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 September 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
- --------------------------------- -------------------
(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 [ ].
Indicate by a check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act. Yes [ ] No [X].
Number of shares of Common Stock, $0.01 par value, outstanding as of
November 7, 2005: 63,130,177 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 Sheet at September 30, 2005 and December 31, 2004........................................... 3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2005 and 2004............ 4
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2005
and 2004......................................................................................................... 5
Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2005........... 6
Consolidated Statements of Cash Flows for the Nine Months Ended September 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....................................................... 42
Item 4. Controls and Procedures.......................................................................................... 43
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................................ 44
Item 6. Exhibits......................................................................................................... 44
Signature................................................................................................................ 46
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)
September 30, December 31,
2005 2004
------------- -------------
ASSETS
Cash ........................................................ $ 188,673 $ 542,891
Trading securities, at fair value
Investment grade .......................................... 41,717 86,215
Subordinates and residuals ................................ 30,078 39,527
Loans held for resale ....................................... 163,003 8,437
Match funded assets (including advances on loans serviced
for others of $315,694 and $276,626)........................ 317,680 280,760
Advances on loans and loans serviced for others ............. 285,903 240,430
Mortgage servicing rights ................................... 115,097 131,409
Receivables ................................................. 53,139 126,719
Real estate ................................................. 4,779 18,732
Loans (net of allowance for loan losses of $47 and $4,546) .. 505 3,792
Premises and equipment ...................................... 39,562 37,440
Other assets ................................................ 71,811 66,180
------------- -------------
Total assets .............................................. $ 1,311,947 $ 1,582,532
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Match funded liabilities .................................. $ 290,476 $ 244,327
Servicer liabilities ...................................... 285,349 291,265
Lines of credit and other secured borrowings .............. 98,267 50,612
Debt securities ........................................... 219,429 231,249
Other liabilities ......................................... 71,306 56,850
Deposits .................................................. -- 290,507
Escrow deposits ........................................... -- 86,084
------------- -------------
Total liabilities ....................................... 964,827 1,250,894
------------- -------------
Minority interest in subsidiaries ........................... 1,508 1,530
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY
Common stock, $.01 per value; 200,000,000 shares
authorized; 63,099,987 and 62,739,478 shares issued
and outstanding .......................................... 631 627
Additional paid-in capital ................................ 184,054 181,336
Retained earnings ......................................... 161,373 148,133
Accumulated other comprehensive income (loss), net of
taxes .................................................... (446) 12
------------- -------------
Total stockholders' equity ................................ 345,612 330,108
------------- -------------
Total liabilities and stockholders' equity .............. $ 1,311,947 $ 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 Nine Months
---------------------------- ----------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
REVENUE
Servicing and related fees .................................. $ 50,886 $ 35,767 $ 139,433 $ 116,549
Vendor management fees ...................................... 11,600 11,342 33,264 35,832
Gain (loss) on trading securities, net ...................... (743) (171) (3,409) 1,688
Valuation gains (losses) on real estate ..................... 13 (165) 106 (3,990)
Gain (loss) on sales of real estate ......................... 1,862 311 1,909 (149)
Operating income (losses) from real estate .................. (296) 444 (635) 1,017
Gain (loss) on debt repurchases ............................. 897 -- 897 --
Other income ................................................ 3,944 6,087 12,847 19,970
------------ ------------ ------------ ------------
Non-interest revenue .................................... 68,163 53,615 184,412 170,917
------------ ------------ ------------ ------------
Interest income ............................................. 3,864 4,988 16,960 15,555
Interest expense ............................................ 8,340 7,141 25,852 22,040
------------ ------------ ------------ ------------
Net interest income (expense) before provision for loan
losses ................................................. (4,476) (2,153) (8,892) (6,485)
Provision for loan losses ................................... (18) (94) (30) (913)
------------ ------------ ------------ ------------
Net interest income (expense) after provision for loan
losses ................................................. (4,458) (2,059) (8,862) (5,572)
------------ ------------ ------------ ------------
Total revenue ........................................ 63,705 51,556 175,550 165,345
------------ ------------ ------------ ------------
NON-INTEREST EXPENSE
Compensation and employee benefits .......................... 23,723 21,300 72,449 64,229
Occupancy and equipment ..................................... 4,517 3,981 13,330 11,999
Technology and communication costs .......................... 7,589 6,190 22,850 19,476
Loan expenses ............................................... 6,875 5,864 18,671 20,573
Professional services and regulatory fees ................... 4,586 4,208 14,963 18,026
Loss (gain) on investments in affordable housing properties . 1,193 (100) 1,717 (179)
Other operating expenses .................................... 4,995 2,653 13,233 7,841
------------ ------------ ------------ ------------
Non-interest expense .................................... 53,478 44,096 157,213 141,965
------------ ------------ ------------ ------------
Income (loss) before income taxes ............................... 10,227 7,460 18,337 23,380
Income tax expense (benefit) .................................... 2,282 (31,845) 5,097 (31,779)
------------ ------------ ------------ ------------
Net income (loss) ........................................... $ 7,945 $ 39,305 $ 13,240 $ 55,159
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE
Basic ....................................................... $ 0.13 $ 0.61 $ 0.21 $ 0.83
Diluted ..................................................... $ 0.12 $ 0.53 $ 0.21 $ 0.78
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic ....................................................... 62,975,006 64,637,454 62,843,375 66,853,296
Diluted ..................................................... 77,397,469 75,816,676 63,843,042 71,505,567
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 Nine Months
--------------------- ---------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- --------- --------- --------- ---------
Net income (loss) ............................................... $ 7,945 $ 39,305 $ 13,240 $ 55,159
Other comprehensive income (loss), net of taxes:
Change in unrealized foreign currency translation adjustment
arising during the period (1) ................................ (219) 43 (458) (957)
--------- --------- --------- ---------
Comprehensive income (loss) ..................................... $ 7,726 $ 39,348 $ 12,782 $ 54,202
========= ========= ========= =========
(1) Net of tax benefit (expense) of $120 and $181 for the three months and
of $247 and $769 for the nine months ended September 30, 2005 and 2004,
respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
5
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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 ............................. -- -- -- 13,240 -- 13,240
Issuance of restricted common stock
awards to employees and directors .... 185,393 2 1,925 -- -- 1,927
Exercise of common stock options ....... 175,116 2 793 -- -- 795
Other comprehensive income (loss), net
of taxes ............................. -- -- -- -- (458) (458)
----------- ----------- ----------- ----------- -------------- -----------
Balances at September 30, 2005 ......... 63,099,987 $ 631 $ 184,054 $ 161,373 $ (446) $ 345,612
=========== =========== =========== =========== ============== ===========
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 nine months ended September 30, 2005 2004
- ----------------------------------------------------------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ............................................... $ 13,240 $ 55,159
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities
Net cash provided (used) by trading activities .............. (26,091) (87,084)
Originations of loans held for resale........................ (203,945) (56,799)
Proceeds from sales of loans held for resale................. 124,756 44,240
Premium amortization (discount accretion) on securities, net 423 (1,608)
Amortization of servicing rights ............................ 73,020 71,173
Depreciation and other amortization ......................... 9,578 10,354
Provision for loan losses ................................... (30) (913)
Valuation (gains) losses on real estate ..................... (106) 3,990
(Gain) loss on trading and match funded securities .......... 3,409 (1,688)
(Gain) loss on sales of real estate ......................... (1,909) 149
(Gain) loss on sale of deposits ............................. (1,750) --
(Gain) loss on investments in affordable housing properties.. 1,717 (179)
(Gain) loss on repurchase of debt securities................. (897) --
Increase (decrease) in servicer liabilities ................. (5,916) 96,094
(Increase) decrease in advances and match funded advances on
loans and loans serviced for other ......................... (84,541) 50,583
(Increase) decrease in receivables and other assets, net .... 61,955 (66,847)
Increase (decrease) in other liabilities, net ............... 10,797 (9,699)
Other ....................................................... 2,740 (5,733)
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Net cash provided (used) by operating activities ................ (23,550) 101,692
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CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments received on match funded loans ........... 1,819 7,559
Acquisitions of match funded loans .......................... -- (7,119)
Proceeds from sale of match funded loans .................... -- 21,592
Proceeds from sale of affordable housing properties ......... 6,325 327
Purchase of mortgage servicing rights ....................... (56,708) (39,997)
Principal payments received on loans ........................ 6,769 29,661
Purchases, originations and funded loan commitments, net .... (218) (16,007)
Capital improvements to real estate ......................... -- (2,536)
Proceeds from sale of real estate ........................... 6,398 18,910
Additions to premises and equipment ......................... (8,339) (6,166)
Acquisition of subsidiary ................................... -- 1,376
Proceeds from sale of subsidiary ............................ 4,337 --
------------- -------------
Net cash provided (used) by investing activities ................ (39,617) 7,600
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits and escrow deposits ......... (210,850) (14,431)
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 ............................................ 47,655 (94,882)
Proceeds from (repayment of) match funded liabilities, net .. 46,149 (17,682)
Repurchase of common stock .................................. -- (49,449)
Repurchase of debt securities................................ (10,569) --
Exercise of common stock options ............................ 805 2,317
Issuance of notes ........................................... -- 175,000
------------- -------------
Net cash provided (used) by financing activities ................ (291,051) 873
------------- -------------
Net increase (decrease) in cash ................................. (354,218) 110,165
Cash at beginning of period ..................................... 542,891 316,167
------------- -------------
Cash at end of period ........................................... $ 188,673 $ 426,332
============= =============
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 nine months ended September 30, 2005 2004
- ----------------------------------------------------------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest .................................................... $ 29,958 $ 23,746
Income tax payments (refunds) ............................... (64,675) 1
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 ................... 3,659 --
SALE OF SUBSIDIARY
Fair value of subsidiary sold ............................... $ 9,200 $ --
Financing to buyer .......................................... (4,863) --
------------- -------------
Net cash received for subsidiary sold ....................... $ 4,337 $ --
============= =============
ACQUISITION OF BUSINESS
Estimated fair value of asset acquired(1) ................... $ -- $ (20,986)
Estimated fair value of liabilities assumed ................. -- 10,743
------------- -------------
Cash paid ................................................... -- (10,243)
Less cash acquired .......................................... -- 11,619
------------- -------------
Net cash acquired (paid) for assets ......................... $ -- $ 1,376
============= =============
(1) Including goodwill of approximately $6,100 resulting from the
acquisition.
The accompanying notes are an integral part of these
consolidated financial statements.
8
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 accounting
principles generally accepted in the United States of America for complete
financial statements. The interim consolidated financial statements of Ocwen
Financial Corporation ("OCN") include the accounts of OCN and its subsidiaries.
At September 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 September 30, 2005 and December 31,
2004, the results of our operations for the three and nine months ended
September 30, 2005 and 2004, our comprehensive income (loss) for the three and
nine months ended September 30, 2005 and 2004, our changes in stockholders'
equity for the nine months ended September 30, 2005 and our cash flows for the
nine months ended September 30, 2005 and 2004. The results of operations and
other data for the three and nine months ended September 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 September 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 servicing
advances and receivables, as well as our valuation of securities, 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
9
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2005
(Dollars in thousands)
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.
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 first quarter of
2006. When issued, the provisions of the final standard are expected to be
effective for interim and annual periods ending after June 15, 2006 and 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 OCN 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"). This statement was issued by
the Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants in December 2003 and requires that 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. 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)
SEPTEMBER 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 Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Basic EPS:
Net income (loss) ............................................... $ 7,945 $ 39,305 $ 13,240 $ 55,159
============ ============ ============ ============
Weighted average shares of common stock ......................... 62,975,006 64,637,454 62,843,375 66,853,296
============ ============ ============ ============
Basic EPS ....................................................... $ 0.13 $ 0.61 $ 0.21 $ 0.83
============ ============ ============ ============
Diluted EPS:
Net income (loss) ............................................... $ 7,945 $ 39,305 $ 13,240 $ 55,159
Interest expense on Convertible Notes, net of income tax (1)... 1,381 957 -- 957
------------ ------------ ------------ ------------
Adjusted net income (loss) ...................................... $ 9,326 $ 40,262 $ 13,240 $ 56,116
============ ============ ============ ============
Weighted average shares of common stock ......................... 62,975,006 64,637,454 62,843,375 66,853,296
Effect of dilutive elements:
Convertible Notes (1) ......................................... 13,599,019 10,003,219 -- 3,358,745
Stock options (2) ............................................. 723,542 915,973 812,251 1,027,805
Restricted stock awards ....................................... 99,902 260,030 187,416 265,721
------------ ------------ ------------ ------------
Dilutive weighted average shares of common stock ................ 77,397,469 75,816,676 63,843,042 71,505,567
============ ============ ============ ============
Diluted EPS ..................................................... $ 0.12 $ 0.53 $ 0.21 $ 0.78
============ ============ ============ ============
(1) Conversion of the Convertible Notes into shares of common stock has not
been assumed for purposes of computing diluted EPS for the first nine
months of 2005 because the effect would be anti-dilutive. Interest
expense and related amortization, net of income taxes, have not been
added back to net income in computing diluted EPS for this period. 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 1,551,865 and 1,453,008 of options
that were anti-dilutive for the third 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 1,604,358 and
1,155,139 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 to the buyer. During the third quarter of 2005,
the Canadian Dollar loan was repaid in full and the related currency futures
contract was terminated. We have managed our exposure to foreign currency
exchange rate risk related to this foreign currency-denominated transaction
through the use of currency futures. Our remaining principal exposure to foreign
currency exchange rates exists with the British Pound 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 prior to its repayment in the third quarter.
11
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 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
-------- ------------- ------------------- ----------- ----------
September 30, 2005:
British Pound currency futures......... Short December 2005 (pound) 14,688 1.8169 $ 831
==========
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 amount of the British Pound currency
futures at September 30, 2005 was $25,913. At December 31, 2004, the
U.S. Dollar equivalent notional amounts of the Canadian Dollar and
British Pound currency futures 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 was 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 that were 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 assigned 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 financial assets. Pursuant to the Guaranty, we also agreed that OCN
and its subsidiaries would not, among other things:
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;
12
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2005
(Dollars in thousands)
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.
As of September 30, 2005, we were in compliance with all of the
covenants specified in the Guaranty.
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
were 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 all fifty states, the District of Columbia and Puerto Rico. As a result of
debanking, we are no longer able to accept 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, or
BaFin), the German Central Bank (Deutsche Bundesbank) and, in respect of minimum
reserves on deposits, the European Central Bank.
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,
13
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2005
(Dollars in thousands)
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
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, aligned within our two areas of focus, are as
follows:
Servicing
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(R)).
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(R)). International servicing is conducted through
GSS.
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.
Loan Processing and Origination Services
o Residential Origination Services. This business provides various loan
processing and 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(R)). 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 Business Process Outsourcing. Business Process Outsourcing provides
outsourcing services to third parties including mortgage underwriting,
data entry, call center services and mortgage research.
Corporate Items and Other. This segment includes 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 non-core 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 sold our one remaining limited
partnership interest in an affordable housing property in the third
quarter of 2005.
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)
SEPTEMBER 30, 2005
(Dollars in thousands)
Financial information for our segments is as follows for the dates
indicated:
Total Assets
-----------------------------
September 30, December 31,
2005 2004
------------- -------------
Residential Servicing ........................................... $ 747,246 $ 687,233
Commercial Servicing ............................................ 12,247 13,659
Ocwen Recovery Group ............................................ 1,237 541
Residential Origination Services (1) ............................ 204,887 49,348
Business Process Outsourcing .................................... 1,930 2,502
------------- -------------
967,547 753,283
------------- -------------
Non-core businesses:
Commercial Assets ........................................... -- 24,149
Affordable Housing .......................................... -- 36,715
------------- -------------
-- 60,864
------------- -------------
Corporate Items and Other (2) ................................... 344,400 768,385
------------- -------------
$ 1,311,947 $ 1,582,532
============= =============
(1) Includes loans held for resale of $163,003 and $8,437 at September 30,
2005 and December 31, 2004, respectively.
(2) Includes cash of $182,668 and $535,733 at September 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 September 30, 2005
Residential Servicing............................ $ 39,121 $ (5,808) $ 25,618 $ 7,695
Commercial Servicing............................. 6,458 (85) 4,311 2,062
Ocwen Recovery Group............................. 2,830 -- 3,479 (649)
Residential Origination Services................. 13,869 1,504 15,468 (95)
Business Process Outsourcing..................... 2,843 (23) 2,428 392
-------------- --------------- ------------- -------------
65,121 (4,412) 51,304 9,405
-------------- --------------- ------------- -------------
Corporate Items and Other........................ 3,042 (46) 2,174 822
-------------- --------------- ------------- -------------
$ 68,163 $ (4,458) $ 53,478 $ 10,227
============== =============== ============= =============
For the three months ended September 30, 2004
Residential Servicing............................ $ 30,812 $ (4,338) $ 23,853 $ 2,621
Commercial Servicing............................. 3,712 (4) 3,888 (180)
Ocwen Recovery Group............................. 3,299 -- 2,591 708
Residential Origination Services................. 9,549 2,898 9,796 2,651
Business Process Outsourcing..................... 2,551 (6) 1,859 686
-------------- --------------- ------------- -------------
49,923 (1,450) 41,987 6,486
-------------- --------------- ------------- -------------
Non-core businesses:
Commercial Assets............................ (260) (377) 1,208 (1,845)
Affordable Housing........................... -- (357) 531 (888)
-------------- --------------- ------------- -------------
(260) (734) 1,739 (2,733)
-------------- --------------- ------------- -------------
Corporate Items and Other........................ 3,952 125 370 3,707
-------------- --------------- ------------- -------------
$ 53,615 $ (2,059) $ 44,096 $ 7,460
============== =============== ============= =============
15
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2005
(Dollars in thousands)
Financial information for our segments is as follows for the dates
indicated:
Net Interest
Income
(Expense) Pre-Tax
Non-Interest after Provision Non-Interest Income
Revenue for Loan Losses Expense (Loss)
-------------- --------------- ------------- -------------
For the nine months ended September 30, 2005
Residential Servicing............................ $ 108,220 $ (15,121) $ 79,858 $ 13,241
Commercial Servicing............................. 15,963 (137) 13,407 2,419
Ocwen Recovery Group............................. 10,019 -- 9,920 99
Residential Origination Services................. 36,896 7,355 39,787 4,464
Business Process Outsourcing..................... 8,287 (74) 7,459 754
-------------- --------------- ------------- -------------
179,385 (7,977) 150,431 20,977
-------------- --------------- ------------- -------------
Corporate Items and Other........................ 5,027 (885) 6,782 (2,640)
-------------- --------------- ------------- -------------
$ 184,412 $ (8,862) $ 157,213 $ 18,337
============== =============== ============= =============
For the nine months ended September 30, 2004
Residential Servicing............................ $ 106,330 $ (15,001) $ 75,775 $ 15,554
Commercial Servicing............................. 11,513 (7) 12,242 (736)
Ocwen Recovery Group............................. 9,958 -- 6,960 2,998
Residential Origination Services................. 31,547 8,988 30,493 10,042
Business Process Outsourcing..................... 6,899 (14) 5,093 1,792
-------------- --------------- ------------- -------------
166,247 (6,034) 130,563 29,650
-------------- --------------- ------------- -------------
Non-core businesses:
Commercial Assets............................ (2,302) 605 3,198 (4,895)
Affordable Housing........................... 17 (1,210) 1,853 (3,046)
-------------- --------------- ------------- -------------
(2,285) (605) 5,051 (7,941)
-------------- ---------------- ------------- -------------
Corporate Items and Other........................ 6,955 1,067 6,351 1,671
-------------- --------------- ------------- -------------
$ 170,917 $ (5,572) $ 141,965 $ 23,380
============== =============== ============= =============
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 $4,561 and $4,813 as of September 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 61 mortgage loans currently or previously serviced by the
Bank. Additional similar lawsuits have been brought in other courts, some of
which may be transferred to 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
16
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SEPTEMBER 30, 2005
(Dollars in thousands)
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 the Consolidated Complaint does
not set forth any specific amounts of claimed damages, plaintiffs are not
precluded from requesting leave from the court to amend the Consolidated
Complaint or 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.
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. In 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 Servicing
business. 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"), 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 challenged the Bank's fee charges for recoveries on charged-off loans.
The complaint variously alleged 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. Following service upon the plaintiff and related parties of
our counterclaim for damages, the parties entered into a definitive settlement
agreement disposing of all claims in this matter. Pursuant to this settlement,
the court on September 7, 2005, dismissed the case with prejudice. The
settlement will not 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' fees 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' fees 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)
SEPTEMBER 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 provider of servicing and origination processing solutions to
the loan industry with headquarters in West Palm Beach, Florida, offices in
Orlando, Florida and Chicago, Illinois and global operations in Canada, Germany,
India, Japan and Taiwan. Our five core business segments, aligned within our two
areas of focus, are as follows:
Servicing
Residential Servicing
Commercial Servicing
Ocwen Recovery Group
Loan Processing and Origination 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 our subsidiary 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.
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.
RESULTS OF OPERATIONS
Overview. Net income for the third quarter of 2005 was $7,945, a $31,360
decline as compared to net income of $39,305 for the third quarter of 2004. Net
income for the third quarter of 2004 includes an income tax benefit of $31,845
that largely resulted from a
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
$36,985 partial reversal of the valuation allowance that we had established on
our deferred tax asset in prior years. Net income for the third quarter of 2005
is net of an income tax provision of $2,282. Pre-tax earnings were $10,227 for
the third quarter of 2005, an improvement of $2,767 or 37% over the third
quarter of 2004. Combined pre-tax earnings from our core businesses increased by
$2,919 in the third quarter of 2005 as compared to 2004, reflecting improvements
in earnings from our Residential Servicing and Commercial Servicing segments
that offset declines in earnings from Ocwen Recovery Group, Residential
Origination Services and Business Process Outsourcing.
Net income for the first nine months of 2005 was $13,240, a decline of
$41,919 as compared with the same period for 2004. Net income for the first nine
months of 2004 includes an income tax benefit of $31,779, while the results for
the same period of 2005 are net of an income tax provision of $5,097. Pre-tax
income for the first nine months of 2005 declined by $5,043 or 22% as compared
to the same period of 2004. Combined pre-tax earnings from our core businesses
declined $8,673 in the first nine months of 2005 as compared to 2004.
Segment Results. The following is a discussion of income (loss) before
income taxes for each of our business segments.
Residential Servicing. 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. In 2005, increases in short-term interest rates have
had a positive impact on our earnings ("float earnings") on funds that we have
received from borrowers that are held on deposit with an unaffiliated bank until
remitted to investors ("float balances"). However, 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.
Selected information
2005 2004
------------ ------------
Number of loans at September 30 ................................. 331,876 327,562
Unpaid principal balance at September 30 ........................ $ 36,513,699 $ 34,365,953
Average unpaid principal balance for the following periods:
Three months ended September 30 ............................. $ 37,146,943 $ 34,347,201
Nine months ended September 30 .............................. $ 37,189,607 $ 35,696,362
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Pre-tax income (loss) ........................................... $ 7,695 $ 2,621 $ 13,241 $ 15,554
Net interest income (expense) ................................... $ (5,808) $ (4,338) $ (15,121) $ (15,001)
Non-interest revenue:
Servicing and related fees:
Fees ...................................................... $ 65,723 $ 59,345 $ 191,329 $ 191,623
Amortization of servicing rights .......................... (22,975) (22,504) (73,020) (71,173)
Compensating interest expense ............................. (6,256) (8,728) (18,070) (25,839)
------------ ------------ ------------ ------------
Total servicing and related fees ............................ 36,492 28,113 100,239 94,611
Vendor management fees ...................................... 1,782 1,978 5,622 6,205
Other ....................................................... 847 721 2,359 5,514
------------ ------------ ------------ ------------
Total non-interest revenue ...................................... $ 39,121 $ 30,812 $ 108,220 $ 106,330
============ ============ ============ ============
Non-interest expense ............................................ $ 25,618 $ 23,853 $ 79,858 $ 75,775
o The increase in fees in the third quarter of 2005, as compared to 2004,
primarily reflects increases in float earnings and other miscellaneous
fees, offset in part by declines in fees related to our VA contract,
late charges and prepayment penalties.
o Float earnings amounted to $9,549 and $4,958 for the third quarter of
2005 and 2004, respectively. For the first nine months of 2005 and 2004,
such earnings amounted to $22,614 and $10,721, respectively. The
increase in earnings is primarily due to an increase in short-term
interest rates. The yield we earned on float balances averaged 3.24% and
1.57% during the third quarter of 2005 and 2004, respectively, and 3.92%
and 1.08% for the first nine months of 2005 and 2004.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
o Servicing fees for the third quarter of 2005 and 2004 include $2,562 and
$4,466, respectively, of real estate property management fees associated
with our contract with the VA. VA servicing fees for the first nine
months of 2005 and 2004 were $9,923 and $14,878, respectively. The
decline in fees in 2005 is primarily due to reduced transaction volumes.
o The decline in other non-interest revenue for the first nine months of
2005 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.
o Non-interest expense for the third quarter of 2005 and 2004 includes bad
debt expense of $2,354 and $26, respectively. Year to date, bad debt
expense amounted to $5,305 and $1,482 for the 2005 and 2004 periods,
respectively. The increase in bad debt expense in the 2005 periods is
primarily the result of providing for aged reimbursable expenses that
may be uncollectible.
See "Non-Interest Revenue - Servicing and Related Fees" for a detail of
the principal components of servicing and related fees.
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 September 30, 2005, this segment serviced a total of 9,210 loans with
an aggregate unpaid principal balance of $12,913,039, of which our office in
Japan serviced 8,514 loans with an unpaid principal balance of $11,266,412.
Selected information
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Pre-tax income (loss) ........................................... $ 2,062 $ (180) $ 2,419 $ (736)
Non-interest revenue:
Servicing and related fees .................................. $ 4,898 $ 2,085 $ 10,673 $ 6,718
Other ....................................................... 1,560 1,627 5,290 4,795
------------ ------------ ------------ ------------
Total non-interest revenue ...................................... $ 6,458 $ 3,712 $ 15,963 $ 11,513
============ ============ ============ ============
Non-interest expense ............................................ $ 4,311 $ 3,888 $ 13,407 $ 12,242
o Both our domestic and international servicing and related fees increased
in the 2005 periods as compared to 2004. Third quarter 2005 fees reflect
an increase in asset and portfolio resolution fees earned in the Asia
operations of GSS and in our domestic servicing operations. Further
growth in the servicing portfolio will be required to earn these fees in
future periods. 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".
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. On
collections for third party owners, we generally earn a fee based upon a
percentage of the amount collected.
Selected information
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Pre-tax income (loss) ........................................... $ (649) $ 708 $ 99 $ 2,998
Non-interest revenue:
Servicing and related fees .................................. $ 2,459 $ 2,785 $ 8,820 $ 8,416
Other ....................................................... 371 514 1,199 1,542
------------ ------------ ------------ ------------
Total non-interest revenue ...................................... $ 2,830 $ 3,299 $ 10,019 $ 9,958
============ ============ ============ ============
Non-interest expense ............................................ $ 3,479 $ 2,591 $ 9,920 $ 6,960
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 as compared to 2004 is
largely the result of an increase in staffing levels. Also, $481 of
legal settlements were recorded during the third quarter of 2005 related
to the settlement of contractual disputes.
21
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
processing and 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). Beginning with our acquisition of a mortgage fulfillment center and
due diligence operation in December 2004, we have continued to add resources and
capacity in this business. This segment also includes the results of our
subprime residual trading securities.
Selected information
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Pre-tax income (loss) ........................................... $ (95) $ 2,651 $ 4,464 $ 10,042
Non-interest income (expense):
Servicing and related fees .................................. $ 4,778 $ 423 $ 12,088 $ 864
Vendor management fees ...................................... 9,802 9,364 27,607 29,635
Gain (loss) on trading securities ........................... (882) (278) (3,590) 47
Other ....................................................... 171 40 791 1,001
------------ ------------ ------------ ------------
Total non-interest revenue ...................................... $ 13,869 $ 9,549 $ 36,896 $ 31,547
============ ============ ============ ============
Net interest income (expense) ................................... $ 1,504 $ 2,898 $ 7,355 $ 8,988
Non-interest expense ............................................ $ 15,468 $ 9,796 $ 39,787 $ 30,493
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 The losses on trading securities during the third quarter and first nine
months of 2005 include unrealized losses of $(2,902) and $(5,608),
respectively, on unrated subprime residual securities, primarily those
backed by subprime residential loans originated in the U.K. A decline in
cash flows from the U.K. securities has resulted in reduced interest
income and a decline in fair value. These unrealized losses for 2005 are
offset in part by a realized gain in the third quarter of 2005 of
$2,019, excluding approximately $700 of consulting and other
professional fees paid in connection with the transaction. See "Gain
(Loss) on Trading Securities, Net."
o The increase in non-interest expense in the 2005 periods is in large
part due to increased staffing, technology and other operating expenses
associated with the mortgage fulfillment center and due diligence
operation we acquired in December 2004.
o Non-interest expense for the third quarter of 2005 and 2004 includes
$4,877 and $4,415, respectively, of fees incurred in connection with the
residential property valuation services that we provided. For the first
nine months of 2005 and 2004, property valuation fees incurred were
$13,882 and $16,525, respectively.
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 Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Pre-tax income (loss) ........................................... $ 392 $ 686 $ 754 $ 1,792
Servicing and related fees ...................................... $ 2,843 $ 2,551 $ 8,287 $ 6,899
Non-interest expense ............................................ $ 2,428 $ 1,859 $ 7,459 $ 5,093
o The increase in non-interest expense in the 2005 periods as compared to
2004 reflects our continued investment in this business. Compensation
and benefits costs are higher in 2005, reflecting an increase in
staffing levels. Technology costs and sales and marketing costs are also
higher in 2005.
Corporate Items and Other. Pre-tax results for this segment include
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
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
related costs of financing these investments and certain other corporate expense
and income items. The table below presents the more significant amounts included
in each of the periods indicated.
Selected information
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Pre-tax income (loss) ........................................... $ 822 $ 3,707 $ (2,640) $ 1,671
Non-interest revenue ............................................ $ 3,042 $ 3,952 $ 5,027 $ 6,955
Net interest income (expense) ................................... $ (46) $ 125 $ (885) $ 1,067
Non-interest expense ............................................ $ 2,174 $ 370 $ 6,782 $ 6,351
o Net interest expense 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 $948 and $2,730 of interest income
recognized during the third quarter of 2005 and 2004, respectively, on
federal income tax refund claims. Year to date, $1,900 and $6,476 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 includes a gain of $1,882 related to the
sale of a commercial real estate investment during the third quarter.
o Non-interest revenue for 2005 also includes $897 of net gains on debt
repurchases during the third quarter and 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.
o Non-interest expense for 2005 includes a loss of $1,272 on the sale of
our one remaining limited partnership interest in an affordable housing
property during the third quarter.
See Note 6 to the Interim Consolidated Financial Statements, for
additional information related to our segments.
Non-Interest Revenue. The following is a discussion of non-interest
revenue during the three and nine month periods ended September 30, 2005 and
2004:
23
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 Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Residential Servicing:
Servicing fees (1) .......................................... $ 40,309 $ 41,264 $ 127,959 $ 132,902
Late charges ................................................ 9,083 9,653 26,833 31,200
Earnings on custodial accounts (2) .......................... 9,549 4,958 22,614 10,721
Prepayment and collection related fees ...................... 2,071 2,926 6,514 11,738
Other fees, net ............................................. 4,711 544 7,409 5,062
------------ ------------ ------------ ------------
65,723 59,345 191,329 191,623
Amortization of servicing rights ............................ (22,975) (22,504) (73,020) (71,173)
Compensating interest expense (3) ........................... (6,256) (8,728) (18,070) (25,839)
------------ ------------ ------------ ------------
36,492 28,113 100,239 94,611
------------ ------------ ------------ ------------
Residential Origination Services:
Mortgage due diligence fees (4) ............................. 2,420 -- 6,409 --
Loan refinancing fees (4) ................................... 2,030 422 4,566 860
Other ....................................................... 328 1 1,113 4
------------ ------------ ------------ ------------
4,778 423 12,088 864
------------ ------------ ------------ ------------
Commercial Servicing:
International servicing fees ................................ 2,885 1,408 6,557 4,065
Domestic servicing fees ..................................... 2,014 677 4,116 2,653
------------ ------------ ------------ ------------
4,899 2,085 10,673 6,718
------------ ------------ ------------ ------------
Business Process Outsourcing .................................... 2,843 2,551 8,287 6,899
Ocwen Recovery Group ............................................ 2,459 2,785 8,820 8,416
Corporate Items and Other ....................................... (585) (190) (674) (959)
------------ ------------ ------------ ------------
$ 50,886 $ 35,767 $ 139,433 $ 116,549
============ ============ ============ ============
(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 $1,176,400 and $1,259,700 for the third quarter of
2005 and 2004, respectively. Year to date, the balances in these
accounts averaged approximately $1,153,100 and $1,322,200 for 2005 and
2004, respectively. The increase in earnings during the third quarter of
2005 and the first nine months 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.
24
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 Servicing
September 30, 2005:
Performing..................... $ 30,742,262 263,960 $ -- -- $ 30,742,262 263,960
Non-performing................. 4,640,753 54,123 1,130,684 13,793 5,771,437 67,916
------------- ------------- ------------- ------------- ------------- ------------
$ 35,383,015 318,083 $ 1,130,684 13,793 $ 36,513,699 331,876
============= ============= ============= ============= ============= ============
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)
September 30, 2005:
Performing..................... $ 1,701,455 324 $ -- -- $ 1,701,455 324
Non-performing (5)............. 11,129,948 8,807 81,636 79 11,211,584 8,886
------------- ------------- ------------- ------------- ------------- ------------
$ 12,831,403 9,131 $ 81,636 79 $ 12,913,039 9,210
============= ============= ============= ============= ============= ============
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 September 30, 2005 we serviced 268,469 subprime loans with a total
unpaid principal balance of $31,199,651, 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 that 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 have been delinquent for 90 days or more.
Performing loans are current or have been delinquent for less than 90
days.
(3) Under sub-servicing contracts we serviced approximately 85,272
residential loans with an unpaid principal balance of $9,074,088. 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 $650,511 and $839,654 of foreclosed residential properties
serviced for the VA at September 30, 2005 and December 31, 2004,
respectively.
(5) At September 30, 2005, our international offices, primarily Japan,
serviced a total of 8,798 loans with an unpaid principal balance of
$12,332,121. 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 Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Residential Servicing (1) ....................................... $ 1,782 $ 1,978 $ 5,622 $ 6,205
Residential Origination Services (2) ............................ 9,802 9,364 27,607 29,635
Corporate Items and Other ....................................... 16 -- 35 (8)
------------ ------------ ------------ ------------
$ 11,600 $ 11,342 $ 33,264 $ 35,832
============ ============ ============ ============
(1) Includes $1,012 and $1,061 of fees earned from vendors in the REALTrans
network during the third quarter of 2005 and 2004, respectively. These
fees amounted to $3,119 and $3,633 during the year to date periods of
2005 and 2004, respectively.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
(2) Includes residential property valuation fees of $7,385 and $7,042 earned
during the third quarter of 2005 and 2004, respectively. For the year to
date periods, property valuation fees of $21,687 and $23,639 were earned
during 2005 and 2004, respectively. Also includes title service and
other fees earned from vendors in the REALTrans network of $2,417 and
$2,322 during the third quarter of 2005 and 2004, respectively. For the
year to date periods, such fees amounted to $5,920 and $5,996 during
2005 and 2004, respectively.
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 Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Unrealized gains (losses):
Residential Origination Services (1) ........................ $ (2,902) $ (278) $ (5,608) $ (10)
Commercial Assets (2) ....................................... -- (418) -- 948
Corporate Items and Other ................................... 140 52 176 221
------------ ------------ ------------ ------------
(2,762) (644) (5,432) 1,159
------------ ------------ ------------ ------------
Realized gains (losses):
Residential Origination Services (3) ........................ 2,019 -- 2,019 57
Corporate Items and Other ................................... -- 473 4 472
------------ ------------ ------------ ------------
2,019 473 2,023 529
------------ ------------ ------------ ------------
$ (743) $ (171) $ (3,409) $ 1,688
============ ============ ============ ============
(1) The unrealized losses in 2005 primarily represent unrealized losses on
unrated residual securities backed by subprime residential loans
originated in the U. K. A decline in expected cash flows from these
securities has resulted in a decline in fair value.
(2) Represents unrealized gains (losses) on a commercial unrated subordinate
security. See "Changes in Financial Condition - Trading Securities."
(3) On June 30, 2005, we purchased $11,766 of unrated residual securities
related to loans for which we were already the master servicer for the
securitizations. As the master servicer, we had the clean-up call rights
to collapse the related trusts once the balance of the underlying loans
outstanding reached the optional termination amount of 10% of the
original amount of loans in the securitization. In September 2005, we
exercised our call rights and purchased the remaining loans from the
trusts. As a result, the over collateralization was remitted to us, and
we realized a gain of $8,495 on the residual securities that we had
purchased. We purchased the loans, which were classified as loans held
for resale at September 30, 2005, with the intention of securitizing or
selling them. A portion of the loans that we acquired were
nonperforming, and we recorded a provision of $6,476 to reduce these
nonperforming loans to their market value, yielding a net gain of
$2,019. See "Changes in Financial Condition - Loans Held for Resale" for
additional information regarding the purchased loans.
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. The $(3,990) of losses in the first nine
months of 2004 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."
Gain (Loss) on Sales of Real Estate. The gains in the 2005 periods are
primarily due to a gain of $1,882 earned during the third quarter that resulted
from the sale of assets by one of our commercial real estate partnerships. See
"Changes in Financial Condition - Real Estate."
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Other Income. The following table sets forth the principal components of
other income by segment for the periods indicated:
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Consulting fees (1) ............................................. $ 488 $ 76 $ 2,130 $ 76
Technology and related revenue (2) .............................. 1,087 1,030 3,043 6,116
Interest on federal tax refund claims (3) ....................... 948 2,730 1,900 6,476
Collections of credit card receivables (4) ...................... 248 492 960 1,457
Gain on sale on deposits (5) .................................... -- -- 1,750 --
Other ........................................................... 1,173 1,759 3,064 5,845
------------ ------------ ------------ ------------
$ 3,944 $ 6,087 $ 12,847 $ 19,970
============ ============ ============ ============
(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. During the third quarter of
2005, we collected $65,317 in connection with these federal tax refund
claims, including $8,772 of interest. See "Changes in Financial
Condition - Receivables".
(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.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
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 Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Interest income:
Interest earning cash and short-term cash investments ....... $ 344 $ 1,047 $ 1,902 $ 2,129
Trading securities (1) ...................................... 3,263 3,448 14,482 11,000
Match funded loans .......................................... 214 272 354 1,035
Loans ....................................................... 43 221 222 1,391
------------ ------------ ------------ ------------
Total interest income ...................................... 3,864 4,988 16,960 15,555
------------ ------------ ------------ ------------
Interest expense:
Match funded liabilities (2) ................................ 4,460 1,143 10,935 3,239
------------ ------------ ------------ ------------
Lines of credit and other secured borrowings ................ 452 149 1,613 2,177
------------ ------------ ------------ ------------
Debt securities
3.25% Convertible Notes (3) ............................... 1,726 1,196 5,258 1,196
10.875% Capital Securities ................................ 1,512 1,529 4,570 4,588
------------ ------------ ------------ ------------
3,238 2,725 9,828 5,784
------------ ------------ ------------ ------------
Deposits .................................................... 190 3,124 3,476 10,840
------------ ------------ ------------ ------------
Total interest expense ..................................... 8,340 7,141 25,852 22,040
------------ ------------ ------------ ------------
Net interest income (expense) before provision for loan
losses .................................................. $ (4,476) $ (2,153) $ (8,892) $ (6,485)
============ ============ ============ ============
(1) Consists primarily of interest income on subordinate and residual
securities. See "Changes in Financial Condition - Trading Securities."
(2) The increase in interest expense on match funded liabilities 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".
Non-Interest Expense. The following is a discussion of non-interest
expense during the three and nine month periods ended September 30, 2005 and
2004:
Compensation and Employee Benefits. The following table presents the
principal components of compensation and benefits we incurred for the periods
indicated:
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Salaries, bonuses and commissions (1) ........................... $ 20,559 $ 18,690 $ 62,466 $ 55,162
Other (2) ....................................................... 3,164 2,610 9,983 9,067
------------ ------------ ------------ ------------
$ 23,723 $ 21,300 $ 72,449 $ 64,229
============ ============ ============ ============
(1) Salaries include fees paid for the services of temporary employees.
Bonus expense includes compensation related to employee incentive awards
of restricted stock and stock options.
(2) Other consists primarily of payroll taxes, insurance, recruiting
expenses, matching contributions to our 401(K) plan, payments to
independent contractors and other benefits.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
The increase in compensation and benefits in the 2005 periods 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 in our India offices. The following
table indicates average employment for the periods indicated:
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
India ........................................................... 2,402 1,822 2,249 1,642
United States and Other ......................................... 1,011 1,097 1,034 1,066
------------ ------------ ------------ ------------
Total ........................................................ 3,413 2,919 3,283 2,708
============ ============ ============ ============
Occupancy and Equipment. The following table presents the principal
components of occupancy and equipment costs for the periods indicated:
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Postage and mailing ............................................. $ 1,491 $ 1,491 $ 4,254 $ 4,332
Rent ............................................................ 1,013 691 2,851 2,079
Depreciation .................................................... 501 649 1,832 2,017
Other ........................................................... 1,512 1,150 4,393 3,571
------------ ------------ ------------ ------------
$ 4,517 $ 3,981 $ 13,330 $ 11,999
============ ============ ============ ============
Technology and Communication Costs. The following table presents the
principal components of technology and communication costs for the periods
indicated:
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Depreciation:
Hardware .................................................... $ 1,505 $ 1,469 $ 4,633 $ 4,564
Software .................................................... 799 716 2,504 2,150
Other ....................................................... 195 215 566 504
------------ ------------ ------------ ------------
2,499 2,400 7,703 7,218
------------ ------------ ------------ ------------
Telecommunications .............................................. 2,088 1,725 5,585 5,013
Document imaging ................................................ 241 251 1,723 1,144
Maintenance and other ........................................... 2,761 1,814 7,839 6,101
------------ ------------ ------------ ------------
$ 7,589 $ 6,190 $ 22,850 $ 19,476
============ ============ ============ ============
Loan Expenses. Loan expenses for the third quarter of 2005 and 2004
included $4,877 and $4,415, respectively, of fees incurred in connection with
property valuation services we provided through the Residential Origination
Services segment. Year to date, such property valuation fees amounted to $13,882
and $16,525 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.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Professional Services and Regulatory Fees. The following table presents
the principal components of professional services and regulatory fees for the
periods indicated:
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Legal fees and settlements (1) .................................. $ 1,120 $ 2,130 $ 6,209 $ 11,136
Consulting fees (non-technology) ................................ 1,376 547 2,947 1,805
Audit and accounting fees (2) ................................... 1,108 610 2,863 1,742
Insurance ....................................................... 555 470 1,432 1,430
Other ........................................................... 427 451 1,512 1,913
------------ ------------ ------------ ------------
$ 4,586 $ 4,208 $ 14,963 $ 18,026
============ ============ ============ ============
(1) Legal fees and settlements for 2004 include $5,178 recorded during the
first six months of the year to establish a reserve for multiple breach
fees that we had ceased to collect directly from borrowers from early in
2004 through August 31, 2005. In the third quarter of 2005, legal fees
and settlements were reduced by approximately $2,600, as a result of our
reversing all but $300 of the remaining balance of the reserve. See
"Changes in Financial Condition - Advances on Loans and Loans Serviced
for Others."
(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.
Loss (Gain) on Investments in Affordable Housing Properties. The loss in
the 2005 periods is primarily the result of a $1,272 loss that we incurred
during the third quarter on the sale of our one remaining limited partnership
interest in an affordable housing property.
Other Operating Expenses. The following table presents the principal
components of other operating expenses for the periods indicated:
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Bad debt expense (1) ............................................ $ 2,937 $ 850 $ 5,969 $ 2,619
Travel, lodging, meals and entertainment ........................ 918 815 3,109 2,430
Amortization of deferred costs .................................. 102 325 422 749
Deposit related expense ......................................... 138 224 575 548
Other ........................................................... 900 439 3,158 1,495
------------ ------------ ------------ ------------
$ 4,995 $ 2,653 $ 13,233 $ 7,841
============ ============ ============ ============
(1) Bad debt expense primarily represents provisions for estimated
uncollectible servicing advances and other receivables related to our
Residential Servicing segment.
Income Tax Expense (Benefit). The following table provides details of
our income tax expense for the periods indicated:
Three Months Nine Months
--------------------------- ---------------------------
For the periods ended September 30, 2005 2004 2005 2004
- ----------------------------------------------------------------- ------------ ------------ ------------ ------------
Income tax expense (benefit) on income (loss) before taxes ...... $ 2,282 $ 930 $ 3,973 $ 5,206
Provision for (reversal of) valuation allowance on deferred
tax asset (1)(2) ............................................... -- (32,775) (843) (36,985)
Provision for recapture of base year bad debt reserves (2) ...... -- -- 1,967 --
------------ ------------ ------------ ------------
Total income tax expense (benefit) .............................. $ 2,282 $ (31,845) $ 5,097 $ (31,779)
============ ============ ============ ============
(1) The net reduction in the valuation allowance that was recorded in the
third quarter of 2004 includes a $36,985 reversal that was the result of
refund claims of $56,526 that had been filed with the IRS. These refund
claims arose because of changes in the tax law that allowed us to carry
back net operating losses from 2001 and 2002 to taxes paid in earlier
years. See "Changes in Financial Condition - Receivables" for additional
information regarding our refund claims and related income taxes
receivable.
(2) In the second quarter of 2005, we recorded 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.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
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 $165,084 and $165,927 at September 30, 2005
and December 31, 2004, respectively. 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. We assess the amount of the valuation
allowance each quarter and in light of our positive recent earnings history,
reversal of all or a portion of the valuation allowance may be appropriate in
the future.
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 nine months of 2005 and 2004 reflects
tax credits of $1,100 and $3,507, 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:
September 30, December 31,
2005 2004
------------- -------------
Investment grade (1):
U.S. Treasury ............................................... $ -- $ 1,594
Collateralized mortgage obligations (AAA-rated) ............. -- 81,466
Commercial paper ............................................ 39,987 --
Bonds and debentures (2) .................................... 1,730 3,155
------------- -------------
$ 41,717 $ 86,215
============= =============
Subordinates and residuals (3):
Single family residential
BB-rated subordinates ..................................... $ 231 $ 256
B-rated subordinates ...................................... 356 435
Unrated subordinates ...................................... 183 217
Unrated residuals ......................................... 26,641 35,277
------------- -------------
27,411 36,185
Commercial unrated subordinates ............................. 2,667 3,342
------------- -------------
$ 30,078 $ 39,527
============= =============
(1) Investment grade securities declined by $44,498 during the first nine
months of 2005 primarily due to maturities, sales and principal
repayments on CMOs, offset in part by the purchase of commercial paper.
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 nine months of 2005, our subordinate and residual
trading securities declined by $9,449. This decline was primarily due to
a decline in fair value of our unrated subprime residual securities.
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
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
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 September
30, 2005:
ANTICIPATED ANTICIPATED ANTICIPATED
YIELD TO YIELD TO WEIGHTED
PERCENT MATURITY AT MATURITY AT AVERAGE
OWNED PURCHASE 9/30/2005 REMAINING
RATING/DESCRIPTION (1) BY OCWEN (2) (3) (2) (4) COUPON LIFE (2) (5)
- ----------------------------------------------------- -------- ----------- ----------- ------ ------------
Single family residential:
BB-rated subordinates............................ 100.00% 19.23% 12.75% 6.75% 3.02
B-rated subordinates............................. 100.00% 12.79% 10.91% 6.10% 0.97
Unrated subordinates............................. 100.00% 13.45% 43.64% 6.56% 1.25
Unrated residuals................................ 100.00% 17.30% 12.97% N/A 4.04
Commercial:
Unrated subordinates............................. 25.00% 15.84% 7.47% N/A 3.27
(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. The lowest potential
class designation is "unrated" which, if included in a securitization,
will always receive interest last and experience losses first.
(2) Subordinate and residual securities do not have a contractual maturity
but are paid down over time as cash distributions are received. Because
they do not have a stated maturity, we disclose the weighted average
life of these securities.
(3) Represents the effective yield from inception to maturity based on the
purchase price and anticipated future cash flows under pricing
assumptions.
(4) Represents the effective yield based on the purchase price, actual cash
flows received from inception until the respective date, and the then
current estimate of future cash flows under the assumptions at the
respective date. Changes in the September 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 September 30,
2005 amortized cost.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
The mortgages that underlie our trading subordinate and residual
securities, which totaled $169,046 at September 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 foreign country is $38,675 in
the United Kingdom.
Loans Held for Resale. Loans held for resale represent single-family
residential loans originated or acquired by our Residential Origination Services
segment and amounted to $163,003 at September 30, 2005, a $154,566 increase over
the $8,437 balance at December 31, 2004. These loans are carried at the lower of
cost or market value and were comprised of three components at September 30,
2005.
First, loans with a carrying value of $75,377, net of a market valuation
reserve of $6,476, were acquired in September 2005 in connection with the
termination of securitization trusts in which we were the servicer and holder of
residual securities. These loans included $16,888 of non-performing loans at the
time of acquisition. At September 30, 2005, we were actively negotiating the
sale or securitization of all of the loans. In October 2005, we completed a
securitization involving $59,756 of these loans. See "Results of Operations -
Non-Interest Revenue - Gain (Loss) on Trading Securities, Net."
Second, $71,267 of loans were originated in connection with our new
origination services business. At September 30, 2005 we had commitments to sell
all of these loans. We sold $62,643 of these loans in October 2005.
Third, a balance of $16,359 represented loans that were originated in
response to requests from Residential Servicing customers to refinance their
mortgage. A balance of $8,437 of such loans was outstanding at December 31,
2004, all of which were sold in January 2005. Only loans with sales commitments
prior to closing are originated under this program. Of the loans outstanding at
September 30, 2005, $15,739 were sold in October 2005.
Match Funded Assets. Match funded assets are comprised of the following
at the dates indicated:
September 30, December 31,
2005 2004
------------- -------------
Match funded advances on loans serviced for others:
Principal and interest ...................................... $ 124,938 $ 107,102
Taxes and insurance ......................................... 117,550 107,710
Other ....................................................... 73,206 61,814
------------- -------------
315,694 276,626
Commercial loans ................................................ 1,986 4,134
------------- -------------
$ 317,680 $ 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 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".
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Advances on Loans and Loans Serviced for Others. Advances related to our
loan portfolios and loans we serviced for others consisted of the following at
the dates indicated:
September 30, December 31,
2005 2004
------------- -------------
Loans serviced for others:
Principal and interest ...................................... $ 90,092 $ 51,782
Taxes and insurance ......................................... 100,715 94,926
Other ....................................................... 94,782 93,375
------------- -------------
285,589 240,083
Loans ........................................................... 314 347
------------- -------------
$ 285,903 $ 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 $639 and $5,212 as
of September 30, 2005 and December 31, 2004, respectively. The reserve balance
at December 31, 2004 included $4,115 related to the remaining balance of
forbearance plan fees and multiple breach fees that we were not collecting
directly from borrowers at that time. As of September 30, 2005, this allowance
had been reduced to $300, including the reversal of approximately $2,600 of
reserve in the third quarter of 2005.
Mortgage Servicing Rights. The unamortized balance of our mortgage
servicing rights is primarily related to residential assets. Our investment
decreased by $16,312 during the nine months ended September 30, 2005 as
amortization exceeded purchases. 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 nine months ended September 30, 2005
reflects the more cautious acquisition strategy that we adopted given the
uncertainty of prepayment speeds in the current environment. See "Results of
Operations - Segment Results - Residential Servicing". The following table sets
forth the activity in our mortgage servicing rights during the first nine months
of 2005:
Balance at December 31, 2004 ............................ $ 131,409
Purchases ............................................... 56,708
Amortization ............................................ (73,020)
--------------
Balance at September 30, 2005 ........................... $ 115,097
==============
At September 30, 2005, we serviced loans under approximately 424
servicing agreements for 22 investors. Purchases during the nine months ended
September 30, 2005 were all for residential assets.
Receivables. Receivables consisted of the following at the dates
indicated:
September 30, December 31,
2005 2004
------------- -------------
Residential Servicing (1) ....................................... $ 9,884 $ 24,012
Residential Origination Services ................................ 12,419 3,455
Commercial Servicing ............................................ 2,460 2,736
Business Process Outsourcing .................................... 1,915 1,532
Ocwen Recovery Group ............................................ 1,092 341
Commercial Assets (2) ........................................... -- 192
Affordable Housing (2) .......................................... -- 18,308
Corporate Items and Other (3)(4) ................................ 25,369 76,143
------------- -------------
$ 53,139 $ 126,719
============= =============
(1) Balances include $2,342 and $12,801 at September 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
$7,285 and $3,395 at September 30, 2005 and December 31, 2004,
respectively.
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
(2) Based on the relative insignificance of the non-core assets remaining in
these segments, the remaining assets have been included in the Corporate
Items and Other segment beginning January 1, 2005. The Affordable
Housing balance primarily represents payments to be received in future
years (through June 2014) from the sale of investments in affordable
housing properties. The December 31, 2004 balance of $18,308 is net of
discount and reserves of $2,346 and $5,596, respectively.
(3) Balances include $1,967 and $68,463 of income taxes receivable at
September 30, 2005 and December 31, 2004, respectively. As of December
31, 2004, income taxes receivable includes $63,398 of federal tax refund
claims, including $6,872 of accrued interest on the claims. In September
2005, we collected the federal income tax refund claims, which totaled
$65,317, including $8,772 of interest.
(4) Balance at September 30, 2005 includes the Affordable Housing assets
that were transferred to this segment effective January 1, 2005, as
noted in (2) above. Those long-term receivables amounted to $13,359, net
of an unaccreted discount of $1,701 and a reserve for doubtful accounts
of $5,924. Also includes $5,248 and $3,384, at September 30, 2005 and
December 31, 2004, respectively, of receivables related to BOK.
Real Estate. Our investment in real estate declined from $18,732 at
December 31, 2004 to $4,779 at September 30, 2005. Our investment in real estate
at September 30, 2005 consists primarily of interests in two limited
partnerships operating as multi-family real estate ventures with a net carrying
value of $3,693. The $13,953 decline in real estate during the first nine months
of 2005 is primarily the result of two transactions. First, during the first
quarter we sold 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. Second, during the third quarter the majority of
the real estate assets owned by one of the partnerships were sold and our share
of the cash proceeds resulted in a gain of $1,882. The remaining real estate
assets of this partnership were sold in October 2005, and our share of the
proceeds resulted in a gain of approximately $600.
Other Assets. Other assets consisted of the following at the dates
indicated:
September 30, December 31,
2005 2004
------------- -------------
Deferred tax assets, net (1) .................................... $ 18,301 $ 17,684
Deferred debt related costs, net ................................ 10,219 11,216
Interest earning collateral deposits (2) ........................ 15,071 8,905
Interest earning debt service accounts (3) ...................... 16,696 5,851
Affordable housing properties (4) ............................... -- 5,641
Goodwill, net(5) ................................................ 5,806 5,312
Prepaid expenses ................................................ 2,958 4,067
Mutual fund and stocks (6) ...................................... 24 2,886
Capitalized software development costs, net ..................... 265 1,148
Other ........................................................... 2,471 3,470
------------- -------------
$ 71,811 $ 66,180
============= =============
(1) Deferred tax assets are net of valuation allowances totaling $165,083
and $165,926 at September 30, 2005 and December 31, 2004, respectively.
See "Results of Operations - Income Tax Expense (Benefit)".
(2) The balance at September 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 September 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) The balances at September 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 September 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.
(4) We sold our one remaining limited partnership interest in an affordable
housing property during the third quarter of 2005 for a loss of $1,272.
(5) The increase in goodwill in 2005 is the result of our purchase from an
unaffiliated third party of their 10% minority interest in a Japanese
subsidiary of GSS.
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
(6) The balance at December 31, 2004 primarily represented an investment by
the Bank in a mutual fund that invested in assets that met 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:
Balance Outstanding
Available ------------------------------
Borrowing September 30, December 31,
Collateral Interest Rate Capacity 2005 2004
- ----------------------------------------- --------------------------- ------------- -------------- -------------
Advances on loans serviced for others (1) See (1) below $ 96,252 $ 178,748 $ 149,342
Advances on loans serviced for others (2) LIBOR plus 175 basis points 90,258 109,742 90,851
Commercial loans (3) -- 1,986 4,134
------------- -------------- -------------
$ 186,510 $ 290,476 $ 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 collection accounts held at an unaffiliated bank and excluded from
our balance sheet, paid directly to an investment trust, or refunded to
borrowers. 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:
September 30, December 31,
2005 2004
------------- -------------
Borrower payments due to collection accounts .................... $ 231,905 $ 255,040
Escrow payments due to collection accounts ...................... 4,458 3,786
Partial payments and other unapplied balances ................... 48,986 32,439
------------- -------------
$ 285,349 $ 291,265
============= =============
36
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:
Balance Outstanding
Available -----------------------------
Borrowing September 30, December 31,
Borrowing Type Interest Rate (1) Maturity Capacity 2005 2004
- --------------------- ------------------------ ------------- ------------- ------------- -------------
Senior secured credit LIBOR + 162.5 or 225 June 2006 $ 56,462 $ 83,538 $ 24,218
agreement (2) basis points
Senior secured credit LIBOR + 250 basis points (3) -- -- 11,458
agreement (3)
Mortgage note (4) 5.62% October 2014 -- 14,729 14,936
------------- ------------- -------------
$ 56,462 $ 98,267 $ 50,612
============= ============= =============
(1) 1-month LIBOR was 3.86% and 2.40% at September 30, 2005 and December 31,
2004, respectively.
(2) Secured by mortgage servicing rights and advances on loans serviced by
others.
(3) Secured by mortgage servicing rights. We repaid in full the balance
outstanding under this credit agreement during the second quarter of
2005 and terminated the agreement.
(4) 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 September 30, 2005, the most restrictive limitation of
all the covenants would limit dividends that could be paid to $90,554. In
addition to these covenants, the Guaranty that we entered into with the OTS as
part of the debanking process limits cash dividends to our consolidated net
income for the year plus our retained earnings for the preceding two years and
requires that we maintain a minimum net worth of $333,000. See Note 5 to the
Interim Consolidated Financial Statements.
Debt Securities. Debt securities consisted of the following at the dates
indicated:
September 30, December 31,
2005 2004
------------- -------------
3.25% Convertible Notes due August 1, 2024 (1) .................. $ 165,500 $ 175,000
10.875% Capital Securities due August 1, 2027 (2) ............... 53,929 56,249
------------- -------------
$ 219,429 $ 231,249
============= =============
(1) The $9,500 decline in the outstanding balance during the first nine
months of 2005 is due to repurchases during the third quarter. These
repurchases generated total gains of $1,092, net of the write-off of
unamortized issuance costs.
(2) The $2,320 decline in the outstanding balance during the first nine
months of 2005 is due to repurchases during the third quarter. These
repurchases resulted in losses totaling $195, including the write-off of
unamortized issuance costs.
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.
37
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
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.
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
38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
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.
Other Liabilities. Other liabilities consisted of the following at the
dates indicated:
September 30, December 31,
2005 2004
------------- -------------
Accrued expenses (1) ............................................ $ 34,949 $ 35,342
BOK bank deposits (2) ........................................... 12,509 10,792
Deferred income ................................................. 7,663 6,179
Other ........................................................... 16,185 4,537
------------- -------------
$ 71,306 $ 56,850
============= =============
(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.
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.
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 $345,612 at
September 30, 2005 as compared to $330,108 at December 31, 2004. The $15,504
increase in stockholders' equity during the first nine months of 2005 was
primarily due to net income of $13,240 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 nine months of 2005.
We did not purchase any shares of our own common stock during the nine
months ended September 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 Match funded liabilities
o Debt securities
o Servicing fees
o Payments received on loans and securities
o Proceeds from sales of assets
At September 30, 2005, we had $187,333 of unrestricted cash and $41,717
of short-term investment grade securities. Unrestricted cash and short-term
investment grade securities combined represented 17% of total assets at
September 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:
39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
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 $83,538 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.
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 September 30,
2005, we had $109,742 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 matures in 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
closed effective July 1, 2005. At September 30, 2005, we had a balance
outstanding under this agreement of $83,538.
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 September 30, 2005, proceeds received in connection with
this transfer of advances were $178,748. 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. At
September 30, 2005, we had a total of $242,972 of available borrowing capacity
under existing credit agreements. 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) $(23,550) and $101,692 of cash
flows during the nine months ended September 30, 2005 and 2004, respectively.
Operating cash flow declined in 2005 primarily as a result of a decline in net
collections on advances and match funded advances on loans serviced for others,
a decline in the amount of borrower payments held by us prior to their being
transferred to collection accounts and an increase in loans held for resale,
offset in large part by the collection of federal income tax refund claims and
related interest totaling $65,317 in the third quarter of 2005 and a decrease in
cash used by trading securities.
Our investing activities provided (used) cash flows totaling $(39,617)
and $7,600 during the nine months ended September 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 a decline loan originations in 2005.
Our financing activities provided (used) cash flows of $(291,051) and
$873 during the nine months ended September 30, 2005 and 2004, respectively.
Cash flows provided financing activities decreased 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. Also, in the third quarter of 2004 we
received proceeds from the issuance of $175,000 of 3.25% Convertible Notes.
Partially offsetting this increase in cash provided, match funded agreements
provided additional net cash in 2005 as a result of increased borrowing
capacity, and we repurchased 5,481,000 shares of our common stock. Also, a line
of credit collateralized by servicing advances matured in 2004 resulting in a
significant cash outflow.
40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
See the Consolidated Statements of Cash Flows in the Interim
Consolidated Financial Statements for additional details regarding cash flows
during the nine months ended September 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.
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.
41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(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 September 30, 2005 and December
31, 2004, we held $115,097 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 4% for every 50 basis point
(bps) increase in interest rates and reduces by approximately 4% 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 September 30, 2005, we had servicing advances of $601,283
consisting of advances on loans serviced for others of $285,589 and match funded
advances on loans serviced for others of $315,694. 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 $810,518 and $867,884
at September 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 Servicing" and "Non-Interest Revenue
- - Servicing and Related Fees" for additional information regarding float
earnings and yields for the reported periods.
At September 30, 2005, the combined balance of our match funded
liabilities, debt securities, lines of credit and other secured borrowings
totaled $608,172. Of this amount $374,014 was variable rate debt, and therefore
sensitive to changes in interest rates, and $234,158 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. Our principal exposure to foreign currency exchange rates exists
with the British Pound versus the U.S. dollar. See Note 4 to our Interim
Consolidated Financial Statements for additional information regarding this
hedge.
42
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 September 30, 2005. Based on this evaluation, our chief
executive officer and principal financial officer concluded that, as of
September 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 September 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 quarters ended March 31, 2005 and
June 30, 2005 and our Forms 8-K filed during 2005. 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.
43
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See "Note 7 Commitments and Contingencies" of Ocwen Financial
Corporation's Interim Consolidated Financial Statements.
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. (5)
4.8 Indenture dated as of July 28, 2004, between OCN and the Bank of New
York Trust Company, N.A., as trustee (5)
10.1 Ocwen Financial Corporation 1996 Stock Plan for Directors, as
amended (6)
10.2 Ocwen Financial Corporation 1998 Annual Incentive Plan (7)
10.3 Compensation and Indemnification Agreement, dated as of May 6, 1999,
between OAC and the independent committee of the Board of
Directors (8)
10.4 Indemnity agreement, dated August 24, 1999, among OCN and OAC's Board
of Directors (9)
10.5 Amended Ocwen Financial Corporation 1991 Non-Qualified Stock Option
Plan, dated October 26, 1999 (9)
10.6 First Amendment to Agreement, dated March 31, 2000, between HCT
Investments, Inc. and OAIC Partnership I, L.P. (9)
10.7 Ocwen Financial Corporation Deferral Plan for Directors, dated March
7, 2005 (10)
10.8 Collateral Trust Agreement, dated June 28, 2005, between OCN and the
Bank of New York Trust Company, N.A. (11)
10.9 Guaranty, dated June 28, 2005, from OCN to the Guaranteed Parties (11)
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 (11)
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)
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 included
with Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2004.
(6) Incorporated by reference from the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-8
(File No. 333-44999), effective when filed with the Commission on
January 28, 1998.
(7) Incorporated by reference from the similarly described exhibit to 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.
44
PART II - OTHER INFORMATION
(8) Incorporated by reference from OAC's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999.
(9) Incorporated by reference from the similarly described exhibit included
with Registrant's Quarterly Report of Form 10-Q for the quarterly period
ended March 31, 2000.
(10) Incorporated by reference from the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2004.
(11) Incorporated by reference from the similarly described exhibit included
with Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2005.
45
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: November 9, 2005
46