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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: ________________to ________________
Commission File No. 1-13219
OCWEN FINANCIAL CORPORATION
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(Exact name of Registrant as specified in our charter)
FLORIDA 65-0039856
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1675 Palm Beach Lakes Boulevard
West Palm Beach, Florida 33401
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(Address of principal executive office) (Zip Code)
(561) 682-8000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE (NYSE)
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12 (g) of the Act: Not applicable.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Aggregate market value of the Common Stock, $0.01 par value, held by
nonaffiliates of the registrant, computed by reference to the closing price as
reported on the NYSE as of the close of business on March 10, 2005:
$284,147,823 (for purposes of this calculation affiliates include only
directors and executive officers of the registrant).
Number of shares of Common Stock, $0.01 par value, outstanding as of March 10,
2005: 62,750,904 shares
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to
Shareholders for fiscal year ended December 31, 2004 are incorporated by
reference into Part I, Item 1 and Part II, Items 5-8 and portions of our
definitive Proxy Statement with respect to our Annual Meeting of Shareholders to
be held on May 17, 2005, are incorporated by reference into Part III, Items 10 -
12 and 14.
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OCWEN FINANCIAL CORPORATION
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business............................................................................................ 4
General........................................................................................... 4
Segments.......................................................................................... 5
Residential Loan Servicing...................................................................... 6
Ocwen Technology Xchange........................................................................ 6
Ocwen Realty Advisors........................................................................... 7
Ocwen Recovery Group............................................................................ 7
Business Process Outsourcing.................................................................... 7
Commercial Servicing............................................................................ 7
Residential Discount Loans...................................................................... 8
Commercial Assets............................................................................... 8
Affordable Housing.............................................................................. 8
Subprime Finance................................................................................ 8
Corporate Items and Other....................................................................... 9
Sources of Funds.................................................................................. 9
Risk Factors...................................................................................... 10
Competition....................................................................................... 10
Subsidiaries...................................................................................... 10
Employees......................................................................................... 10
Regulation........................................................................................ 11
Federal Taxation.................................................................................. 15
State Taxation.................................................................................... 16
Item 2. Properties.......................................................................................... 17
Item 3. Legal Proceedings................................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................................................. 19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................... 19
Item 6. Selected Consolidated Financial Data................................................................ 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......................................... 20
Item 8. Financial Statements and Supplementary Data......................................................... 20
1
OCWEN FINANCIAL CORPORATION
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
(CONTINUED)
PAGE
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 20
Item 9A Controls and procedures............................................................................. 20
Item 9B Other Information................................................................................... 21
PART III
Item 10. Directors and Executive Officers of Registrant...................................................... 21
Item 11. Executive Compensation.............................................................................. 21
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...... 21
Item 13. Certain Relationships and Related Transactions...................................................... 21
Item 14. Principal Accounting Fees and Services.............................................................. 21
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 22
Signatures..................................................................................................... 24
2
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including, but not limited to the
following:
.. Estimates regarding the benefits of cost saving opportunities and quality
workforce in India,
.. Projections for staff reduction in the United States and growth in our India
workforce,
.. Predictions as to the potential business opportunities in business process
outsourcing,
.. Predictions regarding sales of our commercial and affordable housing assets
and
.. Intentions related to the issuance of brokered deposits and other sources of
financing.
Forward-looking statements are not guarantees of future performance and involve
a number of assumptions, risks and uncertainties that could cause actual results
to differ materially. Important factors that could cause actual results to
differ materially from those suggested by the forward-looking statements
include, but are not limited to, the following:
.. General economic and market conditions,
.. Prevailing interest or currency exchange rates,
.. Availability of servicing rights for purchase,
.. Governmental regulations and policies,
.. International political and economic uncertainty,
.. Availability of adequate and timely sources of liquidity,
.. Uncertainty related to dispute resolution and litigation and
.. Real estate market conditions and trends.
Further information on the risks specific to our business are detailed within
this report and our other reports and filings with the Securities and Exchange
Commission, including our periodic reports on Form 10-K, Form 10-Q and Form 8-K.
The forward-looking statements speak only as of the date they are made and
should not be relied upon. OCN undertakes no obligation to update or revise the
forward-looking statements.
3
PART I
ITEM 1 BUSINESS (Dollars in thousands)
GENERAL
Ocwen Financial Corporation ("OCN" or "the Company") is a diversified
financial services holding company with headquarters in West Palm Beach, Florida
and operations in Canada, China, Germany, India, Japan and Taiwan. We are
engaged in a variety of businesses related to residential and commercial
mortgage servicing, real estate asset management, asset recovery, business
process outsourcing and the marketing and sales of technology solutions to third
parties. OCN is a Florida corporation that was organized in February 1988 in
connection with the acquisition of Ocwen Federal Bank FSB (the "Bank"). OCN is a
registered savings and loan holding company subject to regulation by the Office
of Thrift Supervision ("OTS"). The Bank is a wholly owned subsidiary of OCN and
is also subject to regulation by the OTS, as its chartering authority, and by
the Federal Deposit Insurance Corporation ("FDIC"), as a result of its
membership in the Savings Association Insurance Fund, which insures the Bank's
deposits to the maximum extent permitted by law. The Bank is also subject to
regulation by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") and currently is a member of the Federal Home Loan Bank ("FHLB")
of New York, one of the 12 regional banks that comprise the FHLB System.
We have recently begun the process of having the Bank terminate its
status as a federal savings bank under OTS and FDIC supervision, which would,
among other things, eliminate certain restrictions on our growth. If this
process, which we refer to as "debanking," is completed, we would dissolve the
Bank and continue its non-depository businesses, including its mortgage
servicing business, under another subsidiary of our Company, which would be
licensed where necessary at the state or territory level. Should debanking be
completed, Ocwen Financial Corporation would no longer be a savings and loan
holding company and would no longer be able to take deposits in the United
States or benefit from federal preemption. Our ability to debank is subject to a
number of contingencies, many of which are beyond our control, including
approvals by the OTS with respect to the Application for a Voluntary Dissolution
(which we filed with the OTS on November 24, 2004) and sales of the Bank's
deposits to third parties. There can be no assurance that we ultimately will be
successful in debanking.
In connection with our debanking process, on February 4, 2005, we
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 branch facility in Fort
Lee, New Jersey. In addition, Marathon will take over the lease and other
contracts and acquire assets related to the branch. In connection with that
closing, Ocwen will make a cash payment to Marathon, which payment is calculated
based upon, among other things, the amount of those deposit account liabilities
as of the closing. As of February 28, 2005, the amount of the deposit
liabilities of the accounts subject to the Branch Purchase Agreement was
approximately $193,000. The transaction is subject to regulatory and other
customary approvals and conditions.
On September 30, 2004, we acquired Bankhaus Oswald Kruber KG ("BOK") a
German bank, for $9,737, including acquisition costs. Our primary objectives in
acquiring BOK were to diversify our funding sources and to establish a platform
to provide services to our multinational client base. The results of operations
of BOK are included in our consolidated income statement beginning on October 1,
2004. The excess of the purchase price over the fair value of the net assets
acquired (goodwill) related to this transaction is $3,694. We also recorded
$1,741 of intangible assets, none of which are subject to amortization. As of
December 31, 2004 BOK had assets of $23,043, of which $10,699 were interest
earning deposits, and total liabilities of $10,919.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports are made available free
of charge through our website (http://www.ocwen.com) as soon as practicable
after such material is electronically filed with or furnished to the Securities
and Exchange Commission. Also posted on our website, and available in print upon
request, are the charters for our Audit Committee, Compensation Committee and
Governance Committee, our Governance Guidelines, and Code of Ethics and Code of
Ethics for Senior Financial Officers. Within the time period required by the SEC
and the New York Stock Exchange, we will post on our website any amendment to or
waiver of the Code of Ethics for Senior Financial Officers, as well as any
amendment to the Code of Ethics or waiver thereto applicable to any executive
officer or director. The information provided on our website is not part of this
report, and is therefore not incorporated herein by reference.
4
PART I (Continued)
SEGMENTS
In early 2000, we began the execution of our strategic plan to shift our
business activities away from capital-intensive businesses involving the
purchase or origination of loans, real estate and related assets toward less
capital-intensive businesses that generate fee-based revenues. As a result, we
generally ceased to originate or invest in assets in certain of our business
segments ("non-core businesses") unless contractually committed to do so.
However, we continue to actively manage and resolve the remaining assets in
these segments. Our primary fee-based business activity is servicing subprime
residential mortgage loans for others. As of December 31, 2004, our core and
non-core businesses were as follows:
CORE BUSINESSES NON-CORE BUSINESSES
Residential Loan Servicing Commercial Assets
Ocwen Technology Xchange ("OTX") Affordable Housing
Ocwen Realty Advisors ("ORA") Subprime Finance
Ocwen Recovery Group
Business Process Outsourcing
Commercial Servicing
In addition to our core and non-core business segments, we report other
items of revenue and expense in our Corporate Items and Other segment as
discussed later in this section.
Our decision to change our strategy and to focus on fee-based earnings
was driven by changes in the economy and in the markets we serve and in our
perception of how to maximize the long-term value of the Company. The non-core
residential discount loan business and commercial finance business involved the
acquisition of non-performing loans at a discount to par value. The objective
was to resolve the loan and return it to performing status in order to increase
its value. Once the loan was reperforming, the exit strategy was to sell or
securitize the loan for a profit. As the economy continued to expand throughout
the late 1990s, however, the supply of non-performing loans decreased. As a
result, the prices asked for non-performing loans increased, and consequently
the profit margins on the business decreased. Additionally, the earnings
patterns of the businesses could be erratic as they typically depended on the
consummation of a few large sales transactions. Simultaneously, new competitors
that had access to large amounts of capital were entering the market.
In the late 1990s we also began to originate subprime residential
mortgage loans. However, the business attracted a substantial amount of new
capital and competition increased. The competition from larger,
better-capitalized companies put pressure on pricing relative to the rates and
terms offered to subprime borrowers in general, and, as a result, profit margins
declined. Simultaneously, interest rates began to decrease and the assumptions
concerning prepayment speeds that had been used to price new loans turned out to
be overly optimistic as mortgages prepaid more quickly than expected, adding
additional risk to investments in this business line. Consequently, we
determined that our best course of action was to compete where we were
strongest, that is, by using the technology and expertise we had developed over
the years in managing our own portfolio of non-performing residential and
commercial loans and in servicing our own subprime loans and offering it to
other institutions on a fee for service basis, either as a mortgage servicer or
as a technology provider. We believe that these activities offer a more
consistent earnings stream with a more attractive risk profile. Accordingly, in
late 1999 and early 2000 we embarked on our current business strategy.
Segment results in recent years reflect growth in our residential loan servicing
segment, continued investment in the development and marketing of our technology
products, cessation of loan acquisition and origination activities and our
continuing resolution or disposition of those assets not associated with our
core businesses. To date, the Residential Loan Servicing business has been
profitable. Our Ocwen Recovery Group business and ORA are profitable but smaller
contributors to the bottom line. Both earn fee income for performing services
for third parties. OTX markets several products to the real estate and mortgage
industries. However, although we earn some fee income from sales of these
products, they have not yet been sufficient for this business line to earn a
profit. Business Process Outsourcing, which began offering business process
outsourcing services late in 2002, improved its profitability in 2003 and 2004.
Commercial Servicing was not profitable in 2003 and 2002, reflecting start-up
costs associated with expanding our asset servicing business to various other
countries, but achieved a small profit in 2004. Additional information regarding
profitability of our business segments appears under the caption "Segment
Results" on pages 23 to 29 and in "Note 26: Business Segment Reporting" on pages
105 to 107 of our 2004 Annual Report to Shareholders.
A more detailed description of each of our business segments follows.
5
PART I (Continued)
RESIDENTIAL LOAN SERVICING
We service performing, sub-performing and non-performing residential
mortgage loans. Subprime mortgages comprised the vast majority of the
$37,697,318 in total unpaid principal balance of the loans we serviced at
December 31, 2004. We serviced loans under approximately 345 servicing
agreements for 22 clients as of December 31, 2004. These clients include well
capitalized mortgage originators, such as New Century and Delta Funding, Wall
Street firms with mortgage securitization platforms, such as Lehman Brothers,
Credit Suisse First Boston and Morgan Stanley, and governmental agencies, such
as the United States Department of Veterans Affairs.
We are entitled to service mortgages because we purchased the servicing
rights from the owners of the mortgages or have entered into a subservicing
agreement with an entity that owns the servicing rights. The rights and
obligations of servicing rights are typically specified in an agreement between
the various parties to a mortgage securitization transaction. Our largest source
of revenue with respect to servicing rights is the servicing fees we earn
pursuant to servicing and subservicing agreements. Servicing fees are usually
earned as a percentage of the unpaid principal amount of the mortgages that are
being serviced. A typical servicing fee is approximately 0.50% per year and a
typical subservicing fee ranges from approximately 0.17% to 0.19% per year. The
servicing and subservicing fees are supplemented by related income, including
late fees from borrowers who are delinquent in remitting their monthly mortgage
payments and interest earned on payments made to us but not yet remitted to the
owner of the mortgage.
As servicer or subservicer, we also have a variety of obligations that
are also specified in the servicing or subservicing agreement, including the
obligation to service the mortgages according to certain contractual standards
and to advance funds to securitization trusts in the event that borrowers are
delinquent on their monthly mortgage payments. The costs incurred in connection
with meeting these obligations includes, but is not limited to, the cost of
servicing the loans and the interest expense incurred to finance the servicing
rights and servicing advances incurred in connection with conducting the
business.
The contracts for servicing may provide for a single bulk transfer of a
servicing portfolio or the ongoing transfer of loans as they are originated or
purchased by counterparties to the servicing contract. While the loan data are
transferred to us for servicing, the client retains ownership of the loans.
The acquisition of servicing rights is generally structured as a
two-part bid process. A preliminary bid is provided to each potential client
following a preliminary due diligence review of the loan portfolio, the seller's
financial status, the strategic fit of the portfolio with our servicing
capabilities and the portfolio's historical performance characteristics.
Once the preliminary bid is accepted by the potential client, we
initiate a further evaluation of the portfolio through a formal due diligence
process, which includes a more detailed analysis of historical prepayment and
delinquency experience. This formal process determines the present value of a
projected stream of cash inflows and outflows from the portfolio. Based upon the
findings of this formal process, a final bid is prepared for approval by our
Credit Committee and submitted to the client for consideration. Upon the
client's acceptance, we enter into a servicing rights purchase agreement.
The U.S. Department of Housing and Urban Development, Freddie Mac and
Fannie Mae have approved the Bank as a loan servicer. Standard & Poor's has
rated the Bank as "Strong" as a Residential Subprime Servicer and Residential
Special Servicer. "Strong" represents Standard & Poor's highest ratings
category. On April 23, 2004, Standard & Poor's placed these ratings on watch
with negative implications. Moody's has rated the Bank as "SQ2" as a Residential
Subprime Servicer and as a Residential Special Servicer. "SQ2" represents
Moody's above average rating category. Fitch has rated us "RPS2" for Residential
Subprime Servicing and "RSS2" for Residential Special Servicing. These represent
Fitch's second highest categories, respectively. On March 1, 2004, Fitch placed
our "RPS2" rating for Residential Subprime Servicing and our "RSS2" rating for
Residential Special Servicing on negative watch. On December 29, 2004, Fitch
removed our Residential Subprime Servicing and Residential Special Servicing
ratings from negative watch.
OCWEN TECHNOLOGY XCHANGE (OTX)
The OTX segment consists of the following three product lines:
REALTrans(SM), REALServicing(TM) and REALSynergy(TM). Each of these product
lines serves a different market need, and each is at a different stage of
maturity and commercial use.
Our REALTrans product is a web-based vendor management platform that
facilitates the electronic fulfillment of real estate products and services
necessary to process, approve and close residential mortgage loans, as well as
to service them. We market this product to residential lenders and servicers and
their associated vendors. By connecting these two parties through the REALTrans
platform, we allow them to conduct business more effectively and efficiently. We
earn transaction fee revenues from the vendors based on the products and
services they provide to their lenders through this platform. We also earn
revenues through annual membership fees. The transaction fees are recognized
6
PART I (Continued)
as revenue as incurred. The membership fees are deferred and recognized as
revenue over the twelve-month membership period. Among our customer base on the
REALTrans platform are several of the top 35 residential mortgage lenders and
over 4,000 vendors. These lenders account for a significant portion of the
mortgage origination market.
Our REALServicing product is a comprehensive enterprise-level
residential mortgage loan servicing platform, which has been used by the Bank
since January 2001. The REALServicing product suite also includes
REALResolution(TM), a default management platform that provides end-to-end
mortgage default processing support. The target market for this platform
includes both prime and sub-prime residential mortgage loan servicers.
On May 3, 2004, OTX entered into a Service and License Agreement with
Aegis Mortgage Corporation regarding the REALServicing product. Pursuant to that
agreement, OTX has agreed to operate the REALServicing system for use in Aegis's
residential mortgage loan servicing business in exchange for a one-time
documentation fee and a commitment to pay monthly fees. The initial term of the
agreement is for four years with an option for Aegis to renew for one additional
three-year term.
Our REALSynergy product is a comprehensive enterprise-level commercial
mortgage loan servicing platform. The target market for this platform includes
domestic and international commercial mortgage loan servicers. The market in
which REALSynergy competes is served by a limited number of companies. Our
primary competitor is a division of a large, diversified public company. The
REALSynergy product suite includes REALSAMM(TM), the REALSynergy Asset
Management Module, a web-enabled platform for the asset and default management
of performing and non-performing commercial loans and real estate. REALSAMM is
being introduced to selected international markets through GSS, our joint
venture with Merrill Lynch.
OCWEN REALTY ADVISORS (ORA)
As part of our strategic focus on fee-based businesses, we established
ORA in 1999 as a new segment. ORA provides valuation services to external
customers in the wholesale lending community as well as for our own residential
real estate transactions.
An important part of the process of acquiring and managing mortgage loan
portfolios is the accurate review and analysis of the collateral offered as
security for the loans. ORA not only provides traditional valuation products
such as appraisals and broker price opinions, it also employs valuation models
and other alternative valuation products that can more precisely meet the
specific risk management needs of our customers.
OCWEN RECOVERY GROUP
This segment conducts collection activities for third party owners of
unsecured receivables and for a portfolio of unsecured credit card receivables
that we acquired at a discount in 1999 and 2000.
On collections for third party owners, we generally earn a fee based
upon a percentage of the dollars collected. The percentage fee generally ranges
from 17% to 50%. We intend to continue to grow our third party collections
activity.
We accounted for collections of our unsecured credit card receivables
under the cost recovery method through 2001 by which time we had reduced the net
book value of these receivables to zero as a result of collections and reserves.
Our contractual obligations to acquire these receivables expired in June 2000.
We have made no purchases since that time and plan no future purchases.
BUSINESS PROCESS OUTSOURCING
This business segment began operations in December 2002. The results for
2004 and 2003 primarily reflect the initiation of new outsourcing contracts in
the third quarter of 2003. Business Process Outsourcing provides outsourcing
services to third parties, including mortgage underwriting, data entry, call
center services and mortgage research.
COMMERCIAL SERVICING
This segment includes the results of operations of both domestic and
international servicing. International servicing is conducted through Global
Servicing Solutions, LLC ("GSS"), a joint servicing venture we formed with
Merrill Lynch in March 2002 for the servicing of assets in various countries.
Prior to 2004, domestic commercial servicing was reported as a component of the
Commercial Finance segment (re-named Commercial Assets), and the results of our
international operations were reported as a separate segment. Results for prior
years have been restated to conform to this presentation. We own 70% of GSS with
the remaining 30% owned by Merrill Lynch. GSS offices in Tokyo, Japan and
Taipei, Taiwan became fully operational during 2003. We also established
servicing offices in Toronto, Canada and Mainz, Germany in 2004. We have
established consulting operations in the United Kingdom and China.
7
PART I (Continued)
RESIDENTIAL DISCOUNT LOANS
This segment consisted of operations to acquire at a discount and
subsequently resolve sub-performing and non-performing residential mortgage
loans.
We began our discount loan operations in 1991. Our strategy was to
acquire at a discount certain mortgage loans for which the borrowers were not
current as to principal and interest payments. We would work to resolve the
loans by bringing them current and then selling or securitizing the loans for a
profit, by structuring a settlement with the borrower or by foreclosing on the
loan and liquidating the collateral.
The last acquisition of residential discount loans was made in 2000.
Based on the relative insignificance of the non-core assets remaining in this
business at December 31, 2002, the remaining assets of this business and any
related income or loss arising from their resolution have been included in the
Corporate Items and Other segment beginning January 1, 2003.
COMMERCIAL ASSETS
Effective January 1, 2002, we combined our Commercial Loan and
Commercial Real Estate segments, because the assets in each had fundamentally
similar attributes and had been assigned to a single management team. Commercial
activities include both discount loans and originated loans as well as our
investment in commercial real estate.
No new commercial assets have been purchased since 2000. Since then,
this business has consisted of the management, repositioning and resolution of
the remaining non-core assets. Other than loans made to facilitate sales of our
own assets, we also have not originated any commercial loans since 2000. At
December 31, 2004, we had $21,560 of non-core assets in this segment, which
consisted of four real estate assets (a shopping center, parcel of land and two
partnership interests) and one unrated subordinate security. In February 2005,
we sold the subsidiary that held our investment in our shopping center located
in Halifax, Nova Scotia. It is difficult to project with certainty when final
sales or resolutions will be completed or whether further losses may be incurred
upon resolution. We regularly assess the value of our remaining assets and
provide additional loss reserves or impairment charges as appropriate.
AFFORDABLE HOUSING
Historically, we invested in affordable housing properties primarily
through limited partnerships for the purpose of obtaining Federal income tax
credits pursuant to Section 42 of the Internal Revenue Code of 1986, as amended.
Beginning in 2000 we ceased making investments in these properties,
except to complete those projects in which an investment had already been made.
This reflects our change in strategic focus away from capital intensive lines of
business and the fact that the volume of tax credits being generated was
exceeding our ability to utilize them effectively. At that time, we also began
the process of marketing each of these properties for sale. At December 31,
2004, our investment of $5,641 represents a 99.9% limited partnership interest
in one affordable housing property. We also have $3,198 loan outstanding to the
limited partnership. This limited partnership is not consolidated into our
financial statements. While we cannot project sales with certainty, we believe
that it is possible that this property will be sold before the end of 2005 and
that new sources of financing will be established to repay the remaining loan
balance. We regularly assess the carrying value of our remaining assets and
provide additional loss reserves as appropriate.
Tax credits may be claimed over a ten-year period on a straight-line
basis once the underlying multi-family residential properties are placed in
service. Tax credits generally can be lost or recaptured only if non-qualifying
tenants are placed in units, ownership of the project is transferred or the
project is destroyed and not rebuilt during a 15-year compliance period for the
project. There can be no assurance that the multi-family residential projects
owned by the low-income housing tax credit partnerships in which we have
currently or previously invested will satisfy applicable criteria during the
15-year compliance period and that there will not be loss or recapture of a
portion of the associated tax credits.
SUBPRIME FINANCE
We were engaged in subprime residential loan origination prior to
ceasing originations in August of 1999; however, we have continued to manage and
resolve the remaining non-core assets. Effective January 2002, the remaining
business was renamed Subprime Finance from Subprime Residential Lending to
better depict the current nature of the business activity. The remaining assets
of this segment consist primarily of subprime residual securities issued in the
United Kingdom. These securities are presently generating income and return of
principal through cash flows.
8
PART I (Continued)
CORPORATE ITEMS AND OTHER
In this segment we report business activities that are individually
insignificant (including BOK), interest income on cash and cash equivalents,
interest expense on corporate assets, general corporate expenses and gains and
losses from the early retirement of debt.
Additional financial information and related discussion regarding each
of our segments appears under the captions "Segment Results" on pages 23 to 29
and "Note 26: Business Segment Reporting" on pages 105 to 107 of our 2004 Annual
Report to Shareholders.
SOURCES OF FUNDS
General. The principal sources of funds that support our business
activities have historically been:
. Lines of credit and other secured borrowings
. Match funded debt
. Debt securities
. Securities sold under agreements to repurchase
. Deposits
. Servicing fees
. Payments received on loans and securities
. Proceeds from sales of assets
We closely monitor our liquidity position and ongoing funding
requirements. Among the risks and challenges associated with our funding
activities are the following:
. Scheduled maturities of certificates of deposit for 2005, 2006 and
thereafter amount to $201,934, $47,006 and $28,731, respectively.
. Maturity of existing collateralized lines of credit and other secured
borrowings totaling $35,676 at various dates through 2005.
. Potential extension of resolution and sale timelines for non-core
assets.
. Ongoing cash requirements to fund operations of our holding company.
. Cash requirements to fund our acquisition of additional servicing rights
and related advances, as discussed immediately below.
In the last several years, our Residential Loan Servicing business has
grown primarily through the purchase of servicing rights. Servicing rights
entitle the owner to earn servicing fees and other types of ancillary income and
impose various obligations on the servicer. Among these are the obligation to
advance our own funds to meet contractual principal and interest payments for
certain investors and to pay taxes, insurance and various other items that are
required to preserve the assets being serviced.
Our ability to continue to expand our servicing business depends in part
on our ability to obtain additional financing to purchase new servicing rights
and to fund servicing advances. We currently use a variety of sources of debt to
finance these assets, including match funded agreements, deposits, credit
facilities and seller financing. Our credit facilities provide financing to us
at amounts that are less than the full value of the related servicing assets
that serve as collateral for the credit facilities. If we cannot replace or
renew these sources as they mature or obtain additional sources of financing, we
may unable to acquire new servicing rights and make the associated advances.
Deposits. Historically, a significant source of funds for us had been
certificates of deposit obtained primarily through national investment banking
firms and our branch office located in New Jersey. If, as described under
"GENERAL", we cease to control a federal savings bank as a result of debanking,
we would no longer be able to rely on U.S. deposits obtained through the Bank as
a source of funds. Our total deposits amounted to $301,299 at December 31, 2004,
including $290,507 at the Bank and $10,792 at BOK.
Lines of Credit and Other Secured Borrowings. In April 2003, we entered
into a $60,000 secured credit agreement that may be used to fund servicing
advances and acquisitions of servicing rights. The agreement matured in April
2004 and was renewed through April 2005. The size of the facility was increased
to $70,000. At December 31, 2004, we had a balance outstanding under this
agreement of $24,218.
In December 2003, we entered into a $12,500 secured credit agreement
under which any borrowings are collateralized by mortgage servicing rights. In
January 2004, we borrowed $12,500 under this facility and the balance
outstanding as of December 31, 2004 was $11,458.
In October 2004, we obtained a mortgage on our call center in Orlando,
Florida in the amount of $15,000. The note matures in October 2014 and interest
accrues at an annual fixed rate of 5.62%. The balance outstanding at December
31, 2004 was $14,936.
9
PART I (Continued)
Match Funded Liabilities. 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 December 31, 2004, proceeds received in connection
with this transfer of advances were $149,342. As of December 31, 2004, there was
$25,658 of capacity available under this facility. The $100,000 term note under
this facility has a stated maturity of October 2013. The variable funding note
has a stated maturity of November 2010. Under a match funding agreement that we
entered into on December 20, 2001, we are eligible to finance advances on loans
serviced for others up to a maximum debt balance of $200,000 at any one time. At
December 31, 2004, we had $90,851 of match funded liabilities outstanding under
this facility, which will mature in January 2006. The transfers of advances
under these agreements did not qualify as sales for accounting purposes because
we retain effective control of the advances. Accordingly, we report the advances
transferred as match funded assets and the amount of proceeds we receive from
the transfers as a secured borrowing with pledge of collateral.
Securities Sold Under Agreements to Repurchase. We also obtain funds
pursuant to securities sold under reverse repurchase agreements. Under these
agreements, we sell securities (generally mortgage-backed and mortgage-related
securities) under an agreement to repurchase such securities at a specified
price at a later date. Reverse repurchase agreements have short-term maturities
(typically 90 days or less) and are deemed to be financing transactions. All
securities underlying reverse repurchase agreements are reflected as assets in
our consolidated financial statements and are held in safekeeping by
broker-dealers. We had no securities sold under agreements to repurchase at
December 31, 2004.
Debt Securities. Our debt securities at December 31, 2004 consisted of
10.875% Capital Securities due in 2027 with an outstanding balance of $56,249
and 3.25% Convertible Notes due in 2024 with an outstanding balance of $175,000.
In July 2004 we issued the $175,000 of 3.25% Convertible Notes due 2024.
The notes are convertible at the option of the holders, if certain conditions
are met, into shares of our common stock. We have used 25% of the gross proceeds
of the sale of the Convertible Notes to repurchase, in privately negotiated
transactions concurrent with the private placement of the Convertible Notes,
4,850,000 shares of our common stock at a price of $9.02 per share. We have used
the remaining proceeds, net of underwriting discount and other expenses,
primarily to repay maturing deposits and other liabilities, increase our cash
and invest in short-term AAA-rated securities.
RISK FACTORS
There are a number of risk factors that relate to our business and that
may directly or indirectly affect our results of operations and financial
condition. A discussion of our principal risk factors appears under the caption
"Overview of Risks and Related Critical Accounting Policies" on pages 13 to 21
of our 2004 Annual Report to Shareholders and is incorporated herein.
COMPETITION
A discussion of competition as it relates to our primary core businesses
appears under the caption "Risk Relating to Our Business" on pages 13 to 18 of
our 2004 Annual Report to Shareholders and is incorporated herein by reference.
SUBSIDIARIES
A list of our significant subsidiaries is set forth in Exhibit 21.0.
EMPLOYEES
As of December 31, 2004, we had a total of 3,120 employees, of which
1,032 were in our United States facilities and 2,026 were in our India
operations centers. We have developed our India operations centers over the past
three years in order to benefit from the cost savings opportunities and quality
workforce available in that country. We also had 62 employees in other countries
at December 31, 2004.
In the United States, our operations are concentrated in our
headquarters in West Palm Beach, which had 357 employees as of December 31,
2004, and our operations center in Orlando, which had 645 staff members as of
the same date. Our Orlando facility has the capacity to house 1,154 employees
on a single shift. In addition, we had 30 employees at various other locations
in the United States.
In India, our operations are located in the cities of Bangalore and
Mumbai. Of the 2,026 members of the staff in India as of December 31, 2004,
1,201 were in Bangalore and 825 were in Mumbai. Our India workforce can be
summarized by business as follows:
. 43% are engaged in activities for our Residential Loan Servicing
business,
. 22% support Business Process Outsourcing,
. 14% support OTX and Technology Services,
. 17% work in various other business units and
. 4% represent various support functions, including Human Resources and
Corporate Services, Accounting and Risk Management. Our employees are
not represented by a collective bargaining agreement. We consider our
employee relations to be satisfactory.
10
PART I (Continued)
REGULATION
U.S. financial institutions and their holding companies are extensively
regulated under federal and state laws. The Bank is regulated and examined
primarily by the OTS, which has substantial enforcement authority over the Bank.
Because the Bank accepts deposits that are insured by the FDIC, the FDIC serves
as a secondary federal banking regulator of the Bank. As such, it also has
substantial enforcement authority over the Bank. These Federal banking
regulators have the ability to assess civil monetary penalties, to issue
cease-and-desist or removal orders and to initiate injunctive actions for
violations of laws and regulations and unsafe or unsound practices. As a result,
our business can be materially affected by changes in our regulatory
environment.
If, as described under "General" we were to no longer control a federal
savings bank, we would no longer be subject to federal banking regulations but
would remain subject to certain federal, state and local consumer protection
provisions. We also would become subject to regulation in a number of states as
a mortgage service provider and/or as a debt collector. We have not previously
operated our residential loan servicing business under such regulatory regimes
and there can be no assurance that this transition would not result in
additional costs or uncertainties that would have a material adverse effect on
the profitability of our residential loan servicing business.
Although not significant to current operations, BOK is licensed as a
credit institution under the laws of the Federal Republic of Germany and is
subject to supervision and regulation in that country.
THE HOLDING COMPANY
Savings and Loan Holding Company. Ocwen Financial Corporation is a
registered savings and loan holding company under the Home Owners' Loan Act
("HOLA"). As such, we have registered with the OTS and are subject to
regulation, supervision and examination by the OTS. We are required to file
periodic reports with the OTS on our business and activities. The OTS has the
authority to review our activities and determine if any activity constitutes a
serious risk to the financial soundness, safety, or stability of the Bank. If
the OTS makes a determination that these risks exist, the OTS may place
restrictions on our activities or the activities of our subsidiaries or
affiliates. These restrictions may impact the ability of the Bank to pay
dividends, to engage in transactions with us or our subsidiaries or affiliates
and to engage in other banking activities.
Restrictions on Acquisitions. Savings and loan holding companies and
their affiliates are prohibited from acquiring more than 5% of the voting
shares, or from acquiring control, of any other savings association or savings
and loan holding company, without prior approval of the OTS. No person or entity
can acquire a controlling interest in Ocwen Financial Corporation without
receiving the approval of the OTS. Moreover, no other savings and loan holding
company can acquire more than 5% of Ocwen's voting shares without the prior
approval of the OTS.
THE BANK
General. The Bank is a federal savings bank organized under the HOLA.
The Bank is subject to regulation, supervision and examination by the OTS and by
the FDIC. The business and activities of the Bank are reported in periodic
filings with the OTS. Regulations apply to, among other things, insurance of
deposit accounts, capital requirements, payment of dividends, the nature and
amount of the investments that the Bank may make, transactions with affiliates,
community reinvestment, lending, internal policies and controls and changes in
control of the Bank as well as subsidiaries established by the Bank.
FDIC. The FDIC may terminate the deposit insurance of the Bank if the
Bank engages in unsafe or unsound practices, is in an unsafe or unsound
condition or has violated any applicable law, regulation, rule, order or
condition imposed by the OTS or the FDIC. If insurance of accounts is
terminated, the accounts at the institution at the time of the termination, less
subsequent withdrawals, shall continue to be insured for a period of six months
to two years, as determined by the FDIC. Other than in connection with the
completion of debanking as described in "General", we are aware of no existing
circumstances that would result in termination of the Bank's deposit insurance.
Regulatory Capital Requirements. Federal savings banks are subject to
minimum capital requirements set forth by the OTS. The three capital
requirements applicable to the Bank are discussed below.
Leverage Capital Requirement. The minimum leverage capital requirement
for most savings associations is a ratio of core capital to adjusted total
assets of 4%. Core capital includes common shareholders' equity, non-cumulative
perpetual preferred stock and related surplus, minority interests in the equity
accounts of fully consolidated subsidiaries and certain non-withdrawable
accounts and pledged deposits. Deductions from core capital include certain
intangibles, disallowed servicing assets and disallowed deferred tax assets.
Adjusted total assets of a savings association are total assets as reported for
consolidated entities on period-end reports in accordance with GAAP plus the
prorated assets of any includible subsidiary in which the savings association
has a minority ownership interest that is not consolidated under GAAP and any
remaining qualifying supervisory goodwill, minus certain assets not includible
in the applicable capital standard, investments in any includible subsidiary in
which a savings association has minority interests investments in a subsidiary
subject to consolidation.
11
PART I (Continued)
Tangible Capital Requirement. Tangible capital is core capital less all
intangibles other than qualifying mortgage servicing rights. Federal savings
banks are required to maintain tangible capital of at least 1.5% of their
adjusted total assets.
Risk-Based Capital Requirement. A savings bank is allowed to include
both core capital and supplementary capital in the calculation of its total
capital for purposes of the risk-based capital requirements, provided that the
amount of supplementary capital included does not exceed the savings bank's core
capital. Supplementary capital consists of certain capital instruments that do
not qualify as core capital, including subordinated debt that meets specified
requirements and loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. In determining the required amount of risk-based capital,
total assets, as well as residual interests (including certain off-balance sheet
items that are converted to on-balance sheet credit equivalents using a
conversion factor of 0% to 100%), are multiplied by a risk weight based on the
risks inherent in the type of assets. The risk weights assigned by the OTS for
principal categories of assets currently range from 0% to 200%, depending on the
type of asset. Deductions from risk-based capital include real estate acquired
in satisfaction of a debt and held in excess of five years.
Following an examination by the OTS in late 1996 and early 1997, the
Bank committed to the OTS to maintain a core capital ratio and a total
risk-based capital ratio of at least 9% and 13%, respectively. The Bank
continues to be in compliance with this commitment.
Prompt Corrective Action. Federal banking regulators have the authority
to take "prompt corrective action" to resolve the problems of undercapitalized
institutions. The regulations establish five categories with varying degrees of
regulators' powers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." At December 31, 2004, the Bank was a "well capitalized"
institution under the prompt corrective action regulations of the OTS; however,
this classification is for limited purposes and may not be indicative of the
Bank's financial condition. The regulations also permit the appropriate Federal
banking regulator to downgrade an institution to the next lower category under
certain circumstances. Depending upon the capital category of an institution,
the regulators' corrective powers may affect capital and stock distributions,
limits on asset growth, acquisitions and new lines of business, transactions
with affiliates, the ability to accept brokered deposits and changes in officers
and directors, among other things.
Qualified Thrift Lender Test. The Bank is required to meet the qualified
thrift lender ("QTL") test set forth in the HOLA to avoid certain restrictions
on their operations. Under the QTL test provisions, a savings institution must
maintain at least 65% of portfolio assets in qualified thrift investments, which
generally include loans, securities and other investments that are related to
housing, small business and credit card lending. A savings bank that does not
meet the QTL test must either convert to a bank charter or comply with the
following restrictions on its operations:
. The association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment
is permissible for a national bank,
. The branching powers of the association shall be restricted to those of
a national bank; and
. Payment of dividends by the association shall be subject to the rules
regarding payment of dividends by a national bank.
The Bank is currently and expects to remain in compliance with QTL
standards.
Restrictions on Capital Distributions. The Bank is required to file a
notice with the OTS at least 30 days prior to paying a dividend, or making any
payment to repurchase, redeem, retire or otherwise acquire debt instruments
included in total risk-based capital (each a "capital distribution") if (a) it
is not eligible for expedited treatment under the OTS application processing
regulations, (b) the total amount of the Bank's capital distributions (including
the proposed distribution) for the calendar year exceeds the Bank's net income
for the year to date plus retained net income for the previous two years, (c)
the Bank would not be "adequately capitalized" following the proposed capital
distribution or (d) the proposed capital distribution would violate any
applicable statute, regulation, or an agreement between the Bank and the OTS, or
a condition imposed upon the Bank by an OTS-approved application or notice. The
OTS may deny the Bank's application or disapprove the Bank's notice if the OTS
determines that (a) the Bank will be "undercapitalized," "significantly
undercapitalized" or "critically under capitalized," as defined in the OTS
capital regulations, following the capital distribution, (b) the proposed
capital distribution raises safety and soundness concerns or (c) the proposed
capital distribution violates a prohibition contained in any statute, regulation
or agreement between the Bank and the OTS or a condition imposed on the Bank in
an application or notice approved by the OTS. The Bank is in compliance with
these restrictions.
12
PART I (Continued)
Loan-To-One Borrower. The amount of loans and extensions of credit that
may be extended by the Bank to any one borrower, including related entities,
generally may not exceed 15% of the unimpaired capital and unimpaired surplus of
the institution. Loans in an amount equal to an additional 10% of unimpaired
capital and unimpaired surplus may be made to a borrower if the loans are fully
secured by readily marketable collateral, which does not include real estate
collateral. An institution's "unimpaired capital and unimpaired surplus"
includes, among other things, the amount of its core capital and supplementary
capital included in its total capital under OTS regulations. The Bank is
currently in compliance with the loan-to-one borrower limitation.
Affiliate Transactions and Tying. Transactions between the Bank and
Ocwen Financial Corporation, OAC, OTX and their non-bank subsidiaries are
subject to quantitative and qualitative restrictions. Such transactions with any
one affiliate may not exceed 10% of the Bank's capital and surplus and with all
affiliates in the aggregate may not exceed 20% of the Bank's capital and
surplus. Certain such transactions (e.g., loans and guarantees) must meet
collateralization requirements. A transaction between the Bank and its affiliate
must be on terms and conditions at least as favorable to the Bank as those
prevailing at the time for comparable transactions with non-affiliated
companies. Savings banks are required to make and retain detailed records of
transactions with affiliates. Additionally, the Bank is not permitted to make a
loan or extension of credit to any affiliate unless the affiliate is engaged
only in activities the Federal Reserve Board has determined to be permissible
for bank holding companies. The Bank is also prohibited from purchasing or
investing in securities issued by an affiliate, other than shares of a
subsidiary. The Bank is currently and expects to remain in compliance with the
affiliate transaction provisions.
Also, subject to certain exceptions, savings banks are prohibited from
conditioning the availability or pricing of their products or services on the
requirement that a customer obtain another product or service from the savings
bank or an affiliate, provide another product or service to the savings bank or
an affiliate or refrain from obtaining another product or service from a
competitor of the savings bank or an affiliate.
Insider Loans. Savings banks are also subject to various limitations and
reporting requirements on loans to insiders. These limitations require, among
other things, that all loans or extensions of credit to insiders (generally
executive officers, directors or 10% stockholders of the institution) or their
"related interests" be made on substantially the same terms (including interest
rates and collateral) as, and follow credit underwriting procedures that are not
less stringent than, those prevailing for comparable transactions with the
general public and not involve more than the normal risk of repayment or present
other unfavorable features. The Bank currently has no insider loans.
Gramm-Leach-Bliley Act. Title V of the Gramm-Leach-Bliley Act imposes
consumer financial privacy restrictions on savings banks. These restrictions
require a savings bank to safeguard non-public personal information of
consumers; provide notices to consumers about an institution's privacy policies
and practices and the about the right of consumers to opt-out of certain
information sharing by savings banks. Also, these laws provide consumers a right
to prevent a savings bank from disclosing non-public personal information about
the consumer to non-affiliated third parties, with exceptions. The Bank
currently is and expects to remain in compliance with applicable privacy
provisions.
Federal Reserve Regulation. Under Federal Reserve Board regulations, the
Bank is required to maintain a reserve against its transaction accounts, which
increases the Bank's cost of funds. The Bank may borrow from the Federal Reserve
Bank discount window, but the Federal Reserve Board's regulations require the
Bank to exhaust other reasonable alternative sources before borrowing from the
Federal Reserve Bank. Numerous other regulations promulgated by the Federal
Reserve Board affect the business operations of the Bank. These include
regulations relating to equal credit opportunity, electronic fund transfers,
collection of checks, truth in lending, truth in savings and availability of
funds.
Federal Home Loan Bank System. The Federal Housing Finance Board is an
agency of the federal government and is generally responsible for regulating the
FHLB System. FHLBs are federally chartered but privately owned institutions
created by Congress. The primary purpose of the FHLBs is to provide funding to
their members for making housing loans as well as for affordable housing and
community development lending. Generally, an institution is eligible to be a
member of the FHLB for the district where the member's principal place of
business is located. The Bank, whose home office is in Ft. Lee, New Jersey, is a
member of the New York FHLB. As an FHLB member, we are required to own FHLB
capital stock based upon the aggregate outstanding advances from the FHLB. In
addition, there are risk-based and leverage capital requirements that must be
met by FHLB members, which are similar to those currently in place for
depository institutions.
Community Reinvestment Act. The Community Reinvestment Act ("CRA")
requires financial institutions regulated by the federal banking agencies to
ascertain and help meet the credit needs of their delineated communities,
including low- to moderate-income neighborhoods within those communities, while
maintaining safe and sound banking practices. The regulatory agency assigns one
of four possible ratings to an institution's CRA performance: outstanding,
satisfactory, needs to improve and substantial noncompliance. The institution's
regulator must consider its financial capacity and size, legal impediments,
local economic conditions and demographics, including the competitive
environment in which it operates. The most recent review of the Bank's CRA
performance resulted in a "Satisfactory" rating from the OTS in 2002. Since 2002
the Bank has been evaluated as a wholesale institution. Wholesale institutions
are a type of federal savings bank that is not in the business of extending home
mortgage, small business, small farmer or consumer loans to retail customers and
for which a designation as a wholesale savings association is in effect. As a
wholesale institution for purposes of the CRA, the OTS assesses our record of
helping to meet the credit needs of our assessment area through its community
development lending, qualified investments, or community development services.
13
PART I (Continued)
USA PATRIOT Act. Among other requirements, the USA PATRIOT Act requires
savings banks to establish an anti-money laundering program and imposes
limitations and due diligence requirements on private banking accounts and
correspondent accounts with certain foreign nationals and foreign institutions.
Pursuant to the USA PATRIOT Act, the OTS has adopted regulations requiring
depository institutions, such as the Bank, to adopt customer identification
programs. The Bank has adopted an anti-money laundering program as well as a
customer identification program and currently is and expects to remain in
compliance with these laws.
Supervisory Agreement with the OTS. On April 19, 2004, the Bank and the
OTS entered into the Supervisory Agreement regarding various mortgage loan
servicing and customer service practices. The Supervisory Agreement, among other
things, requires that the Bank:
. continue to maintain and further develop an Office of Consumer Ombudsman
to address borrower issues in a timely and effective manner;
. develop a "Borrower-Oriented Customer Service Plan" to set standards and
goals for customer services, with input from one or more
consumer-interest groups;
. develop a "Consumer Dispute Resolution Initiative," to improve and
expedite the resolution of consumer issues;
. implement procedures regarding force-placed hazard insurance, by
providing borrowers/customers the opportunity to respond to a notice
that hazard insurance will be obtained on their behalf and at their
expense if the customer does not have appropriate hazard insurance
already in place;
. not impose fees relating to notice-of-default letters;
. agree not to charge fees to delinquent borrowers for entering into
forbearance agreements (i.e., formally agree to make certain payments on
loan balances in lieu of foreclosure); and
. provide borrowers and/or their attorneys/agents with itemized and
complete written loan pay-off quotes within five business days, and
ensuring that all fees and charges for the quotes are verified by the
Bank prior to issuance, and if a payoff quote, exclusive of principal
and interest, exceeds $1,000, to include conspicuous disclosure that a
borrower may contact the Bank's Consumer Ombudsman or the OTS if a
borrower has reason to dispute any of the charges.
As required under the Supervisory Agreement, the Bank has established a
compliance committee of three directors, all of whom are outside directors, to
monitor and coordinate the Bank's compliance with the Supervisory Agreement as
well as adherence with the practices adopted and implemented under the
Supervisory Agreement. Each quarter the compliance committee will report to the
Bank's board of directors with written progress reports detailing actions taken
to comply with the provisions of the Supervisory Agreement and the results of
those actions, and the Bank's board of directors will provide such reports to
the OTS. Messrs. Lacy (Chairman), Korn and Wish serve as members of the
compliance committee. The Bank also is providing the OTS with monthly reports
summarizing information about the aggregate number and nature of any unresolved
consumer complaints outstanding for 30 or more calendar days as of the last day
of the preceding month. To date, the Bank has complied fully with each of its
obligations under the Supervisory Agreement and is not aware of any reason why
it would not be able to comply with the terms and conditions of the Supervisory
Agreement in the future. The OTS continues to supervise and examine our
compliance with the Supervisory Agreement and our mortgage loan servicing and
customer service practices generally. If the OTS were to determine that we
failed to comply with the Supervisory Agreement or otherwise were to find
deficiencies in our mortgage servicing practices, the OTS could initiate an
enforcement proceeding against the Bank, which could result in civil money
penalties or the imposition of further requirements on the Bank's business
practices.
BOK
Bankhaus Oswald Kruber GmbH & Co. KG, or BOK, our German banking
subsidiary, is licensed as a credit institution (Kreditinstitut) under the laws
of the Federal Republic of Germany and is supervised and regulated in Germany by
the German Federal Financial Supervisory Authority (Bundesanstalt fur
Finanzdienstleistungsaufsicht - BaFin), the German Central Bank (Deutsche
Bundesbank) and, in respect of minimum reserves on deposits, the European
Central Bank.
Under its license, BOK may engage 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. BOK must conduct its banking activities in particular in
accordance with the German Banking Act (Kreditwesengesetz), the German
Securities Trading Act (Wertpapierhandelsgesetz) and the rules and regulations
adopted thereunder. This legal framework reflects certain recommendations of the
Basel Committee on Banking Regulations and Supervisory Practices at the Bank for
International Settlements, as well as legislative acts adopted by the European
Community.
14
PART I (Continued)
German regulatory requirements applicable to BOK concern in particular
the maintenance of adequate regulatory capital and liquidity, the monitoring of,
and limitations on, large credit exposures, limitations on equity and
equity-like participations in other companies, the protection of depositors and
the adoption of certain accounting standards and business practices. The German
Federal Financial Supervisory Authority and the German Central Bank monitor the
compliance of German banks such as BOK 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.
The German Federal Financial Supervisory Authority has a wide range of
means to investigate and enforce a bank's compliance with the German regulatory
requirements. It may conduct audits on a random basis or for cause (even outside
Germany, if the other jurisdiction permits the audit), it may require banks to
furnish information and documents, and it may attend meetings of a bank's
supervisory board or shareholders. If the German Federal Financial Supervisory
Authority discovers any irregularities, it may remove a bank's managers from
office or prohibit them from exercising their duties, it may prohibit a bank
from distributing profits or extending credit, and, as an ultimate measure, it
may revoke a bank's license and order the closure of the bank. The German
Banking Act also entitles the German Federal Financial Supervisory Authority to
take certain emergency measures if a bank is in danger of defaulting on its
obligations to creditors or to avoid the insolvency of a bank.
SARBANES-OXLEY ACT OF 2002
In response to the recent series of regulatory enactments in furtherance
of the provisions of the Sarbanes-Oxley Act, we have taken actions including,
but not limited to:
. Review of the responsibilities and reporting practices of our auditors,
. Development of questionnaires to identify potential conflicts of
interest,
. Establishment of Disclosure Review and Nomination/Governance Committees,
. Review of our procedures and policies with regard to independence of our
board members serving on the Audit Committee and Audit Committee
responsibilities consistent with Section 301 of the Act,
. Establishment of a Whistleblower Policy,
. Development of CEO and CFO certifications to accompany audit reports,
. Review of procedures in place to avoid any improper influence on conduct
of audits,
. Update disclosures in periodic reports to conform with Section 401 of
the Act,
. Establishment of ethics policies identifying prohibited activities under
the Act,
. Expedite insider reporting of transactions,
. Review of internal controls by management,
. Development of practices for real time disclosure of material events and
. Establishment of procedures for document retention and control.
FEDERAL TAXATION
General. OCN and all of its domestic subsidiaries currently file, and
expect to continue to file, a consolidated Federal income tax return based on a
calendar year. Consolidated returns have the effect of eliminating inter-company
transactions, including dividends, from the computation of taxable income.
Alternative Minimum Tax. In addition to the regular corporate income
tax, corporations, including qualifying savings institutions, are subject to an
alternative minimum tax. The 20% tax is computed on Alternative Minimum Taxable
Income ("AMTI") and applies if it exceeds the regular tax liability. AMTI is
equal to regular taxable income with certain adjustments. For taxable years
beginning after 1989, AMTI includes an adjustment for 75% of the excess of
"adjusted current earnings" over regular taxable income. Net operating loss
carrybacks and carryforwards are permitted to offset only 90% of AMTI.
Alternative minimum tax paid can be credited against regular tax due in later
years.
Tax Residuals. From time to time, we acquired Real Estate Mortgage
Investment Conduit ("REMIC") residuals or retained residual securities in REMICs
that were formed by us in connection with the securitization and sale of loans.
Although a tax residual may have little or no future economic cash flows from
the REMIC from which it has been issued, the tax residual does bear the income
tax liability or benefit resulting from the difference between the interest rate
paid on the securities by the REMIC and the interest rate received on the
mortgage loans held by the REMIC. This generally results in taxable income for
us in the first several years of the REMIC and equal amounts of tax deductions
thereafter, although the amount and timing with which we must report taxable
income or deductions may vary based on the particular experience of the mortgage
collateral supporting each REMIC. The tax residuals may also generate excess
inclusion income that could create a tax liability for us if we have not
otherwise earned taxable Income in a particular year.
15
PART I (Continued)
Investments in Affordable Housing Properties. For a discussion of the
tax effects of investments in affordable housing properties, see
"Segments-Affordable Housing."
Examinations. The Internal Revenue Service agent has completed an
examination of the Company's Federal income tax returns for the years 1998
through 2001 and has reviewed the tax years 1995 through 1997 and 2002 as result
of carryback claims filed. The statute of limitations has run with respect to
1997 and all prior tax years. Thus, the Federal income tax returns for the years
1998 through 2000 (due to a waiver of the statute of limitations) and 2001
through 2003 are open for examination. We do not anticipate any material
adjustments as a result of any examination, although there can be no assurances
in this regard.
STATE TAXATION
OCN's income is subject to tax by the States of Florida and California,
which have statutory tax rates of 5.5% and 10.84%, respectively, and its taxable
income in these states is determined based on certain apportionment factors. We
are taxed in New Jersey on income, net of expenses, earned in New Jersey at a
statutory rate of 9.0%. Currently no state return of ours is being examined, and
we have received no notification from any state that intends to examine any of
our tax returns. We do not anticipate any material adjustments as a result of
any examination, although there can be no assurances in this regard.
16
PART I (Continued)
ITEM 2. PROPERTIES (Dollars in thousands)
The following table sets forth information relating to our facilities at
December 31, 2004:
Net Book Value of Property or
Location Owned/Leased Leasehold Improvements
---------------------------------------------------------- ------------ -----------------------------
EXECUTIVE OFFICES:
1675 Palm Beach Lakes Boulevard
West Palm Beach, FL................................... Leased $ 1,367
BANK MAIN OFFICE:
2400 Lemoine Ave
Fort Lee, NJ.......................................... Leased $ 4
SERVICING CENTERS:
12650 Ingenuity Drive
Orlando, FL........................................... Owned $ 21,087
2650 Warrenville Road
Chicago, IL........................................... Leased $ --
SOFTWARE DEVELOPMENT AND SERVICING OPERATIONS CENTER:
Salarpuria Arena
24 Hosur Luskar Road
Bangalore, India...................................... Leased $ 891
Salarpuria Adonis
3/1 Kolar Road, Sarvagna Nagar, Ward No. 85
Binnamangala, Bangalore, India........................ Leased $ --
Spectrum Towers
Mind Space Business District
Link Road, Malad West
Mumbai, India......................................... Leased $ 61
GSS OFFICES:
Taiwan office:
Taipei World Trade Center
333 Keelung Road
Taipei, Taiwan........................................ Leased $ 36
Japan office:
SK Building
3F 2-7-4 Nishi-Shinbashi
Tokyo, Japan.......................................... Leased $ 12
China office:
China World Tower 1
No. 1 Jian Guo Men Wai Avenue
Beijing, Peoples' Republic of China................... Leased $ 19
Canada office:
111 Richmond Street West, Suite 1202
Toronto, Ontario, Canada.............................. Leased $ 5
Germany office:
Bonifaziusturm B, 21st Floor, Erthalstrasse 1
D-55118 Mainz, Germany................................ Leased $ --
BOK OFFICES:
Berlin office:
Bondickstrasse 22
13469 Berlin, Germany................................. Leased $ --
Frankfurt office:
Mainzer Landstrasse 16
60325 Frankfurt, Germany.............................. Leased $ --
17
PART I (Continued)
ITEM 3. LEGAL PROCEEDINGS (Dollars in thousands)
A description of material pending or recently settled legal proceedings
to which OCN or its subsidiaries are a party follows:
OCN and certain of its affiliates, including the Bank, have been named
as defendants in purported class action lawsuits brought in various federal and
state courts challenging the Bank's mortgage servicing practices. On April 13,
2004 the United States Judicial Panel on Multi-District Litigation granted our
petition to transfer and consolidate a number of the lawsuits 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"). Additional similar
lawsuits have been brought in other courts, some of which have been or may be
transferred and consolidated in the MDL Proceeding.
The MDL Proceeding currently includes the following actions in which OCN
and/or the Bank are defendants:
(1) Patricia Antoine, et al v. Ocwen Federal Bank FSB, et al.,
case No. C-03-5503 (N.D.Cal.)
(2) Deborah Bush v. Ocwen Federal Bank FSB, et al.,
Case No. 7:04-cv-02827 (N.D.Ala.)
(3) Carolyn P. Calhoun v. Ocwen Federal Bank FSB, et al.,
Case No. 4:04-cv-00293 (N.D.Miss.)
(4) Ralph Carreon Jr., et al. v. Ocwen Federal Bank FSB,
Case No. 5:03-5151 (Bankr. W.D.Tex.)
(5) Stevie Cooper, et al. v. Ocwen Federal Bank FSB, et al.,
Case No. 1:04-cv-00639 (S.D.Ala.)
(6) Mary Crosby v. Ocwen Federal Bank FSB, et al.,
Case No. 5:04-cv-02828 (N.D.Ala.)
(7) Billy M. Dockery, et al. v. Ocwen Federal Bank FSB, et al.,
Case No. 7:04-cv-02830 (N.D.Ala.)
(8) Thomas B. Doherty v. Ocwen Federal Bank FSB, et al.,
Case No. 04-cv-04880 (D.Minn.)
(9) Unnatiben Gandabhai, et al. v. Ocwen Federal Bank FSB, et al.,
Case No. 3:04-2582 (N.D.Cal.)
(10) Lizzie Hannah, et al. v. Ocwen Federal Bank FSB, et al.,
Case No. 7:04-cv-02833 (N.D.Ala.)
(11) Kweku Hanson, et al v. Ocwen Federal Bank FSB, et al.,
Case No. 02-CV-860 (D.Conn.)
(12) William Hearn, et al v. Ocwen Federal Bank FSB, et al.,
Case No. C-04-0291 (E.D.Cal.)
(13) Stephanie Hunter, et al. v. Ocwen Federal Bank FSB, et al.,
Case No. 2:04-cv-02864 (N.D.Ala.)
(14) Lula M. Jackson, et al v. Ocwen Federal Bank FSB, et al.,
Case No. C-03-0743 (N.D.Cal.)
(15) Freddie Jones v. Ocwen Federal Bank FSB, et al.,
Case No. 4:04-cv-00294 (N.D.Miss.)
(16) Marion Long v. Ocwen Federal Bank FSB, et al.,
Case No. 7:04-cv-02852 (N.D.Ala.)
(17) Allie M. Maddox, et al v. Ocwen Federal Bank FSB, et al.,
Case No. CV-03-9515 (C.D.Cal.)
(18) Jeannette E. Martinez v. Ocwen Federal Savings Bank FSB,
Case No. 1:04-296 (D.N.M.)
(19) Michele McAuliffe, et al. v. U.S. Bank, N.A. as Trustee., et al.,
Case No. 03-C-1103 (N.D. Ill.)
(20) George McDonald v. Ocwen Financial Corp., et al.,
Case No. 1:04-03673 (N.D.Cal.)
(21) Al McZeal v. Ocwen Federal Bank FSB, et al.,
Case No. 4:04-1576 (S.D.Tex.)
(22) Delores B. Moore v. Ocwen Federal Bank FSB, et al.,
Case No. 2:04-2612 (E.D. Pa.)
(23) Timothy Napier, et al. v. Ocwen Federal Bank FSB, et al.,
Case No. 2:03-174 (E.D.Wash.)
(24) William A. Soto, et al v. Ocwen Federal Bank FSB, et al.,
Case No. 02-C-6818 (N.D.Ill.).
(25) Geneva Spires, et al v. Ocwen Financial Services, Inc., et al.,
Case No. C-03-5600 (N.D.Cal.)
(26) Maggie Williams, et al. v. Ocwen Federal Bank FSB, et al.,
Case No. 4:04-cv-02869 (N.D.Ala.)
(27) Thomas Wright, et al. v. Ocwen Federal Bank FSB, et al.,
Case No. 1:04-cv-00638 (S.D.Ala.)
On August 23, 2004, plaintiffs filed a Consolidated Complaint, setting
forth claims contained in lawsuits consolidated in the MDL Proceeding. Those
claims variously involve alleged violations of federal statutes, including the
Real Estate Settlement Procedures Act and Fair Debt Collection Practices Act,
and state deceptive trade practices statutes, and assert common law claims. The
claims are based on various allegations of improper servicing practices,
including (i) charging borrowers allegedly improper or unnecessary fees such as
breach letter fees, hazard insurance premiums, foreclosure-related fees, late
fees and property inspection fees; (ii) untimely posting and misapplication of
borrower payments; and (iii) improperly treating borrowers as in default on
their loans. While some of the individual lawsuits had set forth specific damage
allegations (e.g., the Gandabhai complaint (item 9 above) claimed actual damages
of $61; the Hanson complaint (item 11 above) claimed actual damages of $150,000
and punitive and exemplary damages of $1,500,000; the various Alabama and
Mississippi cases generally alleged damages less than $75 (items 2, 3, 5, 6, 7,
10, 13, 15, 16, 26 and 27 above)), the Consolidated Complaint in the MDL
Proceeding does not set forth any specific amounts of claimed damages. The
absense of any specification of damages in the Consolidated Complaint does not,
however, preclude plaintiffs in the MDL Proceeding from requesting leave from
the court to amend the Consolidated Complaint or from otherwise seeking damages
should the matter proceed to trial.
18
PART I (Continued)
On September 30, 2004, the Ocwen defendants filed various motions to
dismiss, for summary judgment, to strike class allegations and to stay
discovery. Briefing on these motions has recently closed. Discovery in the MDL
Proceeding has been stayed pending resolution of the motions. No motion for
class certification has been submitted by plaintiffs, and the Court has not
indicated when any such motion would be permitted to be filed.
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. By the November 3, 2004 order, the judge reduced a prior jury verdict in
the amount of $9,320 after trial on this matter involving allegations of
misappropriation of trade secrets and contract-related claims brought by a
former vendor. The litigation does not relate to our core Residential Loan
Servicing business practices. Notwithstanding the nominal damage award against
the Bank, it was assessed a statutory award to Cartel of attorneys' fees in an
additional amount of $170, and the Bank and OTX were further assessed costs in
the amount of $9. Cartel and defendants are pursuing cross-appeals in the United
States Court of Appeals for the Tenth Circuit. A reserve of $1,000 had been
established for this matter. 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 have not yet been reduced to final judgments, are
against the weight of evidence and contrary to law. Defendants have filed
motions for a new trial and/or remittitur and, if necessary, will take an appeal
to the Florida Court of Appeals for the Fourth District. We intend to continue
to vigorously defend this matter.
On February 28, 2005, a jury in County Court for Nueces County, Texas,
returned a verdict of $140 in compensatory and statutory damages in favor of two
borrowers whose mortgage loan was serviced by the Bank in a lawsuit arising out
of a disputed foreclosure. The jury rejected plaintiffs' request for punitive
damages. The verdict included $2,900 for plaintiffs' attorneys' fees, an amount,
which we believe is unsupported by the evidence and impermissibly excessive
under the controlling legal authorities. The verdict has not yet been reduced to
a final judgment. We are pursuing post-trial motions seeking to set aside or
substantially reduce the attorneys' fees award and, if necessary, will take an
appeal on that issue and perhaps other issues to the Texas Court of Appeals for
the Thirteenth Judicial District. We intend to continue to vigorously defend
this matter.
In light of the above-referenced developments in the Florida and Texas
matters, we have established a reserve of $3,000 in 2004.
On March 9, 2005, the Bank was served with a complaint filed in Superior
Court for Los Angeles County, California, by Banco Popular North America,
successor by merger to Quaker City Bank ("Banco Popular"), which claims to be a
holder of residual interest in two mortgage loan trusts for which the Bank
provides loan servicing. In this lawsuit, Banco Popular challenges the Bank's
fee charges for recoveries on charged-off loans. The complaint variously alleges
breach of contract, conversion, breach of fiduciary duty and fraud, and seeks
declaratory and equitable relief, along with claimed compensatory damages in
excess of $3,000 and punitive damages in an unspecified amount. We believe the
allegations are without merit and will vigorously defend this matter.
OCN and the Bank are also subject to various other pending legal
proceedings. In our opinion, the resolution of these other 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 accrue a
litigation reserve when it is probable that a liability had been incurred and
the amount of loss can be reasonably estimated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the
quarter ended December 31, 2004.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information required by this Item appears under the caption "Shareholder
Information" on page 115 of our 2004 Annual Report to Shareholders and under the
caption "Security Ownership of Certain Beneficial Owners and Related Stockholder
Matters - Equity Compensation Plan Information" in our 2005 Proxy Statement and
is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information required by this Item appears under the caption "Selected
Consolidated Financial Information" on pages 10 to 12 of our 2004 Annual Report
to Shareholders and is incorporated herein by reference. See Item 8 below and
Part IV, Item 15 regarding our consolidated financial statements and notes.
19
PART II (Continued)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required by this Item appears under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 13 to 64 of our 2004 Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item appears under the captions "Asset and
Liability Management" on pages 56 to 60, "Note 1: Summary of Significant
Accounting Policies" on pages 73 to 82 and "Note 18: Derivative Financial
Instruments" on pages 96 to 97 of our 2004 Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item appears on pages 66 to 114 in our 2004
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company's
management, under the supervision of and with the participation of the Company's
Chief Executive Officer and Acting Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures, as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as of the end of the period covered by
this report. Based on such evaluation, the Company's Chief Executive Officer and
Acting Chief Financial Officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures are effective and are
reasonably designed to ensure that all material information relating to the
Company required to be included in the Company's reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission.
Status of Management's Report on Internal Control over Financial
Reporting. The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting, as that term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and
with the participation of the Company's management, including the principal
executive officer and principal financial officer, the Company is in the process
of conducting an evaluation of its internal control over financial reporting
based on the framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
The Company's evaluation of its internal control over financial
reporting has not yet been completed. In connection with this process, the
Company has identified certain significant deficiencies that have been or are
being remediated. There can be no assurance that as a result of the ongoing
evaluation of internal control over financial reporting, additional deficiencies
will not be identified or that any deficiencies identified, either alone or in
combination with others, will not be considered a material weakness.
Pursuant to Securities and Exchange Commission Release No. 34-50754,
which, subject to certain conditions, provides up to 45 additional days beyond
the due date of this Form 10-K for the filing of management's annual report on
internal control over financial reporting required by Item 308(a) of Regulation
S-K, and the related attestation report of the independent registered public
accounting firm, as required by Item 308(b) of Regulation S-K, management's
report on internal control over financial reporting and the associated report on
the audit of management's assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, are not filed
herein and are expected to be filed no later than May 2, 2005.
Changes in Internal Control over Financial Reporting. There have not
been any changes in the Company's internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act
during the Company's fiscal quarter ended December 31, 2004 that have materially
affected, or are reasonable likely to materially affect, the Company's internal
control over financial reporting.
Limitations on the Effectiveness of Controls. The Company's management,
including the Chief Executive Officer and Acting Chief Financial Officer, does
not expect that the Company's disclosure controls or the Company's internal
control over financial reporting will prevent all errors and all fraud.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in
20
PART II (Continued)
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Further, the design of disclosure controls and internal control over
financial reporting must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected.
ITEM 9B. OTHER
There was no information required to be reported on Form 8-K during the
fourth quarter of the year covered by this Form 10-K that was not so reported.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in our definitive Proxy Statement with respect
to our Annual Meeting of Shareholders to be held on May 17, 2005 and as filed
with the Commission on or about March 16, 2005 (the "2005 Proxy Statement")
under the captions "Election of Directors - Nominees for Director," "Executive
Officers Who Are Not Directors," "Board of Directors and Corporate Governance -
Committees of the Board of Directors - Audit committee", "Security Ownership of
Certain Beneficial Owners and Related Stockholder Matters - Section 16(a)
Beneficial Ownership Reporting Compliance" and "Board of Directors and Corporate
Governance - Code of Ethics" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in our 2005 Proxy Statement under the captions
"Executive Compensation," "Board of Directors Compensation" and "Comparison of
Cumulative Total Return" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained in our 2005 Proxy Statement under the captions
"Security Ownership of Certain Beneficial Owners and Related Stockholder Matters
- - Beneficial Ownership of Common Stock" and "Security Ownership of Certain
Beneficial Owners and Related Stockholder Matters - Equity Compensation Plan
Information" are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is included in our 2005 Proxy
Statement under the caption "Ratification of Appointment of Independent
Registered Certified Public Accounting Firm" and is incorporated herein by
reference.
21
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES and REPORTS ON FORM 8-K
(a) 1 & 2 Financial Statements and Schedules. The following Consolidated
Financial Statements of Ocwen Financial Corporation and Report of
PricewaterhouseCoopers LLP, Independent Registered Certified Public
Accounting Firm, are incorporated herein by reference from pages 66 to
114 of our Annual Report to Shareholders:
Report of Independent Registered Certified Public Accounting Firm
Consolidated Statements of Financial Condition at December 31, 2004
and 2003
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 2004
Consolidated Statements of Changes in Shareholders' Equity for each of
the three years in the period ended December 31, 2004
Consolidated Statements of Comprehensive Income for each of the three
years in the period ended December 31, 2004
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2004
Notes to Consolidated Financial Statements
Financial statement schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or notes thereto.
(a) 3 EXHIBITS.
2.1 Agreement of Merger dated as of July 25, 1999 among Ocwen
Financial Corporation, Ocwen Asset Investment Corp. and Ocwen
Acquisition Company (1)
3.1 Amended and Restated Articles of Incorporation (2)
3.2 Amended and Restated Bylaws (3)
4.0 Form of Certificate of Common Stock (2)
4.1 Certificate of Trust of Ocwen Capital Trust I (4)
4.2 Amended and Restated Declaration of Trust of Ocwen Capital
Trust I (4)
4.3 Form of Capital Security of Ocwen Capital Trust I (included in
Exhibit 4.4) (4)
4.4 Form of Indenture relating to 10.875% Junior Subordinated
Debentures due 2027 of OCN (4)
4.5 Form of 10.875% Junior Subordinated Debentures due 2027 of OCN
(included in Exhibit 4.6) (4)
4.6 Form of Guarantee of OCN relating to the Capital Securities of
Ocwen Capital Trust I (4)
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
directors (9)
10.5 Amended Ocwen Financial Corporation 1991 Non-Qualified Stock
Option Plan, dated October 26, 1999 (9)
10.6 First Amendment to Agreement, dated March 30, 2000 between HCT
Investments, Inc. and OAIC Partnership I, L.P. (9)
10.7 Ocwen Financial Corporation Deferral Plan for Directors dated
March 7, 2005 (filed herewith)
11.1 Computation of earnings per share (10)
12.1 Ratio of earnings to fixed charges (filed herewith)
13.1 Excerpts from the Annual Report to Shareholders for the year
ended December 31, 2004 (filed herewith)
21.0 Subsidiaries (filed herewith)
23.0 Consent of PricewaterhouseCoopers LLP (filed herewith)
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
22
PART IV (Continued)
32.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith)
32.2 Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith)
(1) Incorporated by reference from a similarly described exhibit included
with the Registrant's Current Report on Form 8-K filed with the
Commission on July 26, 1999.
(2) Incorporated by reference from the similarly described exhibit filed
in connection with the Registrant's Registration Statement on
Form S-1 (File No. 333-5153) as amended, declared effective by the
commission on September 25, 1996.
(3) Incorporated by reference from the similarly described exhibit
included with the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998.
(4) Incorporated by reference from the similarly described exhibit filed
in connection with our Registration Statement on Form S-1 (File No.
333-28889), as amended, declared effective by the Commission on
August 6, 1997.
(5) Incorporated by reference from the similarly described exhibit
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 our
definitive Proxy Statement with respect to our 1998 Annual Meeting of
Shareholders as filed with the Commission on March 31, 1998.
(8) Incorporated by reference from OAC's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999.
(9) Incorporated by reference from the similarly described exhibit
included with the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2000.
(10) Incorporated by reference from "Note 17: Basic and Diluted Earnings
per Share" on page 95 of our 2004 Annual Report to Shareholders.
(b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 2004
(1) A Form 8-K was filed by OCN on October 21, 2004, which contained a
news release announcing our 2004 third quarter results and certain
other information.
(2) A Form 8-K was filed by OCN on November 30, 2004, which announced the
application by Ocwen Federal Bank to the OTS for Voluntary Dissolution
pursuant to 12 C.F.R. Section 546.4.
23
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on our behalf by the undersigned, thereunto duly authorized.
OCWEN FINANCIAL CORPORATION
By: /s/ WILLIAM C. ERBEY
-----------------------------------
William C. Erbey
Chairman of the Board and
Chief Executive Officer
(duly authorized representative)
Date: March 16, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ WILLIAM C. ERBEY Date: March 16, 2005
- -------------------------------------------------
William C. Erbey, Chairman of the
Board and Chief Executive Officer
(principal executive officer)
/s/ RONALD M. FARIS Date: March 16, 2005
- -------------------------------------------------
Ronald M. Faris, President and Director
/s/ RONALD J. KORN Date: March 16, 2005
- -------------------------------------------------
Ronald J. Korn, Director
/s/ WILLIAM H. LACY Date: March 16, 2005
- -------------------------------------------------
William H. Lacy, Director
/s/ W. MICHAEL LINN Date: March 16, 2005
- -------------------------------------------------
W. Michael Linn, Executive Vice President
and Director
/s/ W.C. MARTIN Date: March 16, 2005
- -------------------------------------------------
W.C. Martin, Director
/s/ BARRY N. WISH Date: March 16, 2005
- -------------------------------------------------
Barry N. Wish, Director
/s/ ROBERT J. LEIST, JR. Date: March 16, 2005
- -------------------------------------------------
Robert J. Leist, Jr., Vice President &
Chief Accounting Officer and
Acting Chief Financial Officer
(principal financial and accounting officer)
24