periods as compared to 2004 resulted primarily from our increased
investment in CMOs to meet the Qualified Thrift Lender requirements of the
Bank prior to debanking.
(2) The increase in interest expense on match funded advances in the 2005
periods is primarily due to an increase in the outstanding balance of
match funded liabilities as a result of a servicing advance securitization
that we executed in November 2004. See "Changes in Financial Condition -
Match Funded Liabilities".
(3) In July 2004, we issued $175,000 of 3.25% Contingent Convertible Senior
Unsecured Notes that are due in 2024. See "Changes in Financial Condition
- Debt Securities".
(4) The decrease in interest expense on deposits in the 2005 periods is
primarily due to a decline in the balance of deposits outstanding as a
result of maturing certificates of deposit, reflecting reduced reliance on
deposits as a source of financing our operations prior to debanking.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Non-Interest Expense. The following table sets forth the principal
components of our non-interest expense during the period indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Compensation and employee benefits .................... $ 24,355 $ 20,897 $ 48,727 $ 42,930
Occupancy and equipment ............................... 4,571 4,021 8,813 8,018
Technology and communication costs .................... 7,862 6,616 15,261 13,285
Loan expenses ......................................... 6,084 6,783 11,796 14,710
Professional services and regulatory fees ............. 5,656 7,994 10,377 13,819
Loss (gain) on investments in affordable housing
properties ........................................... (118) (41) 524 (79)
Other operating expenses .............................. 3,668 2,151 8,239 5,187
---------- ---------- ---------- ----------
$ 52,078 $ 48,421 $ 103,737 $ 97,870
========== ========== ========== ==========
Compensation and Employee Benefits. The following table presents the
principal components of compensation and benefits we incurred for the period
indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Salaries (1) .......................................... $ 16,673 $ 14,592 $ 33,385 $ 28,697
Bonuses (2) ........................................... 2,812 2,514 5,421 5,209
Payroll taxes ......................................... 1,045 968 2,836 2,702
Commissions ........................................... 1,783 1,328 3,100 2,567
Insurance ............................................. 793 702 1,595 1,227
Severance ............................................. 236 70 236 978
Other (3) ............................................. 1,013 723 2,154 1,550
---------- ---------- ---------- ----------
$ 24,355 $ 20,897 $ 48,727 $ 42,930
========== ========== ========== ==========
(1) Salaries include fees paid for the services of temporary employees.
(2) Bonus expense includes 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, other benefits and payments to independent contractors.
The increase in compensation and benefits in the second quarter and
first six months of 2005 as compared to the same periods of 2004 is primarily
due to increases in salaries. The increase in salaries has occurred primarily
because of an increase in the average number of our full-time employees, both in
the U.S. and our India offices. Our total combined workforce (domestic and
international) averaged 3,278 employees in the second quarter of 2005 as
compared to 2,733 for the second quarter of 2004. For the year to date periods,
our total combined workforce averaged 3,218 and 2,603 during 2005 and 2004,
respectively. An average of 2,286 and 1,624 employees were based in our India
locations during the second quarter of 2005 and 2004, respectively. For the
first six months of 2005 and 2004, our India workforce averaged 2,173 and 1,553,
respectively. Severance for the first quarter of 2004 includes a one-time
payment of $750 to the former president of OTX in accordance with the terms of
his employment agreement.
Occupancy and Equipment. The following table presents the principal
components of occupancy and equipment costs for the period indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Postage and mailing ................................... $ 1,581 $ 1,284 $ 2,761 $ 2,843
Rent .................................................. 938 679 1,837 1,388
Depreciation .......................................... 617 671 1,333 1,368
Other ................................................. 1,435 1,387 2,882 2,419
---------- ---------- ---------- ----------
$ 4,571 $ 4,021 $ 8,813 $ 8,018
========== ========== ========== ==========
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Technology and Communication Costs. The following table presents the
principal components of technology and communication costs for the years
indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Depreciation:
Hardware .......................................... $ 1,649 $ 1,522 $ 3,128 $ 3,095
Software .......................................... 860 728 1,705 1,434
Other ............................................. 184 146 370 288
---------- ---------- ---------- ----------
2,693 2,396 5,203 4,817
---------- ---------- ---------- ----------
Telecommunications .................................... 1,929 1,803 3,497 3,290
Document imaging ...................................... 759 411 1,482 894
Maintenance and other ................................. 2,481 2,006 5,079 4,284
---------- ---------- ---------- ----------
$ 7,862 $ 6,616 $ 15,261 $ 13,285
========== ========== ========== ==========
Loan Expenses. Loan expenses for the second quarter of 2005 and 2004
included $4,951 and $5,015, respectively, of appraisal fees incurred in
connection with property valuation services we provided through the Residential
Origination Services segment. Year to date, such appraisal fees amounted to
$9,005 and $12,110 for 2005 and 2004, respectively. The decline in appraisal
fees in 2005 primarily relates to the initial boarding of the VA portfolio of
properties in 2004 and reduced transaction volumes in 2005. Loan expenses also
include other miscellaneous expenses incurred in connection with the refinancing
and servicing of loans for others.
Professional Services and Regulatory Fees. The following table
presents the principal components of professional services and regulatory fees
for the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Legal fees and settlements (1) ........................ $ 2,876 $ 5,673 $ 5,090 $ 9,007
Consulting fees (non-technology) ...................... 1,040 656 1,571 1,258
Audit and accounting fees (2) ......................... 854 578 1,755 1,132
Insurance ............................................. 328 526 874 962
Other ................................................. 558 561 1,087 1,460
---------- ---------- ---------- ----------
$ 5,656 $ 7,994 $ 10,377 $ 13,819
========== ========== ========== ==========
(1) Legal fees for 2004 include $4,000 ($2,000 recorded during the second
quarter) to establish a reserve for multiple breach fees that were charged
to borrowers but may no longer be collectible.
(2) The increase in audit and accounting fees in the 2005 periods is primarily
due to additional fees incurred in connection with our compliance with
Section 404 of the Sarbanes-Oxley Act of 2002.
Other Operating Expenses. The following table presents the principal
components of other operating expenses for the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Bad debt expense (1) .................................. $ 828 $ 119 $ 3,032 $ 1,769
Travel, lodging, meals and entertainment .............. 1,118 955 2,192 1,617
Amortization of deferred costs ........................ 33 160 321 424
Deposit related expense ............................... 212 127 437 324
Other ................................................. 1,477 790 2,257 1,053
---------- ---------- ---------- ----------
$ 3,668 $ 2,151 $ 8,239 $ 5,187
========== ========== ========== ==========
(1) Bad debt expense primarily represents provisions for estimated
uncollectible servicing advances and other receivables related to our
Residential Servicing segment. The provision recorded during the first six
months of 2004 includes $1,000 recorded in the first quarter to establish
an allowance for forbearance fees that we are no longer collecting
directly from borrowers.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Income Tax Expense (Benefit). The following table provides details of
our income tax expense for the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Income tax expense (benefit) on income (loss) before
taxes ................................................ $ 1,141 $ 2,642 $ 1,691 $ 4,417
Provision for (reversal of) valuation allowance on
deferred tax asset (1)................................ (843) (2,587) (843) (4,351)
Provision for recapture of base year bad debt
reserves(1) .......................................... 1,967 -- 1,967 --
---------- ---------- ---------- ----------
Total income tax expense (benefit) .................... $ 2,265 $ 55 $ 2,815 $ 66
========== ========== ========== ==========
(1) Represents a one-time provision, net of a related reversal of the valuation
allowance on the deferred tax asset, to recognize a deferred tax liability
arising from the recapture of bad debt reserves in connection with our
termination of the Bank's status as a federal savings bank.
We maintain a valuation allowance in an amount sufficient to reduce
our deferred tax asset to the amount that is more likely than not to be
realized. The valuation allowance amounted to $165,083 and $165,927 at June 30,
2005 and December 31, 2004, respectively. Our assessment of the amount of the
valuation allowance was based on consideration of all available evidence, both
positive and negative, including our recent earnings history, current tax
position and estimates of future taxable income. The tax character (ordinary
versus capital) and the carry forward and carry back periods of certain tax
attributes (e.g., capital losses and tax credits) were also considered. Reversal
of all or a portion of the valuation allowance may be appropriate in the future
based on the results of our operations.
Income tax expense (benefit) on income (loss) before income taxes
differs from amounts that would be computed by applying the Federal corporate
income tax rate of 35% because of the effect of foreign taxes, non-economic tax
residual payments, changes in the valuation allowance and low-income housing tax
credits. Income tax expense for the first six months of 2005 and 2004 reflects
tax credits of $734 and $1,197, respectively. Although we have substantial
unused tax credits available to reduce the liability arising from income taxes
on our current year income, tax credits can be used to reduce income tax expense
only to the corporate alternative minimum tax rate of 20% of taxable income.
CHANGES IN FINANCIAL CONDITION
Trading Securities. The following table sets forth the fair value of
our trading securities at the dates indicated:
June 30, December 31,
2005 2004
------------ ------------
Investment grade (1):
U.S. Treasury .......................................... $ 595 $ 1,594
Collateralized mortgage obligations (AAA-rated) ........ -- 81,466
Bonds and debentures (2) ............................... 2,347 3,155
------------ ------------
$ 2,942 $ 86,215
============ ============
Subordinates and residuals (3):
Single family residential
BB-rated subordinates ................................ $ 252 $ 256
B-rated subordinates ................................. 389 435
Unrated subordinates ................................. 193 217
Unrated residuals .................................... 41,907 35,276
------------ ------------
42,741 36,184
Commercial unrated subordinates ........................ 2,602 3,343
------------ ------------
$ 45,343 $ 39,527
============ ============
(1) Investment grade securities declined by $83,273 during the first six
months of 2005 primarily due to maturities, sales and principal repayments
on CMOs. Prior to debanking we invested in CMOs as needed to meet the
Qualified Thrift Lender requirements of the Bank.
(2) These securities were acquired in connection with our acquisition of BOK
on September 30, 2004.
(3) During the first six months of 2005, our subordinate and residual trading
securities increased by $5,816. This change was primarily due to the
purchase of $11,766 of unrated residual securities on June 30, 2005,
offset in part by a decline in fair value of our unrated subprime residual
securities.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
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.
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 subordinate and
residual trading securities summarized by classification and rating at June 30,
2005:
ANTICIPATED ANTICIPATED ANTICIPATED
YIELD TO YIELD TO WEIGHTED
PERCENT MATURITY AT MATURITY AT AVERAGE
OWNED PURCHASE 6/30/2005 REMAINING
RATING/DESCRIPTION (1) BY OCWEN (2) (3) (2) (4) COUPON LIFE (2) (5)
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
Single family residential:
BB-rated subordinates ......... 100.00% 19.23% 12.00% 6.75% 3.79
B-rated subordinates .......... 100.00% 17.01% 15.55% 6.02% 1.96
Unrated subordinates .......... 100.00% 13.96% 41.90% 6.53% 0.19
Unrated residuals ............. 100.00% 17.28% 11.39% N/A 4.14
Commercial:
Unrated subordinates .......... 25.00% 15.84% 10.94% N/A 0.86
(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.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
(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 June 30, 2005 anticipated yield to
maturity from that originally anticipated are due to differences between
estimated and actual cash flows. Each quarter we update the assumptions
used to estimate future cash flows based on the actual results to date.
The primary assumptions include prepayment speeds, loss rates and the
discount rate.
(5) Represents the weighted average life in years based on the June 30, 2005
book value.
The mortgages that underlie our trading subordinate and residual
securities, which totaled $184,727 at June 30, 2005, are secured by properties
located in forty-nine states and the United Kingdom. The largest aggregate value
of mortgages in any one state or country is $41,997.
Match Funded Assets. Match funded assets are comprised of the
following at the dates indicated:
June 30, December 31,
2005 2004
---------- ------------
Match funded advances on loans serviced for others:
Principal and interest .......................... $ 134,803 $ 107,102
Taxes and insurance ............................. 120,564 107,710
Other ........................................... 75,970 61,814
---------- ------------
331,337 276,626
Commercial loans .................................... 3,352 4,134
---------- ------------
$ 334,689 $ 280,760
========== ============
Match funded advances on loans serviced for others resulted from the
transfers of certain residential loan servicing related advances to qualified
special purpose entities ("SPE") in exchange for cash. These advances are owned
by the SPEs and are, therefore, not available to satisfy claims of our general
creditors. These transfers did not qualify as sales under generally accepted
accounting principles because we retained effective control of the advances.
Accordingly, we report the amount of proceeds we received from the sales as
secured borrowings with pledges of collateral (match funded liabilities). See
"Match Funded Liabilities".
Commercial match funded loans held by our GSS subsidiary in Japan
resulted from the transfer, on a non-recourse basis, of an undivided 100%
participation interest in certain real estate loans to a Japanese subsidiary of
Merrill Lynch in exchange for cash. The transfer did not qualify as a sale under
generally accepted accounting principles as we did not meet all of the
conditions for surrender of control over the transferred loans. Accordingly, we
report the amount of proceeds we received from the transfer as a secured
borrowing with pledge of collateral (match funded liabilities). See "Match
Funded Liabilities".
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:
June 30, December 31,
2005 2004
---------- ------------
Loans serviced for others:
Principal and interest .......................... $ 22,797 $ 51,782
Taxes and insurance ............................. 83,234 94,926
Other ........................................... 81,064 93,375
---------- ------------
187,095 240,083
Loans ............................................... 328 347
---------- ------------
$ 187,423 $ 240,430
========== ============
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 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 the extent that we
estimate that advances are uncollectible, taking into consideration the age and
nature of the advance and our historical loss experience, among other factors.
Advances on loans serviced for others are net of reserves of $3,375 and $5,212
as of June 30, 2005 and December 31, 2004, respectively. The reserve balance at
June 30, 2005 includes $3,131 to provide for forbearance plan fees and multiple
breach fees that may no longer be collectible. See "Results of Operations -
Non-Interest Revenue - Segment Results - Residential Servicing".
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Advances on loans serviced for others do not include match funded
advances that were transferred to a third party in transactions that did not
qualify as sales for accounting purposes and that we account for as secured
borrowings. See "Match Funded Assets" for information regarding these advances.
Mortgage Servicing Rights. The unamortized balance of our mortgage
servicing rights is primarily related to residential assets. Our investment
increased by $924 during the six months ended June 30, 2005 as purchases
exceeded amortization. The rate of amortization reflects high rates of actual
and projected prepayments on subprime residential mortgage loans due to low
interest rates. Purchases for the six months ended June 30, 2005 reflects the
more cautious acquisition strategy that we adopted given the uncertainty of
prepayment speeds in the current environment. In addition, prior to debanking,
we had commitments with the OTS to maintain our investment in mortgage servicing
rights at certain levels. See "Results of Operations - Segment Results -
Residential Servicing". The following table sets forth the activity in our
mortgage servicing rights during the first six months of 2005:
Balance at December 31, 2004 ................ $ 131,409
Purchases ................................... 50,969
Amortization ................................ (50,045)
----------
Balance at June 30, 2005 .................... $ 132,333
==========
At June 30, 2005, we serviced loans under approximately 411 servicing
agreements for 22 investors. Purchases during the six months ended June 30, 2005
were all for residential assets.
Receivables. Receivables consisted of the following at the dates
indicated:
June 30, December 31,
2005 2004
------------- -------------
Residential Servicing (1) ................... $ 13,076 $ 24,012
Residential Origination Services ............ 5,614 3,455
Commercial Servicing ........................ 2,700 2,736
Business Process Outsourcing ................ 1,225 1,532
Ocwen Recovery Group ........................ 715 341
Commercial Assets (2) ....................... -- 192
Affordable Housing (3) ...................... -- 18,308
Corporate Items and Other (4) ............... 96,613 76,143
------------- -------------
$ 119,943 $ 126,719
============= =============
(1) Includes $6,522 and $12,801 at June 30, 2005 and December 31, 2004,
respectively, of receivables representing fees earned from the servicing
of loans and real estate. The remaining balance consists principally of
reimbursable expenses due from loan servicing investors. The total
balance of receivables for this segment is net of reserves of $5,201 and
$3,395 at June 30, 2005 and December 31, 2004, respectively.
(2) Based on the relative insignificance of the non-core assets remaining in
this segment, the remaining assets of this business have been included in
the Corporate Items and Other segment beginning January 1, 2005.
(3) Based on the relative insignificance of the non-core assets remaining in
this segment, the remaining assets of this business have been included in
the Corporate Items and Other segment beginning January 1, 2005. The
balance primarily represents payments to be received in future years
(through June 2014) from the sale of investments in affordable housing
properties. On June 30, 2005 the balance included in the Corporate Items
and Other segment was $18,259, net of an unaccreted discount of $1,870 and
a reserve for doubtful accounts of $5,799. The December 31, 2004 balance
of $18,308 is net of discount and reserves of $2,346 and $5,596,
respectively.
(4) Includes $60,586 and $61,591 of income taxes receivable at June 30, 2005
and December 31, 2004, respectively. As of June 30, 2005, income taxes
receivable includes $56,526 of federal tax refund claims, the payment of
which has been approved by the Joint Committee on Taxation of the U.S.
Congress. The receivable balance a June 30, 2005 and December 31, 2004
also included $7,823 and $6,872, respectively, of accrued interest on the
federal tax refund claims. The increase in the balance of receivables in
the Corporate Items and Other segment in 2005 is primarily due to the
transfer of Affordable Housing assets to this segment effective January 1,
2005, as noted in (3) above.
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Real Estate. Our investment in real estate declined from $18,732 at
December 31, 2004 to $9,314 at June 30, 2005. This decline of $9,418 is
primarily due to the sale of our consolidated subsidiary that owned a retail
shopping center located in Halifax, Nova Scotia. This property had a net
carrying value of $8,827 at December 31, 2004. Our investment in real estate at
June 30, 2005 consists primarily of interests in two limited partnerships
operating as multi-family real estate ventures with a net carrying value of
$8,238. In July 2005, the majority of the assets owned by one of the
partnerships were sold and our share of the cash proceeds resulted in a gain of
approximately $1,800.
Loans, Net. Our net investment in loans amounted to $8,725 and $3,792
at June 30, 2005 and December 31, 2004, respectively. The balance at June 30,
2005 consists primarily of two loans - a loan with a carrying value of $3,275 to
our one remaining affordable housing property, in which we have invested as a
limited partner but do not consolidate in our financial statements and a loan
with a carrying value of $4,898 that we made during the first quarter of 2005 to
facilitate the sale of our investment in a consolidated subsidiary that owned a
shopping center located in Halifax, Nova Scotia. This new loan is the primary
reason for the $5,499 increase in loans during the first six months of 2005. See
"Real Estate" above.
Loans are net of an allowance for losses of $4,334 and $4,546 at June
30, 2005 and December 31, 2004, respectively. 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 table sets forth an analysis of activity in the allowance for loan
losses during the first six months of 2005:
Balance at December 31, 2004 ................ $ 4,546
Provision for loan losses ................... (12)
Charge-offs ................................. (200)
----------
Balance at June 30, 2005 .................... $ 4,334
==========
The allowance for loan losses at June 30, 2005 and December 31, 2004
included $4,269 and $4,468, respectively, related to a loan to our one remaining
affordable housing property.
Other Assets. Other assets consisted of the following at the dates
indicated:
June 30, December 31,
2005 2004
------------ ------------
Deferred tax assets, net (1) ..................... $ 16,576 $ 17,683
Deferred debt related costs, net ................. 11,220 11,216
Interest earning collateral deposits (2) ......... 15,063 8,905
Loans held for resale (3) ........................ 14,716 8,437
Interest earning debt service accounts (4) ....... 16,026 5,850
Goodwill, net .................................... 5,312 5,312
Prepaid expenses ................................. 3,127 4,069
Mutual fund and stocks (5) ....................... 33 2,886
Capitalized software development costs, net ...... 518 1,147
Other ............................................ 3,590 3,471
------------ ------------
$ 86,181 $ 68,976
============ ============
(1) Deferred tax assets are net of valuation allowances totaling $165,083 and
$165,927 at June 30, 2005 and December 31, 2004, respectively. See
"Results of Operations - Income Tax Expense (Benefit)".
(2) The balance at June 30, 2005 and December 31, 2004 includes $8,864 and
$8,905, respectively, of deposits that were required 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. The balance at June 30, 2005 also includes a $5,000
cash collateral account required under a guaranty we entered into in
connection with debanking. See Note 5 to the Interim Consolidated
Financial Statements.
(3) Loans originated in response to requests from Residential Servicing
customers to refinance their mortgage. Only loans with sales commitments
prior to closing are originated under this program. The loans outstanding
at June 30, 2005 were all sold during July 2005.
36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
(4) The balances at June 30, 2005 and December 31, 2004 include amounts set
aside from the proceeds of one of our match funded advance facilities to
provide for possible shortfalls in the funds available to pay certain
expenses and interest. The balance at June 30, 2005 also includes
collections on match funded advances related to our other advance facility
that were forwarded to the trustee prior to the scheduled payment
application date.
(5) The balance at December 31, 2004 primarily represents an investment by the
Bank in a mutual fund that invests in assets that meet the requirements of
the Community Reinvestment Act. This investment was sold during the second
quarter of 2005 in connection with debanking.
Match Funded Liabilities. Match funded liabilities represent proceeds
received from transfers of loans and advances on 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. See "Match Funded
Assets" for additional details regarding these transactions. Match funded
liabilities were comprised of the following at the dates indicated:
June 30, December 31,
Collateral (Interest Rate) Interest Rate 2005 2004
- --------------------------------------------- ------------------------------ ---------- ------------
Advances on loans serviced for others (1) ... See (1) below $ 175,000 $ 149,342
Advances on loans serviced for others (2) ... LIBOR plus 175 basis points 106,470 90,851
Commercial loans (3) ........................ 3,352 4,134
---------- ------------
$ 284,822 $ 244,327
========== ============
(1) In November 2004, we executed a servicing advance securitization. This
transaction involved the issuance of a term note for $100,000 and a
one-year variable funding note for a maximum of $75,000. On March 31,
2005, we executed an indenture supplement to the November 2004
securitization with a closing date of April 6, 2005. This supplement
included the issuance of a second term note for $75,000. In addition, the
maximum amount of the variable funding note was increased to $100,000. The
original term note bears interest at LIBOR plus 50 basis points, and the
second term note bears interest at LIBOR plus 40 basis points. The
variable funding note bears interest at a commercial paper rate plus a
margin that approximates LIBOR plus 50 basis points. The original term
note under this facility has a stated maturity of October 2013, and the
second term note has a stated maturity of March 2014. The variable funding
note has a stated maturity of November 2010.
(2) Under the terms of the agreement, we are eligible to finance additional
advances on loans serviced for others up to a maximum balance of $200,000.
This facility will mature in January 2006.
(3) Represents a 100% participation interest held by a third party.
The lending agreements for our match funded liabilities 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. We are currently in compliance with these covenants.
Servicer Liabilities. Servicer Liabilities represent amounts we have
collected, primarily from Residential Servicing borrowers, that will either be
deposited in collections accounts held at an unaffiliated bank and excluded from
our balance sheet, paid directly to an investment trust, or refunded to
borrowers. Previously, we had included the majority of these balances as a
reduction of our cash balances, while others were included within escrow
deposits. Reclassifications have been made to the prior periods to conform to
this presentation. The following table sets forth the principal components of
servicer liabilities at the dates indicated:
June 30, December 31,
2005 2004
---------- ------------
Borrower payments due to collection accounts ........ $ 249,434 $ 255,040
Escrow payments due to collection accounts .......... 11,100 3,786
Partial payments and other unapplied balances........ 49,835 32,440
---------- ------------
$ 310,369 $ 291,266
========== ============
37
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Lines of Credit and Other Secured Borrowings. We have obtained secured
borrowings from unaffiliated financial institutions as follows:
June 30, December 31,
Borrowing Type Collateral Maturity Interest Rate (1) 2005 2004
- --------------------- ------------------------ ----------------------- -------------------- --------- ------------
Senior secured credit Purchased mortgage April 2006 LIBOR + 162.5 or 225 $ 37,728 $ 24,218
agreement servicing rights and basis points
advances on loans
serviced for others (2)
Senior secured credit Purchased mortgage December 2005 LIBOR + 250 basis -- 11,458
agreement servicing rights points
Mortgage note Office building (3) October 2014 5.62% 14,797 14,936
--------- ------------
$ 52,525 $ 50,612
========= ============
(1) 1-month LIBOR was 3.34% and 2.40% at June 30, 2005 and December 31, 2004,
respectively.
(2) The maximum amount of borrowing under this facility was increased from
$70,000 to $140,000 effective July 1, 2005. See "Liquidity, Commitments
and Off-Balance Sheet Risks".
(3) Collateral represents our loan servicing call center located in Orlando,
Florida. We entered into this mortgage in October 2004.
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. We are currently in compliance with
these covenants. While we have not historically paid dividends, our covenants,
by establishing net worth requirements, in effect limit the amount of dividends
that could be paid. As of June 30, 2005, the most restrictive limitation of all
the covenants would limit dividends that could be paid to $78,615.
Debt Securities. Debt securities consisted of the following at the
dates indicated:
June 30, December 31,
2005 2004
------------- -------------
3.25% Convertible Notes due August 1, 2024 ..... $ 175,000 $ 175,000
10.875% Capital Securities due August 1, 2027 .. 56,249 56,249
------------- -------------
$ 231,249 $ 231,249
============= =============
In addition to the specific requirements discussed below, each of our
debt securities 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. We are currently in compliance with these
covenants.
Convertible Notes. In July 2004, OCN issued $175,000 aggregate
principal amount of 3.25% Contingent Convertible Senior Unsecured Notes due 2024
("Convertible Notes") in a private placement as permitted by the Securities Act
of 1933, as amended. We filed with the Securities and Exchange Commission a
registration statement, which was declared effective March 15, 2005, covering
resales by holders of the Convertible Notes and the common stock issuable upon
conversion of the Convertible Notes. The Convertible Notes are senior unsecured
obligations of Ocwen Financial Corporation and bear interest at the rate of
3.25% per year. Interest is payable on February 1 and August 1 of each year,
beginning on February 1, 2005. The Convertible Notes will mature on August 1,
2024.
Holders may convert all or a portion of their notes into shares of our
common stock under the following circumstances: (1) at any time during any
calendar quarter commencing after December 31, 2004, if the closing sale price
of our common stock for at least 20 trading days in a period of 30 consecutive
trading days ending on the last trading day of the calendar quarter prior to
such quarter is greater than 125% of the conversion price per share of common
stock on such last day; (2) subject to certain exceptions, during the five
business day period after any five-consecutive-trading-day period in which the
trading price per $1 principal amount of the notes for each day of the
five-consecutive-trading-day period was less than 98% of the product of the
closing sale price of our common stock and the number of shares issuable upon
conversion of $1 principal amount of the notes; (3) if the notes have been
called for redemption; (4) upon the occurrence of specified corporate
transactions; or (5) if we elect at our sole discretion to permit conversion
following the implementation of EITF Issue 04-8. We elected not to permit
conversion following the implementation of EITF 04-8 in the fourth quarter of
2004.
38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
The conversion rate will be 82.1693 shares of our common stock per $1
principal amount of the notes, subject to adjustment. Events that may cause the
conversion rate to be adjusted, as more fully described in the related indenture
agreement, primarily relate to cash dividends or other distributions to holders
of our common stock. Upon conversion, we may at our option choose to deliver, in
lieu of our common stock, cash or a combination of cash and common stock as
described herein.
Beginning August 1, 2009, we may redeem all or a portion of the notes
for cash for a price equal to 100% of the principal amount of the notes to be
redeemed plus accrued and unpaid interest, if any.
Holders may require us to repurchase all or a portion of their notes
for cash on August 1, 2009, August 1, 2014, and August 1, 2019 or upon the
occurrence of a "fundamental change" at a repurchase price equal to 100% of the
principal amount of the notes to be repurchased plus accrued and unpaid
interest, if any. A "fundamental change", as further defined in the indenture
agreement, is deemed to have occurred upon a change of control or a termination
of trading in our common stock.
Capital Securities. 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.
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
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 therefor.
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.
39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Deposits. In connection with debanking, on June 30, 2005, Marathon
National Bank assumed the customer deposits associated with the Bank's branch
facility. As a result of our termination of the Bank's status as a federal
savings bank, we are no longer able to take deposits in the United States. See
Note 5 to the Interim Consolidated Financial Statements for additional
information regarding debanking. Total customer deposits amounted to $290,507 at
December 31, 2004.
Other Liabilities. Other liabilities consisted of the following at the
dates indicated:
June 30, December 31,
2005 2004
------------- -------------
Accrued expenses (1) .......................... $ 32,545 $ 35,343
BOK bank deposits (2) ......................... 11,135 10,792
Deferred income ............................... 9,061 6,179
Other ......................................... 13,115 4,535
------------- -------------
$ 65,856 $ 56,849
============= =============
(1) Consists primarily of accruals for incentive compensation awards, audit
fees, interest on debt securities and operating expenses.
(2) Represents funds of third parties held on deposit by our German bank
subsidiary.
Escrow Deposits. Escrow deposits amounted to $86,084 at December 31,
2004 and consisted of custodial deposit balances representing funds collected
from borrowers for the payment of taxes and insurance premiums on mortgage
properties underlying loans that we serviced for others. In connection with
debanking, these custodial deposits were transferred from the Bank to an
unaffiliated bank and are now excluded from our balance sheet.
Stockholders' Equity. Stockholders' equity amounted to $336,084 at
June 30, 2005 as compared to $330,108 at December 31, 2004. The $5,976 increase
in stockholders' equity during the first six months of 2005 was primarily due to
net income of $5,295 and the issuance of vested restricted stock to employees as
part of our annual incentive awards. See the Consolidated Statements of Changes
in Stockholders' Equity in the Interim Consolidated Financial Statements for
additional information regarding changes in stockholders' equity during the
first six months of 2005.
We did not purchase any shares of our own common stock during the six
months ended June 30, 2005. A total of 5,568,900 shares may be purchased under a
plan we announced on May 9, 2000 to repurchase up to 6,000,000 shares of our
issued and outstanding common stock.
LIQUIDITY, COMMITMENTS AND OFF-BALANCE SHEET RISKS
Our primary sources of funds for liquidity are:
o Lines of credit and other secured borrowings o Servicing fees
o Match funded debt o Payments
received on
loans and
securities
o Debt securities o Proceeds from
sales of assets
We closely monitor our liquidity position and ongoing funding
requirements. At June 30, 2005, we had $308,837 of unrestricted cash and $2,942
of short-term investment grade securities. Unrestricted cash and short-term
investment grade securities combined represented 24% of total assets at June 30,
2005. Under certain of our credit facilities, we are required to maintain
minimum liquidity levels. Among the risks and challenges associated with our
funding activities are the following:
o As a result of debanking, we are no longer able to take deposits in
the United States, and we made a net cash payment of $164,212 to
Marathon National Bank on June 30, 2005 in connection with their
assumption of our customer deposits.
o Cash requirements to fund our acquisition of additional servicing
rights and related advances.
o The maturity of existing senior secured credit agreements with an
outstanding balance of $37,728 within the next twelve months.
o Ongoing cash requirements to fund operations.
In the last several years, our Residential Servicing business has
grown through the purchase of servicing rights. Servicing rights entitle us as
the owner to earn servicing fees and other types of ancillary income, but they
also impose on us various obligations as 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.
40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Our ability to expand our Residential 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 match funded agreements, 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 or make the associated advances.
Credit facilities directly related to our Residential Servicing business are
summarized as follows:
o 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 June 30,
2005, we had $106,470 of match funded liabilities outstanding under
this facility, which will mature in 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.
o In April 2003, we also entered into a secured credit agreement that
may be used to fund servicing advances and acquisitions of servicing
rights. The agreement matured in April 2005 and has been renewed
through April 2006. In April 2005 we concluded a syndication of this
credit line that increased our borrowing capacity under this agreement
by $70,000 for a total of $140,000. The syndication formally closed
effective July 1, 2005. At June 30, 2005, we had a balance outstanding
under this agreement of $37,728.
o On November 17, 2004, we entered into a match funded agreement under
which we transferred certain of our advances on loans serviced for
others. As of June 30, 2005, proceeds received in connection with this
transfer of advances were $175,000. The transfers of advances under
this agreement do not qualify as sales for accounting purposes because
we retain effective control of the advances. Accordingly, we report
the advances transferred as match funded assets and the amount of
proceeds we receive from the transfers as a secured borrowing with
pledge of collateral. The two term notes of $100,000 and $75,000 under
this facility have stated maturities of October 2013 and March 2014,
respectively. The variable funding note, which has a maximum amount of
$100,000, has a stated maturity of November 2010.
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
debt securities, lines of credit from unaffiliated parties, match funded debt
and other secured borrowings.
Our operating activities provided (used) $152,702 and $154,072 of cash
flows during the six months ended June 30, 2005 and 2004, respectively.
Operating cash flow declined in 2005 primarily as a result of lower net income,
a decline in net collections on advances and match funded advances on loans
serviced for others and slower growth in the amount of borrower payments held by
us prior to their being transferred to collection accounts, offset in large part
by an increase in cash provided by trading securities. The increase in cash
provided by trading securities in 2005 is primarily due to maturities, sales and
principal repayment on CMOs, which we invested in prior to debanking to meet the
Qualified Thrift Lender requirements of the Bank.
Our investing activities provided (used) cash flows totaling $(52,719)
and $6,592 during the six months ended June 30, 2005 and 2004, respectively. The
decline in cash flows provided by investing activities in 2005 is largely the
result of an increase in purchases of mortgage servicing rights, coupled with a
decline in proceeds from the sale of real estate and a decline in principal
payments received on loans. These increased cash outflows were partly offset by
declines in acquisitions of match funded loans and originations of loans in
2005.
Our financing activities provided (used) cash flows of $(332,641) and
$(36,273) during the six months ended June 30, 2005 and 2004, respectively. Cash
flows used by financing activities increased principally because of the decline
in deposits in 2005 as a result of maturing certificates of deposit and the cash
payment to Marathon National Bank on June 30, 2005 in connection with their
assumption of our customer deposits. Partially offsetting this increase in cash
outflows, match funded agreements provided additional net cash in 2005 as a
result of increased borrowing capacity. Also, a line of credit collateralized by
servicing advances matured in 2004 resulting in a significant cash outflow.
See the Consolidated Statements of Cash Flows in the Interim
Consolidated Financial Statements for additional details regarding cash flows
during the six months ended June 30, 2005 and 2004.
Commitments. 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. Such contractual obligations include our Convertible Notes,
Capital Trust Securities, lines of credit and other secured borrowings and
operating leases. See Note 7 to the Interim Consolidated Financial Statements
for additional information regarding commitments and contingencies.
41
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
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 foreign currency exchange rate risk. See
Note 4 to the Interim Consolidated Financial Statements and "Quantitative and
Qualitative Disclosures about Market Risk."
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 MATTERS
See Note 5 to the Interim Consolidated Financial Statements.
RECENT ACCOUNTING DEVELOPMENTS
For information relating to the effects of our adoption of recent
accounting standards, see Note 2 to the Interim Consolidated Financial
Statements.
42
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (Continued)
(Dollars in thousands)
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, mortgage servicing rights and in the value of the
collateral underlying loans and the value of real estate held.
We are also exposed to liquidity risk primarily because of the highly
variable daily cash requirements to support the Residential Servicing business,
including acquisitions of mortgage servicing rights, the requirement to make
advances pursuant to servicing contracts and the process of remitting borrower
payments to the custodial accounts. In general, we finance our operations
through operating cash flows and various other sources, including long-term debt
and financing facilities. See "Liquidity, Commitments and Off-Balance Sheet
Risks" for additional discussion regarding liquidity.
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. Increases in prepayment speeds result in increases in the amortization
expense of our mortgage servicing rights. As of June 30, 2005 and December 31,
2004, we held $132,333 and $131,409, respectively, of mortgage servicing rights.
We perform an interest rate sensitivity analysis of our mortgage
servicing rights portfolio every quarter. We currently estimate that the fair
value of the portfolio increases by approximately 5% for every 50 basis point
(bps) increase in interest rates and reduces by approximately 7% for every 50
bps decline in interest rates. Mortgage servicing rights are carried at the
lower of amortized cost or fair value by strata. To the extent that fair value
were to decline below amortized cost, we would record an impairment charge to
earnings and establish a valuation allowance. A subsequent increase in fair
value could result in the recovery of some or all of a previously established
valuation allowance. However, an increase in fair value of a particular stratum
above its amortized cost would not be reflected in current earnings.
Our Residential Servicing business is characterized by non-interest
earning assets financed by interest-bearing liabilities. Among the more
significant non-interest earning assets are servicing advances and mortgage
servicing rights. At June 30, 2005, we had servicing advances of $518,432
consisting of advances on loans serviced for others of $187,095 and match funded
advances on loans serviced for others of $331,337. See "Changes in Financial
Condition - Match Funded Assets and - Advances on Loans and Loans serviced for
Others".
We are also exposed to interest rate risk because earnings on float
balances are affected by short-term interest rates. These float balances, which
are not included in our financial statements, amounted to $1,020,725 and
$867,884 at June 30, 2005 and December 31, 2004, respectively. We report these
earnings as a component of servicing and related fees. See "Results of
Operations - Segment Results - Residential Loan Servicing" and "Non-Interest
Revenue - Servicing and Related Fees" for additional information regarding float
earnings and yields for the reported periods.
At June 30, 2005, the combined balance of our match funded
liabilities, debt securities, lines of credit and other secured borrowings
totaled $568,596. Of this amount $322,550 was variable rate debt, and therefore
sensitive to changes in interest rates, and $246,046 was fixed rate debt. See
"Changes in Financial Condition - Match Funded Liabilities, Lines of Credit and
Other Secured Borrowings and Debt Securities" for information regarding debt
maturities.
Our Asset/Liability Management 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.
We have entered into foreign currency futures to hedge our net
investment in the foreign subsidiary that owns our U.K. suprime residual
securities and the short-term Canadian-Dollar-denominated loan that we made to
facilitate the sale of our investment in the foreign subsidiary that owned the
shopping center in Halifax, Nova Scotia. 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. See Note 4 to our Interim
Consolidated Financial Statements for additional information regarding these
hedges.
43
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer
and principal 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 June 30, 2005. Based on this evaluation, our chief executive
officer and principal financial officer concluded that, as of June 30, 2005 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 acting principal 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 June 30, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
FORWARD-LOOKING STATEMENTS
This Quarterly 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 projections for growth of the residential loan servicing business and
business opportunities in other core businesses;
o assumptions related to the sources of liquidity and the adequacy of
financial resources;
o estimates regarding interest rates and foreign currency transactions;
and
o expectations related to pending litigation.
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 for the year ended
December 31, 2004, Form 10-Q for the quarter ended March 31, 2005 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.
44
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See "Note 17 Commitments and Contingencies" of Ocwen Financial
Corporation's Interim Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At OCN's Annual Meeting of Shareholders held on May 17, 2005, the
following individuals were elected to the Board of Directors:
Votes For Votes Withheld
--------------- ---------------
William C. Erbey ....................... 57,586,356 129,099
Ronald M. Faris ........................ 55,563,524 2,151,931
Ronald J. Korn ......................... 57,606,900 108,555
William H. Lacy ........................ 57,607,030 108,425
W. Michael Linn ........................ 56,285,436 1,430,019
W.C. Martin ............................ 57,606,775 108,680
Barry N. Wish .......................... 53,589,949 4,125,506
Ratification of PricewaterhouseCoopers LLP as the independent auditors
of OCN for the fiscal year ending December 31, 2005 was also voted on and
approved by the shareholders. The votes were as follows:
Votes for ................................... 57,681,793
Votes against ............................... 13,813
Abstentions ................................. 19,849
ITEM 6. 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 to Ocwen Capital Trust I
(4)
4.3 Form of Capital Security of Ocwen Capital Trust I (Included in
Exhibit 4.2) (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 4.4) (4)
4.6 Form of Guarantee of OCN relating to the Capital Securities of Ocwen
Capital Trust I (4)
4.7 Registration Rights Agreement dated as of July 28, 2004, between OCN
and Jeffries & Company Inc. (10)
4.8 Indenture dated as of July 28, 2004, between OCN and the Bank of New
York Trust Company, N.A., as trustee (10)
10.1 Ocwen Financial Corporation 1996 Stock Plan for Directors, as
amended (5)
10.2 Ocwen Financial Corporation 1998 Annual Incentive Plan (6)
10.3 Compensation and Indemnification Agreement, dated as of May 6, 1999,
between OAC and the independent committee of the Board of Directors
(7)
10.4 Indemnity agreement, dated August 24, 1999, among OCN and OAC's
Board of Directors (8)
10.5 Amended Ocwen Financial Corporation 1991 Non-Qualified Stock Option
Plan, dated October 26, 1999 (8)
10.6 First Amendment to Agreement, dated March 31, 2000, between HCT
Investments, Inc. and OAIC Partnership I, L.P. (8)
10.7 Ocwen Financial Corporation Deferral Plan for Directors, dated March
7, 2005 (9)
10.8 Collateral Trust Agreement, dated June 28, 2005, between OCN and the
Bank of New York Trust Company, N.A. (filed herewith)
10.9 Guaranty, dated June 28, 2005, from OCN to the Guaranteed Parties
(filed herewith)
10.10 Cash Collateral Agreement, dated June 28, 2005 among OCN, Bank of
New York Trust Company, N.A. as Collateral Trustee and Bank of New
York Trust Company N.A. as Account Bank (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 Principal Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith)
45
PART II - OTHER INFORMATION
32.1 Certification of the Chief Executive Officer pursuant to 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 Principal Financial Officer pursuant to 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 the 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 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 Ocwen Financial Corporation's Registration Statement on
Form S-1 (File No. 333-28889), as amended, declared effective by the
Commission on August 6, 1997.
(5) Incorporated by reference from the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-8 (File
No. 333-44999), effective when filed with the Commission on January 28,
1998.
(6) Incorporated by reference from the similarly described exhibit to Ocwen
Financial Corporation's Definitive Proxy Statement with respect to Ocwen
Financial Corporation's 1998 Annual Meeting of Shareholders filed with the
Commission on March 31, 1998.
(7) Incorporated by reference from OAC's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999.
(8) Incorporated by reference from the similarly described exhibit included
with Registrant's Quarterly Report of Form 10-Q for the quarterly period
ended March 31, 2000.
(9) 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, 2004.
(10) Incorporated by reference from the similarly described exhibit included
with Registrant's Quarterly Report on Form10-Q for the quarterly period
ended June 30, 2004.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
OCWEN FINANCIAL CORPORATION
By: /s/ ROBERT J LEIST, JR
----------------------------------------
Robert J Leist, Jr ,
Senior Vice President & Principal
Financial Officer
(On behalf of the Registrant and as its
principal financial officer)
Date: August 9, 2005
47